Covenant-Lite
Covenant-lite loans have fewer or weaker maintenance covenants, reducing early warning and lender control.
Allocator relevance: High — increases tail risk by delaying intervention and shifting outcomes toward payment default rather than early renegotiation.
Expanded Definition
Traditional maintenance covenants (e.g., leverage, coverage tests) trigger lender rights when performance deteriorates, enabling earlier action. Covenant-lite structures typically rely more on incurrence covenants and payment default triggers, which can allow performance to worsen before formal lender remedies activate. Covenant-lite is common in competitive environments and can appear in both syndicated markets and private credit under pressure.
Decision Authority & Governance
Governance depends on the full protection package: collateral quality, reporting frequency, sponsor behavior, documentation rights, and the manager’s enforcement discipline. Allocators evaluate whether the manager is being paid enough (spread/OID) to accept weaker covenants.
Common Misconceptions
- Covenant-lite means no covenants at all.
- Covenant-lite guarantees losses.
- Covenant-lite risk is offset by “strong sponsors” automatically.
Key Takeaways
- Covenant strength directly impacts loss behavior in stress.
- Evaluate covenants with leverage, collateral, and spread.
- Weak covenants require stronger pricing discipline and monitoring.