Borrower-friendly covenant-lite (or cov-lite) loans are experiencing a post-crisis surge, according to an article in Leveraged Finance News. Cov-lite loans typically eliminate financial maintenance covenants requiring a borrower to meet certain performance criteria monthly or quarterly, or face penalties such as a higher interest rate. Cov-lite loans also often have looser negative covenants, allowing the borrower greater scope to take actions such as incurring additional debt, paying dividends or making acquisitions, subject to certain restrictions. Lenders are more willing to accept cov-lite terms in their loan agreements in the current climate because of the present level of excess market liquidity and increased investor demand, as loan investors look for higher yields.

Cov-lite loans became widespread at the height of the last credit cycle, before the 2007 credit crunch. In 2006 and 2007 combined, cov-lite loans totalled $107.84 billion. During the credit crunch, however, cov-lite loans largely disappeared from the market because lenders had greater negotiating leverage to reject these types of borrower-friendly deals. Between 2008 and 2010, there was less than $10 billion of cov-lite volume. By contrast, according to a study published by Moody's, cov-lite loan issuance approached $40 billion in 2011. So far in 2012, 21 cov-lite loans have hit the US market, raising over $15 billion.

Many borrowers are entering into cov-lite loans to refinance existing loans that have full covenant packages. The cost to the borrower of replacing full covenant packages with cov-lite structures is higher pricing, resulting in higher yields for lenders. In 2006 and 2007, most cov-lite loans were used for buyouts. Presently most cov-lite loans are used by companies primarily for refinancings and dividend recapitalizations.

For more information on covenant-lite loans, see Practice Notes, Covenant-lite Loans: Overview and What's Market: Covenant-lite Loans.