Securities laws, bank monitoring, and the choice between cov-lite loans and bonds for highly levered firms
Charles A. Dice Center Working Paper No. 2019-1
83 Pages Posted: 12 Jan 2019 Last revised: 23 Jun 2020
Date Written: June 18, 2020
In contrast to bonds, cov-lite loans do not require SEC registration and are not subject to securities laws. We show that this distinction plays an important role in firms’ choice between funding through cov-lite loans and bonds and helps understand why the market share of cov-lite loans has been so high in recent normal times. Compared to cov-heavy loans, cov-lite loans are closer substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans.
Keywords: Debt contracting, covenants, securities laws, regulation, loan trading
JEL Classification: G32, G18, G23, D82
Suggested Citation: Suggested Citation