Consequences of Cov-Lite Loans

52 Pages Posted: 30 Apr 2020

See all articles by Peter R. Demerjian

Peter R. Demerjian

University of Illinois at Chicago

Eric Horne

University of Nevada, Reno - Department of Accounting and Information Systems

Keehea Moon

George Washington University - School of Business

Date Written: April 29, 2020

Abstract

Recent years have seen a new trend in commercial bank lending—loans with no financial covenants. These covenant light, or cov-lite, loans raise concerns about excessive risk to lenders due to lack of monitoring. In this study, we examine the consequences of cov-lite loans. Focusing on rated, institutional loans, we find that cov-lite loans are more likely to default than loans with financial covenants. Further, we find minimal evidence that investment riskiness is different for cov-lite borrowers but find evidence that cov-lite borrowers have worse future performance than other borrowers. The results collectively suggest a benefit to financial covenants to lenders which is lost when they issue cov-lite loans.

Keywords: covenants, cov-lite, agency conflicts, incomplete contracting

JEL Classification: G21, G23, G32, M41

Suggested Citation

Demerjian, Peter R. and Horne, Eric and Moon, Keehea, Consequences of Cov-Lite Loans (April 29, 2020). Available at SSRN: https://ssrn.com/abstract=3588603 or http://dx.doi.org/10.2139/ssrn.3588603

Peter R. Demerjian (Contact Author)

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

Eric Horne

University of Nevada, Reno - Department of Accounting and Information Systems ( email )

United States

Keehea Moon

George Washington University - School of Business ( email )

Washington, DC 20052
United States

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