Consequences of Cov-Lite Loans
52 Pages Posted: 30 Apr 2020
Date Written: April 29, 2020
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: Suggested Citation