A Study on the Covenant-Lite Phenonmenon

Abstract

This dissertation seeks to investigate the factors that triggered the development of the covenant-lite phenomenon and concurrently analyzes whether the recent phenomenon of covenant-lite has been exported to the debt markets outside of the United States. The study of debt markets reveals that confluence of several factors appears to have led to the development of covenant-lite phenomenon. Broadly, these factors are low cost of credit, multiple providers of credit, changes in providers of structured credit, regulatory changes and the growth of private equity. Amalgamating the strengths of analytical and argumentation approach, analysis in this dissertation reports that development of the phenomenon was a gradual process that began in 1997 with the loosening of debt covenants. Through a relatively comprehensive analysis of the loan deals in the United Kingdom and debt market data related to Europe, research in this dissertation also finds that dominance of covenant-lite appears to be restricted to United States. Both the objectives are analyzed during the credit boom period between 1997 and 2007.