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.
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