Glossary
Covenant-lite
Crédit allégé en covenants de maintien
A covenant-lite loan carries no financial covenant tested at regular intervals; the ratios are checked only when the borrower undertakes a specific transaction.
Definition
A covenant-lite, or cov-lite, loan is a loan without financial maintenance covenants. A maintenance covenant is a ratio that the borrower meets on each test date, usually every quarter. A cov-lite loan replaces it with incurrence tests, on the model of high yield bonds: the ratio is checked when the company wants to take on more debt, pay a dividend or make an acquisition. The term has no legal definition and by extension describes an agreement with fewer or looser covenants. The first cov-lite loans appeared in Europe in early 2007. In 2018, the ECB estimated that they accounted for around 80% of leveraged loan issuance in Europe as in the United States, compared with less than a quarter before the financial crisis. In 2022, a member of its Supervisory Board described them as the norm in Europe. For the borrower, the absence of a quarterly test removes the risk of a covenant breach caused by a difficult quarter and reduces the number of waiver requests. In return, lenders intervene later when difficulties arise, which delays defaults and weighs on recovery rates.
Worked example
A group with €400m of revenue raises a €250m cov-lite term loan and a €40m RCF. Neither facility carries a quarterly test. A debt-financed acquisition remains permitted as long as pro forma leverage stays below 5.5x.
Points to check
- Whether each tranche carries maintenance covenants.
- The incurrence ratios that govern additional debt, dividends and acquisitions.
- The debt and distribution baskets permitted outside the ratios.
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