| Abstract | Since 2008, covenant-lite loans, or loans that lack maintenance covenants, have increased as a percentage of total outstanding loans. Today, over 90% of outstanding institutional loans are considered covenant-lite (Isin et al., 2021). In the past decade covenant-lite facilities have been scrutinized by regulators, researchers, and creditors due to their potential for imposing systemic risk. The leveraged lending market has experienced increased volume of leveraged loans, elevated levels of business debt among borrowers, and a shift towards non-bank lenders (KPMG, 2022). This thesis explores (i) the characteristics of borrowers of covenant-lite loans, (ii) firm performance in the year following a covenant-lite facility, and (iii) if lenders price in the elevated risk associated with covenant-lite loans. Through various regressions, the thesis concludes that borrowers of covenant-lite loans have higher leverage and lower asset tangibility. In addition, the thesis finds that in the year following a covenant-lite facility, a firm experiences lower ROA and higher risk of bankruptcy. Finally, the thesis shows that lenders price the additional risk by increasing the loan cost for the facilities. |
