Trends in Covenant-Lite Loans: Q4 2022 Update

Covenant-lite features have become very common in leveraged lending, both in cash flow financings and asset-based lending. While the terms and structures of covenant-lite loans vary, aside from the lack of maintenance covenants, covenant-lite loans often have loosened negative covenant restrictions on the borrower. Sometimes, one or more incurrence-based financial covenants permit the borrower to avail itself of certain negative covenant exception baskets. Some covenant-lite loans also permit borrower-friendly add-backs to the borrower's EBITDA for calculation of financial covenant.

According to Market Standards, out of 1,093 credit agreements that closed during the fourth quarter of 2021 through the third quarter of 2022, 18.48% of transactions (202 deals) were covenant-lite loans.

However, the percentage of covenant-lite deals fell during Q4 2022. Out of 307 credit agreements that closed in Q4, only 46 (14.98%) were covenant-lite loans (see the search in Market Standards). It appears that the percentage of covenant-lite loans is continuing to decline, as illustrated in Market Trends 2021/22: Covenant-Lite Loans where a survey of deals from 2020-2021 showed that 21.08% were covenant-lite while a survey of deals from 2019-2020 showed that 23.91% were covenant-lite loans.

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Related Content

• Financial Covenants Clauses (Credit Agreement)
  Use these clauses in your credit agreements for syndicated loan transactions to require the borrower to comply with negotiated financial performance standards. These clauses assure lenders that the borrower will be able to repay its loans as planned.

• Financial Covenants and EBITDA Calculations in Credit Agreements
  Read this practice note to understand the use of financial covenants in credit agreements, which require the borrower to comply with negotiated financial performance benchmarks. It also discusses how EBITDA is defined in a credit agreement.

• Affirmative, Negative, and Financial Covenants
  Review this practice note to understand covenants found in credit agreements (i.e., promises made by the borrower to take certain actions, or to refrain from certain actions, during the life of the loans), along with the processes by which loan parties are captured, or not, by those covenants.

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