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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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