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Covenant-Lite Loans in Leveraged Lending: Trends, Terms, Features, Considerations for Borrowers and Lenders

Recording of a 90-minute premium CLE video webinar with Q&A

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Conducted on Thursday, September 12, 2024

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This CLE webinar will discuss how the emergence of private lenders has led to a rise in the number of covenant-lite (cov-lite) loans in leveraged lending. The panel will review the typical terms and features of cov-lite loans, recent trends and developments, and the advantages and disadvantages of cov-lite loans for borrowers and lenders.

Description

With the dramatic expansion of private credit in the direct lending space, there is a great deal of competition amongst lenders. As a result, lenders are willing to carry more risk by providing borrowers with more flexibility and minimal constraints resulting in loan documents with relatively limited covenants, restrictions, and obligations for borrowers.

While cov-lite loans have many variations, one common feature is the absence of financial maintenance covenants. Also, many cov-lite loans have fewer or looser negative covenants, allowing the borrower to incur additional debt, reclassify indebtedness, pay dividends, make acquisitions, and repay junior debt, resulting in fewer protections and high downside risk for lenders.

Counsel advising borrowers and lenders must understand the common terms, elements, and structures of cov-lite loans as well as the advantages and disadvantages of these loans to properly advise clients entering into these transactions.

Listen as our authoritative panel reviews the advantages and disadvantages of cov-lite loans for borrowers and lenders and the current trends with these types of financings. The panel will also address common elements of cov-lite loans and ways lenders can protect themselves at the outset to increase their chance for recovery.

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Outline

  1. Overview: market conditions and the rise in the number of cov-lite loans
  2. Types of financings where cov-lite loans are used
  3. Common cov-lite loan structures and terms
  4. Advantages and disadvantages of cov-lite loans for borrowers and lenders
  5. Default and recovery rates with cov-lite loans
  6. Guidance for lenders making cov-lite loans to increase the chance of recovery

Benefits

The panel will review these and other key issues:

  • What are the current market conditions that have given rise to the use of cov-lite loans in leveraged financings?
  • What types of transactions typically involve cov-lite loan features?
  • What are the common elements and structures of cov-lite loans?
  • What are the advantages and disadvantages of cov-lite loans for borrowers and lenders?
  • Do cov-lite loans result in lower recovery rates for defaulted loans?

Faculty

O'Sullivan, Maura
Maura E. O'Sullivan
Partner
A&O Sherman

Ms. O’Sullivan has extensive experience in representing financial advisors, lenders and borrowers in various...  |  Read More

Steinberg, Michael J.
Michael J. Steinberg
Partner
A&O Sherman

Mr. Steinberg focuses his practice on various types of financing transactions, including leveraged acquisition...  |  Read More

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