What can be a consequence of limited covenants in a loan?

Limited covenants in a loan often result in higher risks for lenders during restructuring. Covenants are stipulations that impose certain restrictions or conditions on the borrower to protect the lender's interests. When these are limited, the lender has less oversight and fewer mechanisms to enforce compliance with financial and operational benchmarks.

In the absence of robust covenants, a borrower may take on excessive risk or fail to adhere to best practices, leading to potential financial instability. During a restructuring phase, the absence of these protective measures can mean that the lender has reduced control over the borrower's actions, making it more challenging to navigate the financial distress and increasing the likelihood of losses. Thus, limited covenants can exacerbate risks for lenders, particularly when facing difficulties in recovering their investments during restructuring processes.

The other options do not accurately encapsulate the primary consequence of limited covenants. For instance, limited covenants do not provide increased protection for lenders or more stable borrowing costs. Instead, they typically lead to a less secure lending environment. Additionally, covenants play a key role in establishing market comparisons, and their absence would not necessarily lower comparisons with market rates, but rather complicate the lender’s ability to gauge risk effectively.