What implication do covenant lite loans present during financial restructuring?

Covenant lite loans are designed with fewer restrictions on the borrower, which can increase borrower flexibility. This means that borrowers can operate with more freedom, as they face fewer constraints on their financial decisions. However, this flexibility also brings certain challenges during financial restructuring.

In the context of financial restructuring, covenant lite loans can imply higher borrowing costs for companies. Because these loans lack the stringent covenants that protect lenders, they can be perceived as more risky investments. Lenders may require higher interest rates or spreads to compensate for the increased risk associated with these types of loans. This can lead to increased borrowing costs for companies seeking to refinance or restructure their debt.

Overall, while covenant lite loans may offer advantages in terms of flexibility for borrowers, they also result in higher expenses related to borrowing, especially in turbulent financial situations where restructuring is necessary. The implications of these loans can significantly affect the overall financial stability and costs for companies undergoing restructuring.