What is a common reason companies face higher borrowing costs with covenant lite loans?

Companies often face higher borrowing costs with covenant lite loans primarily because these loans involve less oversight and monitoring from lenders. In a traditional loan structure, covenants are established to impose certain financial and operational standards that the borrowing company must adhere to. These covenants not only protect the lender by allowing them to monitor the company's financial health and business operations but also provide early warning signs of potential distress, which can help manage risk.

When loans are covenant lite, it means that such protections are either significantly reduced or completely absent. This lack of monitoring increases the lender's exposure to risk, as they are not equipped with the same level of information or control over the borrower’s operations. Consequently, lenders may charge higher interest rates on covenant lite loans to compensate for the additional risk they undertake due to the limited oversight and the potential for unexpected financial difficulties within the borrowing entity.

While other options present interesting factors, they do not fundamentally capture the essence of why higher costs are associated with covenant lite loans as effectively as the aspect of reduced monitoring.