What is a key characteristic of “covenant lite” loans?

A key characteristic of “covenant lite” loans is that they have fewer restrictions compared to traditional loans. These types of loans typically lack certain covenants, which are clauses that impose specific restrictions on the borrower regarding their financial and operational activities. This can include limitations on additional debt, maintenance of certain financial ratios, and other operational mandates.

The fewer restrictions associated with covenant lite loans can make them attractive to borrowers, as they afford more flexibility in terms of financial activities. Borrowers may prefer these loans in situations where they want to avoid stringent operational controls while still securing financing. Thus, the essence of covenant lite loans lies in their relaxed covenant structure, allowing borrowers greater latitude than would be found in more traditional lending arrangements.