Which of the following is a risk associated with covenant lite loans?

Covenant lite loans are characterized by fewer restrictions on borrower activities compared to traditional loans, which often include various covenants that require borrowers to maintain certain financial metrics or conditions. The primary risk associated with these types of loans stems from the decreased oversight and limited financial monitoring they allow.

With fewer covenants, lenders may not have a timely warning if the borrower's financial condition begins to deteriorate. This can lead to a situation where the borrower becomes over-leveraged or engages in risky financial behavior without the lender's knowledge, increasing the likelihood of default. In such cases, the absence of strict covenants means that lenders may not be able to take corrective actions until it’s too late, resulting in a greater risk that the borrower will fail to meet their repayment obligations.

This higher risk of borrower default reflects the fundamental nature of covenant lite loans, where reduced financial safeguards can lead to a lack of accountability for the borrower, making it more difficult for lenders to manage and mitigate risks effectively.