Cov-lite

Although traditionally banks have insisted on a wide range of covenants that allow them to intervene if the financial position of the borrower or the value of underlying assets deteriorates, around 2006 the increasing strength of private equity firms and the decreasing opportunities for traditional corporate loans made by banks fueled something of a "race to the bottom", with syndicates of banks competing with each other to offer ever less invasive terms to borrowers in relation to leveraged buy-outs.

In the wake of the Financial crisis of 2007–08 growth in the use of cov-lite loans stalled, but more recently they have increased in popularity again.

[1] Cov-lite lending is seen as riskier because it removes the early warning signs lenders would otherwise receive through traditional covenants.

[4][5] It was also pointed out at the time that cov-lite loans operated in a very similar way to bonds, but at lower values.

In March 2011 the Financial Times reported that, in the three months prior, cov-lite loans to the value of $17bn had been issued.