Cov-lite structures grew from a minority of the leveraged-loan market to the overwhelming majority, driven by strong demand from clo vehicles and a borrower-friendly issuance environment.
The consequence is delayed recognition. Problems surface later, by which time enterprise value has eroded further, so cov-lite defaults tend to produce lower recoveries even though the default itself may arrive later than it otherwise would.
Example: two loans default in the same year. The covenanted deal was restructured at 4.8 times leverage and recovers 72 cents. The cov-lite deal ran to 7.5 times before missing a payment and recovers 51 cents.
Related: covenant, leveraged-loan, clo, recovery-rate, high-yield