The impact of covenant-lite from an allocator’s perspective

Investors are well aware of the proliferation of covenant-lite (or “cov-lite”) issuance over the past few years in the broadly syndicated bank loan and high yield markets and appreciate that the diminished investor protections were beneficial for the issuer, not the debtholder.

In the recent pre-Covid benign credit market, the magnitude of the impact had largely remained obfuscated. However, as corporate defaults rise, the impact is becoming more evident and is likely to further highlight the divergence between public and private credit investments. In this brief note we outline that divergence by focusing on the impact of cov-lite for debtholders and offering some observations on the potential opportunities for private credit investors