medium · Debt Capital Markets credit-ratings-risk
In a 'Covenant-Lite' loan, the absence of financial maintenance covenants increases the importance of the 'Negative Pledge' and 'Lien' provisions.
Why is this the case?
- Because the provisions automatically convert the outstanding loan from a floating-rate basis to a fixed-rate one once bankruptcy is filed.
- Because they prevent the borrower from layering in new secured debt that could prime the existing lenders before a default is even triggered.
- Because they obligate the borrower to prepay and amortize the loan whenever the market value of the company's common equity drops below a set floor.
- Because they bar the company from appointing or replacing its chief executive officer without first obtaining the consent of the lender group.
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