medium · Private Credit documentation-covenants-terms
What is the risk to a lender of a 'Covenant-Lite' loan that lacks an ECF sweep?
- The borrower's interest rate would automatically reset downward to the risk-free benchmark rate
- The lender would be contractually forced to convert their outstanding term loan debt into common equity
- The borrower would simply be unable to make any further acquisitions or bolt-on investments under the agreement
- The borrower could remain highly leveraged until maturity even if it generates massive surplus cash flow.
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