hard · Private Equity & LBOs

What is the primary risk of a 'Covenant-Lite' loan for a lender, as described in the practitioners' treatise?

1. The interest rate is fixed, exposing the lender to losses if market rates rise.
2. The borrower is allowed to skip interest payments during periods of low EBITDA.
3. The loan principal is automatically converted to equity if the company's credit rating is downgraded.
4. Lenders lose the ability to intervene early through 'maintenance' covenants, potentially allowing a borrower to deteriorate significantly before a default occurs.

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