Do Lenders Still Monitor? Leveraged Lending and the Search for Covenants

It was once conventional wisdom that lenders routinely influenced corporate managers' decision making. Covenants constrained borrower risk taking and compelled specific affirmative obligations to protect lenders. Recent policy discussion, however, laments loan markets' turn to various form...

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Bibliographic Details
Published in:The Journal of corporation law 2021-09, Vol.47 (1), p.153
Main Author: Tung, Frederick
Format: Article
Language:English
Subjects:
Bank loans
Collateralized loan obligations
Contracts
Corporate governance
Covenants
Deregulation
Junk bonds
Laws, regulations and rules
Leverage (Finance)
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Summary:It was once conventional wisdom that lenders routinely influenced corporate managers' decision making. Covenants constrained borrower risk taking and compelled specific affirmative obligations to protect lenders. Recent policy discussion, however, laments loan markets' turn to various forms of high-risk lending. So-called leveraged loans-relatively risky, below-investment-grade loans--more than doubled in outstanding dollar terms, growing from about $550 billion in 2010 to $1.2 trillion by 2019. These risky loans have taken up a larger and larger share of the loan markets over time. More leveraged loans are also "covenant-lite," issued without traditional financial maintenance covenants. And regulators worry about "add-backs "--borrowers' growing practice of making upward adjustments to projected earnings that tend to weaken leverage constraints.
ISSN:0360-795X