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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Covenant-lite (cov-lite)

What is a covenant-lite loan, and where does the lender's protection go?

ONE OF 366 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

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A covenant-lite loan has no financial maintenance covenants, the ratio tests a borrower must pass each quarter, and relies instead on incurrence covenants that apply only when the borrower takes certain steps, such as borrowing more or paying a dividend. It is common in institutional loans to sponsor-backed companies and unusual in bank lending to mid-sized businesses. The lender gives up the early warning a quarterly test provides and the negotiation a breach brings, so a struggling borrower can run down its cash before anything triggers a default; often the only maintenance test left is a springing covenant on the revolving facility.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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