Covenant-lite agreement and credit risk: A key relationship in the leveraged loan market

G. De Novellis, P. Musile Tanzi and Elena Stanghellini

Research in International Business and Finance, 2024, vol. 70, issue PB

Abstract: In recent years, the leveraged loan market has experienced considerable growth, with the covenant-lite loan being the predominant agreement. The goal of this research is to assess whether the covenant-lite type reduces or increases the probability of default. Mediation analysis allows us to decompose the effect of balance sheet indicators on a default event into direct and indirect effects, the latter mediated by the covenant-lite. Results show that the covenant-lite is granted to borrowers with a greater profitability. In turn, all other conditions being equal, this agreement plays a role in making a default event less likely, giving rise to a significant indirect effect.

Keywords: Covenant-lite agreement; Credit risk; Leveraged loans; Syndicated loans; Mediation analysis (search for similar items in EconPapers)
JEL-codes: C3 F34 G01 G21 G23 G24 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:70:y:2024:i:pb:s0275531924001703

DOI: 10.1016/j.ribaf.2024.102377

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