An article in the WSJ provided a fantastically concise and simple explanation of the danger cov-lite loans pose for investors:
“The problem with higher leverage is that debt becomes much harder to repay, or refinance, if earnings start to decline. In the past, when debt was too high or earnings didn’t improve, covenants could push companies and lenders to renegotiate terms, which would protect the value of the loan and give the company room to fix its problems. Today, a lack of protection is both encouraging some investors to sell sooner and reducing the price that distressed investors are willing to pay.”