An article in the WSJ describes how J. Crew managed to avoid bankruptcy by taking advantage of covenant-lite loan documents:
“J. Crew, and the private-equity firms that control the company, used provisions in its loan documents that govern so-called permitted investments. The company transferred the intellectual property behind its brand name into a newly created affiliate, where the term-loan holders have no claim. The affiliate then issued new debt to its junior bondholders in a swap. The provision is in many other corporate loans and bonds, especially those of companies owned by private-equity firms.”
This maneuver will reduce recoveries on the term loan to 41 cents on the dollar.