Continuing with our special series on leveraged loan recoveries, let’s turn to one of the most pondered questions on the subject; namely, how will covenant-lite loans fare in the next downturn?

At a recent loan market conference, senior S&P analyst Ruth Yang reviewed the lite environment. She reminded attendees that broadly syndicated leveraged loans without maintenance covenants are the “new kids on the block” when it comes to documentation risk. Most of the growth in cov-lite volume (Chart 1) has been post-credit crisis.Today the vast majority of liquid loans are cov-lite. Defaults overall have been relatively scarce during this nine-year economic recovery. Cov-lite defaults even scarcer (see Chart of the Week). While cov-lite was applied to only the best credits in the early stage of the post-crisis period, it appears that qualification has slipped.