Securities Laws, Bank Monitoring, and the Choice Between Cov-lite Loans and Bonds for Highly Levered
In contrast to bonds, cov-lite loans do not require SEC registration and are not subject to securities laws. We show that this distinction plays an important role in firms’ choice between funding through cov-lite loans and bonds and helps understand why the market share of cov-lite loans has been so high in recent normal times. Compared to cov-heavy loans, cov-lite loans are closer substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans.
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