Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273026 
Year of Publication: 
2022
Series/Report no.: 
Working Papers No. 22-5
Publisher: 
Federal Reserve Bank of Boston, Boston, MA
Abstract: 
High-yield debt, including leveraged loans, is characterized by incurrence financial covenants, or "cov-lite" provisions. Unlike, traditional, maintenance covenants, incurrence covenants preserve equity control rights but trigger pre-specified restrictions on the borrower's actions once the covenant threshold is crossed. We show that restricted actions impose significant constraints on investments: Similar to the effects of the shift of control rights to creditors in traditional loans, the drop in investment under incurrence covenants is large and sudden. This evidence suggests a new shock amplification mechanism through contractual restrictions that are at play for a highly levered corporate sector long before default or bankruptcy.
Subjects: 
high-yield debt
corporate debt
covenants
incurrence covenants
cov-lite
amplification mechanisms
contracts
contingent contracting
JEL: 
G31
G33
G21
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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