A Much Criticized Loan Feature May Help Borrowers Survive Virus

The flexible terms that have become the new norm in Europe’s loan market may prove a lifeline for highly leveraged companies that might otherwise flounder during a coronavirus-induced downturn.

So-called “cov-lite” loans grant borrowers leeway in the amount of debt they carry relative to core earnings. Once criticized by regulators uneasy about the lack of restraint, the permissive loans may now offer some breathing room amid the economic fallout.

Of all the loans raised last year in Europe, 94% were cov-lite. That compares with the 2006-2007 boom when all but a handful of deals had covenants. With a reduction in ...