Covenant-light vs covenant-heavy loan approaches and typical usage. Which statement is true?

• A. Covenant-light has more reporting obligations
• B. Covenant-heavy eliminates covenants
• C. Covenant-light has fewer restrictive covenants
• D. Covenant-heavy is used for stronger borrowers

Answer: (C)

Covenant-light loans are designed to give borrowers more flexibility by loosening restrictive covenants, often with lighter or less frequent financial reporting. Lenders accept higher risk in exchange for easier access to capital, which is common with creditworthy, stable borrowers or in deals where speed and flexibility matter. That makes the statement that covenant-light has fewer restrictive covenants the correct one.

In contrast, covenant-heavy loans impose more covenants, stricter financial tests, and more onerous reporting, providing the lender with tighter control but limiting borrower actions. The other choices don’t fit because covenant-light isn’t characterized by more reporting obligations, covenant-heavy doesn’t eliminate covenants, and covenant-heavy is not typically used for stronger borrowers; it’s used to add protection when risk is higher.