Cov-lite loans usually offer investors returns of about 3 percent or 4 percent today. Covenants vary, but they are often tied to corporate debt levels. If a company borrowing money—often backed by a private equity firm—violates one of the loan covenants, the lender can request its money back or charge a higher interest rate.
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The surge in cov-lite doesn't surprise observers.
"When you get this far into the business cycle, this is what happens. It's as simple as that. History doesn't repeat itself, but it rhymes," said Jack Flaherty, an investment director for $129 billion GAM's fixed income investment team.
Flaherty said he doesn't have an allocation to cov-lite loans but also isn't worried about a blow-up in the near future. "I don't think there's any reason to say this is going to fall apart soon," he said. "There's still too much money sloshing around."
Still, the surge of covenant lite loans is problematic for some.
"Covenants have been stripped away, cov-lite is the norm, senior debt levels are actually higher than they were in 2007," Marc Rowan, co-founder of $159 billion Apollo Global Management, said in May at the Milken Institute's Global Conference. "I do see many signs of the bubble of the future—the default specter that you're talking about. I agree that short term we're not likely to see that, but all the danger signs are there of a future crisis."
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Matthew Litwin, director of research at wealth advisory firm Greycourt & Co., also urged caution.
"We have been getting more cautious on loans across the spectrum, including cov-lite," Litwin told CNBC.com. "Even if mass defaults aren't imminent, there's just too little reward for the risk of having only a couple strings attached."
Not everyone, however, thinks cov-lite should be avoided.
"Nothing is attractive. Bank loans are trading at low single digits. It's a matter of pick the poison and hold on until the correction comes," said Michael Lewitt, a bond investor and editor of The Credit Strategist.
Lewitt said problems with such loans aren't likely before 2016, leaving many months of positive, albeit low, returns in parallel with continued low interest rates.
"That's just the game right now," he said. "It's just a matter of what's least offensive when you're trying to put money to work."