Back when the private equity bubble was deflating, a lot of attention was focused on covenant-lite loans. In some quarters, such loans were held up as an example of either how the private equity firms had hoodwinked lenders to the detriment of portfolio companies or how banks had become way too promiscuous with credit--or both. These loans were light on protections for lenders, as they contained no provisions that limited the amount of debt a borrower could take on and no specific cash flow targets.

But now, covenant-lite loans are making a comeback, according to Breakingviews. Data from Standard & Poor's shows that cov-lites have actually outperformed their cov-heavy counterparts over the period 2006 to January 2011. Volume also seemed to be rising this year.

To some, this return to normal may be troubling. One could argue that cov-heavy loans never really offered a lot of protection anyway. But the solution might have been to make restrictions more meaningful rather than to return to cov-lites.

But in any case, the market seems to be voting. Investors in bonds issued by leveraged buyout targets will have some huge decisions to make. The power pendulum may be swinging back toward the private equity firms, who benefit from the relative flexibility these bonds offer. 

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