Weak covenants as a cause of lower recovery rates in the near future!

Could the last couple of years’ weaker covenants (caused by the desperate search for yield) in all kinds of loan arrangements be a further cause of problems ahead? Not very much has been said about this but I suspect that cov-lites and other softer contract types (seen from the borrower’s perspective) could cause borrowers to turn into “zombies” for a longer time than earlier. Of course, if they manage to turn the ship around, then that´s good. However, if they instead dig the black hole that they find themselves in deeper over a graze period they earlier wouldn’t have had, it might instead lead to a much bigger eventual collapse. And most interestingly for the investor, much lower recovery rates! I think we will see more discussion on these issues in 2008.