With supercharged loan markets returning, oft-maligned covenant-lite structures have emerged as well, raising questions again about whether their proliferation is a hazard or, as some evidence suggests, a boon.

Fully 26% of first-lien institutional loans in 2011 qualify as covenant-lite, according to Standard & Poor's Leveraged Commentary & Data, compared to 5.1% in 2010. Banks traditionally insisted on a range of covenants, which allowed them to intervene if a loan appeared at risk.

But in 2006, driven by demand from private equity firms and a dearth of corporate loan opportunities, banks scaled back onerous terms -- for example, borrowers wouldn't be hassled if they failed to maintain capital ratios. These covenant-lite loans imposed restrictions only if the company wanted to incur more debt, known as incurrence covenants.

Of course, new covenant-lite deals all but disappeared in 2007 when the credit crunch descended, with many predicting that banks behind cov-lite deals would face the same doom as lenders of subprime mortgages.

Well, not quite. LBO loans had little in common with subprime, and cov-lite actually performed better than covenant loans in the recession. Of 2007 cov-lite loans, only 7.8% defaulted on payments, little more than half that of loans with covenants, according to LCD. And cov-lites since 2006 registered returns of 33.3%, compared to 30.9% for those with maintenance restrictions.

That evidence gave proponents a rationale for a revival. "There's no fundamental reason for them not to come back," says Meredith Coffey, executive vice president of research at the Loan Syndications and Trading Association.

Driving demand for covenant-lite loans are loan funds, collateralized loan obligations and so-called crossover investors from the high-yield market. This last group makes particular sense, since bonds contain only incurrence covenants and the average yield for junk has plummeted to 6.87%. As a result, crossover investors get a similar vehicle with higher yield.

Hedge funds, distressed investors and high-yield funds now make up 30% of the institutional loan market, according to LCD. This troubles critics concerned by short-term-trading tendencies of junk investors versus the buy-and-hold strategy of traditional cov-lite holders.

Cov-lite also performed well with CLOs, the single largest buyer of institutional loans, according to the LSTA, and a group that saw many of its precrisis loans paid back in last year's record junk bond issuance. Yet CLO managers have been pretty selective and are "not going to just buy everything that comes down the pike," says Wells Fargo Securities LLC analyst Dave Preston.

CLO share has declined, and is less than 40% of the primary loan market, versus more than 70% in 2001, says the LSTA. Though CLOs have far more investment capacity, $157.3 billion, than loans that need refinancing, $11.04 billion, that may change by 2013. Preston believes CLO managers may favor amend-to-extend loans, in which maturities are extended, rather than cov-lites.

CLO influence is not about to disappear. The same people who run CLOs also manage funds through mutual funds, which have seen record inflows of $13 billion over the past 32 weeks, according to Lipper FMI.

Smaller borrowers may have more to gain from turning to bank loans, which demand less disclosure than high-yield offerings, according to Jamie Knox, a partner in DLA Piper LLP's corporate group. "For the smaller-size company, it's a more compelling differential, because the up-front cost is substantial," he says.

Is the resurgence of cov-lite a sign of the next apocalypse? Not if you believe the credit ratings. S&P data shows that of all current sponsored first-lien cov-lites, only 10% are rated lower than B. By contrast, 18% of cov-heavy loans are rated B- or lower, at which point the loan requires more favorable economic conditions to be paid back. A full third of cov-lites were rated B, compared to only 14.6% of cov-heavies.

"People have gotten to, 'Covenant lite loans are not inherently evil,' " says Coffey. "Now it's the market's decision to see where it goes from here."