Events of default

An event of default is a contractual trigger. It means something listed in the loan agreement has happened and the lender gains rights it did not previously have.

Those rights can be serious: the lender may stop further drawdowns, charge default interest, demand immediate repayment or enforce its security. But a trigger does not mean every lender will use every remedy straight away. The agreement creates the rights; the facts and the negotiation determine what happens next.

This guide explains the usual growth debt and venture debt events of default, the protection that drafting can provide, and the actions to take if a trigger is approaching.

Default, potential default and event of default

The language can be confusing because these terms are sometimes used loosely in conversation.

• A breach is a failure to comply with a term of the agreement, such as missing a reporting deadline.
• A potential event of default is a problem that could become an event of default after notice is given, time passes or another condition is met.
• An event of default is a trigger that has satisfied the contractual test, including any applicable grace period or materiality threshold.

The exact definitions in your signed documents govern. A late report might be a breach on day one, for example, but only become an event of default if it remains uncorrected after an agreed cure period.

The most common events of default

Growth debt agreements vary, but the following categories appear frequently.

Non-payment

A missed payment of principal, interest or fees is usually the clearest trigger. Agreements may allow a short grace period where the failure is caused by an administrative or technical error, but borrowers should not assume one exists.

The practical control is simple: maintain a debt payment calendar, identify the account from which each payment will be made and confirm that sufficient cleared cash is available before the due date.

Breach of covenant

A covenant is a promise to do something, not do something or maintain a stated financial position. Examples include delivering management accounts, maintaining minimum liquidity, limiting new borrowing and obtaining consent before an acquisition.

Some covenants are tested on a particular date. Others apply continuously. A breach of a high priority restriction may trigger default immediately, while a breach of a reporting obligation may have a cure period. Read the event of default clause alongside the covenant itself.

Misrepresentation

When a company signs or draws under a facility, it makes statements called representations. These may cover its accounts, legal status, disputes, ownership of assets and the accuracy of information supplied to the lender.

A representation that was materially incorrect when made, or when repeated, can be an event of default. Borrowers should check which representations repeat automatically on drawdown dates, interest dates or other occasions. A statement that was accurate at signing may need to be reassessed later.

Insolvency and creditor action

Loan agreements usually contain triggers connected with an inability to pay debts, formal insolvency proceedings, negotiations with creditors and enforcement action against company assets.

These clauses can be broad and may apply before a company enters a formal insolvency process. Definitions, financial thresholds, time periods and protections for contested or frivolous proceedings therefore matter.

Cross-default

A cross-default clause links this facility to other borrowing. A problem under another debt agreement can therefore create an event of default under the growth debt facility.

A borrower-friendly version normally includes a meaningful financial threshold and excludes minor, disputed or short-lived issues. It may also be framed as cross-acceleration, so the clause is triggered only if the other lender has actually accelerated its debt, rather than merely because a technical default exists.

Material adverse change

A material adverse change, often shortened to MAC, is a serious deterioration that meets the definition in the agreement. The wording may focus on the business, assets, financial condition or the company's ability to perform its payment obligations.

This is one of the most judgement-based provisions. Founders should resist treating it as standard background wording. Ask what must be affected, how serious the effect must be, whether the test is objective and whether the lender must act reasonably.

Other triggers

Depending on the facility, events of default may also cover:

• a change of control without lender consent;
• the security becoming invalid or losing its agreed priority;
• a guarantee or finance document ceasing to be effective;
• the company stopping all or a substantial part of its business;
• it becoming unlawful to perform the finance documents;
• a material court judgment that is not paid or set aside; and
• repudiating, or stating an intention not to comply with, a finance document.

The protections hidden inside the drafting

The headline list of triggers tells only half the story. Four drafting features often determine whether an operational mistake becomes a default.

• Grace period: extra time before a missed payment or other failure becomes an event of default.
• Cure period: time allowed to correct a breach. Some periods start when the company becomes aware; others start after lender notice.
• Materiality: a requirement that the breach or its effect is significant, rather than trivial.
• Threshold: a minimum financial amount before a judgment, creditor claim or default under other debt counts.

Also check whether a cure applies automatically, whether it is available only for breaches capable of remedy, and whether using it depends on the lender's consent. Five business days and five calendar days are not the same.

What the lender can do

Once an event of default is continuing, the lender's remedies commonly include:

• cancelling any undrawn commitment;
• refusing further drawdowns;
• increasing the interest rate to the contractual default rate;
• declaring all outstanding amounts immediately due, known as acceleration;
• requiring cash to be held in controlled accounts or applying cash against the debt;
• enforcing security over company assets; and
• recovering agreed enforcement and adviser costs.

These are rights, not an automatic sequence. A lender may waive the event, agree a temporary standstill, amend the facility or reserve its rights while discussions continue. Its choice will depend on the company's liquidity, the cause of the problem, the recovery outlook, sponsor support and the credibility of management's plan.

Default does not always mean enforcement

If the company has a viable plan and communicates early, a negotiated solution may produce a better recovery for the lender than immediate enforcement. The lender might ask for new information, tighter reporting, additional pricing, a fee, revised covenants, an equity contribution or a formal amendment.

A waiver addresses a specified past or current breach. It does not necessarily change the agreement for the future. An amendment changes the contractual terms. Make sure the document matches the outcome you need.

A simple default timeline

1. 1A warning indicator appears, such as a forecast showing minimum cash will be missed next month.
2. 2The company checks the exact wording, test date, calculation method and available cure period.
3. 3Management updates the board, advisers and an owner for lender communications.
4. 4The company prepares a reliable cash forecast, explanation and corrective plan.
5. 5The lender is approached before the trigger where possible, with a specific request.
6. 6Any waiver, amendment or standstill is documented before the company relies on it.

Do not assume that a friendly email or verbal reassurance is a waiver. Loan agreements commonly require formal written consent from the right lender party.

What to negotiate before signing

The best time to reduce default risk is before the facility is signed.

• Ask for appropriate grace and cure periods, especially for administrative and reporting failures.
• Limit immediate defaults to serious obligations and give remediable breaches time to be fixed.
• Add materiality qualifications where a minor error should not justify acceleration.
• Set sensible monetary thresholds for cross-defaults, judgments and creditor action.
• Prefer cross-acceleration to a broad cross-default where possible.
• Narrow the MAC definition to objectively serious effects, ideally linked to payment ability.
• Exclude proceedings that are being contested in good faith and discharged within an agreed period.
• Make recurring representations proportionate and qualify them by knowledge or materiality where appropriate.

Your lawyer should map every event of default against the operational owner who can monitor it. A clause is harder to breach accidentally when somebody knows exactly what it requires.

If a default may be approaching

Act before the test date if possible. Early disclosure is uncomfortable, but late disclosure can create a second problem if the agreement also requires prompt notification of a default.

1. 1Identify the precise clause and calculate the earliest possible trigger date.
2. 2Build a daily cash view and a realistic 13-week forecast.
3. 3Check whether the same facts affect other facilities, leases, payment providers or key contracts.
4. 4Agree a board-level plan and appoint one person to lead lender communication.
5. 5Present facts, corrective actions and a specific consent request. Avoid unsupported optimism.
6. 6Keep complying with unaffected obligations and preserve a clear written record.

Where solvency may be in doubt, take legal and restructuring advice immediately. Directors' duties and available options can change as financial distress deepens.

Questions to ask your lawyer

• Which triggers have no cure period?
• When does each cure period start, and does notice have to be given?
• Which representations repeat, and on what dates?
• Does cross-default apply to all group companies and all financial indebtedness?
• What is the exact MAC test?
• Can the lender block undrawn tranches before an event of default has fully occurred?
• What consents are needed for a waiver, amendment or standstill?
• Could one default trigger another agreement?

The bottom line

Events of default are not merely boilerplate at the back of a loan agreement. They define when the balance of control can move sharply towards the lender.

Focus on the triggers your company could realistically encounter, the time and thresholds available to fix them, and the remedies the lender gains. Then turn the signed wording into an operating checklist. If trouble appears, accurate information and early action usually create more options than waiting for the breach to become unavoidable.

Where to go next

• What happens if you breach a debt covenant? explains the response to a failed covenant test.
• What happens if a company cannot repay growth debt? covers the options and risks when repayment becomes uncertain.
• Covenants in growth lending explains the promises and tests that govern the facility.
• Security and collateral in growth lending explains what lenders take security over and why it matters.