Events of default

Events of default (cas de défaut) are the contractual list of events that give lenders the right to cancel undrawn amounts, to demand immediate repayment of the loan and to enforce the security. The Loan Market Association model for leveraged financings includes, among others, non-payment, financial covenant breach, breach of other undertakings, misrepresentation, cross default, insolvency and the opening of insolvency proceedings, cessation of business, change of control, auditors’ qualifications, material litigation and material adverse change. The negotiation covers the grace periods: five to seven business days for a payment default caused by a technical error, around three business days for an ordinary payment default, and 10 to 30 days for a breach of a covenant or of an undertaking. Finally, it covers the materiality thresholds. The agreement refers to a “continuing” event of default: it is in your interest to define this term as a default that has been neither remedied nor waived, so that a corrected breach stops having effect without waiting for a formal waiver.

A company delivers its compliance certificate showing leverage of 5.3x against a 5.0x covenant on a €110m financing. The agreement provides a period of 20 business days for a shareholder injection. During that period, the lenders cannot accelerate the loan. The €7m injection brings the ratio back below the threshold and the event of default ceases to be continuing.

• Grace periods by category: payment, covenants, other undertakings.
• Materiality thresholds, in particular for cross default and litigation.
• The wording of the material adverse change clause.
• The definition of a “continuing” event of default.
• The interaction with the equity cure and with the clean-up period after an acquisition.