Mechanics
Event of default
An event of default is a defined failure that gives the lender the right to act. It does not compel them to, and on a business still trading and paying interest, they almost never take the most drastic option available.
Also called EoD · default · acceleration · cross-default · default interest
A default opens a ladder of responses. Lenders start at the bottom of it, and most situations never leave the bottom.
| Response | How common |
|---|---|
| Reservation of rights | Usual first step |
| Waiver for a fee | 18–44 on the scale |
| Reset with amended terms | 35–60 on the scale |
| Default interest | 55–78 on the scale |
| Acceleration | Rare |
| Enforcement | Rarest |
Relative frequency of each response on a first breach by a trading borrower. Illustrative, not measured data.
A right, not a consequence
An event of default sounds terminal and is not. It gives the lender the right to act: to charge default interest, to demand repayment, ultimately to enforce security. It does not compel any of it.
The commercial logic matters more than the drafting here. For a business that is still trading and paying interest, a lender that accelerates and enforces almost always recovers less than one that works the situation out. The security a cashflow lender holds, a debenture over the company and a charge over its shares, only bites if the relationship breaks down entirely, and realising it means selling a business that has just been destabilised by the enforcement itself.
So the practical question after a default is not whether the lender can accelerate. It is what they want, which is usually to be repaid in full and on time, and what arrangement gets them there.
The categories
A facility agreement lists events of default at some length, and they are not equivalent in the lender's mind.
A failure to deliver information on time is administrative and usually resolved with a phone call. A financial covenant breach is the common case at £3-15m and is usually worked out. A misrepresentation is more serious than its size suggests, because it casts doubt on everything else in the pack. A cross-default imports a problem from another facility. A payment default, meaning a missed interest or principal payment, is a different order of event. And an insolvency event is generally decisive.
Reading which category you are in tells you how the conversation will go. A covenant trip on a business paying its interest is a negotiation. A missed payment is not.
The breach happens on the test date. The certificate is only when the lender finds out, up to two months later.
| Stage | Timing |
|---|---|
| Covenant tested | Day 0 |
| You know | Days 14-21 |
| Certificate due | Days 30-60 |
Convention: compliance certificate delivery window of typically 30 to 60 days after the test date.
When the breach happens
This is the timing point borrowers routinely miss. The covenant is tested on the test date, and the breach crystallises then. The compliance certificate reporting the ratios is delivered later, typically within a window of thirty to sixty days.
The gap between those two dates is not a grace period. Nothing about it delays the default; it only delays the lender's knowledge of it. What it is, is your window to decide how to report and whether to open a conversation before the document lands rather than after.
That distinction has practical value. The moment you have the quarter's management numbers, usually within two or three weeks of the period end, you know whether you have tripped. Every day after that is a day you could be using to prepare a re-forecast and a proposal, or a day you are spending hoping the certificate says something different.
Grace periods and materiality
Some events of default carry a grace period written into the agreement, and knowing which do is worth an hour with the document before you need it.
Payment defaults usually carry a short cure period, often a small number of business days, to cover administrative failures such as a payment sent to the wrong account. Breaches of general undertakings frequently carry a remedy period of a couple of weeks where the breach is capable of remedy. Financial covenant breaches typically carry none at all, which is why an equity cure right, capped at three or four over the loan life and not usable in consecutive quarters, is the mechanism that stands in for one.
Materiality qualifiers matter too. An undertaking breached in a way that has no material adverse effect may not trigger a default at all, depending on how the clause is drafted. Where a facility has no materiality thresholds on its general undertakings, every minor administrative slip is technically an event of default, which is worth negotiating out at term-sheet stage.
Not all defaults are equal. A covenant trip and an insolvency event sit at opposite ends of a lender's reaction.
| Category | How a lender reads it |
|---|---|
| Information undertaking | Administrative |
| Financial covenant | Usually worked out |
| Misrepresentation | Trust damaged |
| Cross-default | Imported |
| Payment default | Serious |
| Insolvency event | Decisive |
Relative severity as a lender reads them. Illustrative, not measured data.
Cross-default against cross-acceleration
A cross-default clause makes a default under one facility a default under this one. It is standard, and on a business with several facilities it means a breach anywhere becomes a breach everywhere at once.
Cross-acceleration is the borrower-friendlier variant. It bites only once the other lender has itself accelerated, rather than on the mere existence of a default elsewhere. That difference buys real time: a covenant trip on an asset finance line becomes your senior lender's problem immediately under cross-default, and only becomes their problem under cross-acceleration if the asset financier decides to act on it.
Where a business carries invoice finance, asset finance and a senior facility together, asking for cross-acceleration rather than cross-default, or at least a de minimis threshold below which small facilities do not trigger it, is one of the higher-value requests available at term-sheet stage.
The escalation ladder
Lenders start at the bottom of the ladder and most situations never leave it.
The usual first step is a reservation of rights letter. It confirms the default, records that the lender is not waiving anything by continuing to fund, and preserves their position while a conversation happens. It is a procedural step rather than an aggressive one, though it reads alarmingly the first time.
Next comes a waiver for a defined number of periods, usually for a fee, or a reset of the covenant with amended terms which may include tighter reporting, a higher margin or additional information undertakings. Default interest, an uplift on the rate while the default subsists, is charged less often on a first breach than borrowers expect. Acceleration and enforcement sit at the top and are rare, because they are the responses that typically recover least.
What the first week decides
Go early, and go with a plan rather than a problem.
The sequence that works is to re-forecast honestly as soon as the management numbers are available, quantify the shortfall against the covenant, decide which remedy you are asking for, and open the conversation before the compliance certificate lands. A lender told six weeks in advance with a credible forecast is in a materially different frame from one that learns from a document.
The ask is better settled before the meeting than in it. A reset of the schedule, a waiver for defined periods, an equity injection, a disposal applied to prepayment, or conversion of a maintenance test to a springing one are the usual options, and each is priced. The price is lower when the request arrives with evidence than when it arrives after a failure.
Where the business has a credible alternative lender, that changes the negotiation materially. A borrower who could refinance is negotiating a waiver from a different position than one who cannot, which is one more reason competitive tension has value beyond the day the facility is signed.
Common questions
What is an event of default?
A defined failure under the facility agreement that gives the lender the right to act: to charge default interest, demand repayment, or ultimately enforce security. It gives a right, not an automatic consequence, and for a business still trading and paying interest lenders rarely take the most drastic option available.
Will my lender call in the loan if I breach a covenant?
Usually not. A lender that accelerates and enforces almost always recovers less than one that works the situation out, because realising security means selling a business the enforcement itself has destabilised. The common first step is a reservation of rights letter, followed by a waiver or a covenant reset.
When does a covenant breach happen?
On the test date, not when you report it. The compliance certificate is typically due thirty to sixty days later, but that window is not a grace period. It only delays the lender's knowledge. Since you usually have management numbers within two or three weeks, you know well before you have to report.
Is there a grace period for a covenant breach?
Usually none for financial covenants, which is why an equity cure right exists as a substitute. Payment defaults often carry a short cure period of a few business days to cover administrative errors, and general undertakings frequently carry a remedy period of a couple of weeks where the breach can be remedied.
What is a cross-default clause?
It makes a default under one facility a default under this one, so on a business with several facilities a breach anywhere becomes a breach everywhere. Cross-acceleration is the borrower-friendlier variant: it only bites once the other lender has itself accelerated, which buys time to fix the underlying problem.
What is a reservation of rights letter?
A letter confirming the default and recording that the lender is not waiving any rights by continuing to fund while a conversation happens. It is a procedural step to preserve their position, not an aggressive one, though it reads alarmingly the first time you receive one.
Will I be charged default interest?
Less often on a first breach than borrowers expect. Default interest is an uplift on the rate while the default subsists, and it sits partway up the escalation ladder rather than at the start. It is more likely where a breach is unreported, repeated, or accompanied by a loss of confidence in management information.
What should I do the moment I know I have breached?
Re-forecast honestly, quantify the shortfall, decide which remedy you are asking for, and open the conversation before the compliance certificate lands. Come with a plan rather than a problem. Each remedy is priced, and the price is lower when the request arrives early with evidence than after a failed certificate.
The full treatment sits in the guide: covenant breach.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.