Events of Default

Default of payment

For credit agreements, a default in the payment of interest often enjoys a grace period of 2 to 3 business days.

In contrast to credit agreements, the typical bond indenture has a payment-default grace period (whether for principal or interest) of 30 days. The longer grace period for bonds reflects the practical reality that, if a default occurs, there is greater difficulty in first locating and then obtaining waivers from a disparate and anonymous bondholder group than from lenders under a credit agreement.

Inaccuracy of representations

Whenever a representation proves to have been false in any material aspect, it constitutes an event of default. Bond indentures rarely include a default based on a breach of representations. Bond indentures are always accompanied by a detailed offering circular and bonds are a security for SEC purposes.

A bank information memorandum tends to be much less detailed and normally provides only high level view of the borrower.

Breach of covenants

Bond indentures usually have 30 or 60 day grace periods and require that notice be given before the grace period commences. There are no immediate events of default based on covenant breaches.

There is no uniform approach to credit agreements. It could be immediate while others require notice.

Cross default

The cross default is one of the most misunderstood provisions but also one of the most powerful. Borrowers have 3 concerns 1) borrower has credit related problems 2) risk of other debt being accelerated 3) borrower can get a waiver from other lenders or restructure to disadvantage other creditors such as granting collateral security.

Cross default refers more accurately to a provision that allows the credit agreement to be accelerated whenever a default or event of default occurs in another instrument, whether or not the debt under that other instrument has been or may be accelerated.

Judgment default

Texaco in 1984 faced a $11B judgment against it for allegedly interfering with Pennziol’s acquisition of Getty Oil. Texaco, which thought it had good grounds to appeal, could not obtain a bond of that size without breaching its debt agreements. It was forced to file for bankruptcy to gain the benefit of the Bankruptcy Code’s automatic stay and thereby capture the time it needed to appeal. In the end, after a four year saga that included its filing for bankruptcy, Texaco settled with Pennzoil for $3B.

Change of control

In contrast to bond indentures, in which changes of control are almost universally mandatory redemption or repurchase events, credit agreements often treat a change of control as a default rather than as a mandatory redemption or repurchase events, credit agreements often treat a change of control as a default rather than as a mandatory prepayment.

Material Adverse Change

In rare cases, particularly in asset based lending transactions, a credit agreement includes an event of default upon a MAC.


When an event of default occurs, lenders are faced with difficult choices. The best course of action may not be to force a default but to renegotiation terms.