05 Jan Events That Can Trigger a Loan Default
- Material adverse changes to the business, including any breaches of previously agreed-upon covenants (some of which may be outside of the loan itself, but which could impact the operations of the business).
- Defaults on the payment. Any failure to pay principal, interest or fees on the due date or during the grace period could trigger a loan default.
- Breach of the representations and warranties. This can sometimes be subject to the qualification that the breach be material.
- Cross default. This one can become a bit convoluted as the default of a loan agreement may be triggered by a default of another loan or security agreement. In some cases, the trigger may occur when material agreement that the borrower is a party to is breached. Typically such a cross default requires maturity of the other paper (i.e. the cure period must have already expired and the other lender has the right to accelerate).
- General insolvency. In some cases a default on a loan may be triggered by both voluntary and involuntary bankruptcy, if not discharged by the borrower within a specified period of time (many times within 60 to 90 days).
- The triggering of an ERISA liability in excess of a specified amount.
- The untimely death of a C-level executive within the company, or someone who is the chief guarantor on the loan. The CEO, CFO or other managers within the firm may have personal guarantees on debt taken on by the company.
- If a borrower places a lien on the business, a default trigger may go into effect. This is true unless the lien is pursuant to the lender/loan in question as it would then directly relate to the agreement itself.