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Do lenders really care about technical defaults?

I assume technical defaults on debt covenants draw a variety of lender responses. What is to be expected?

This question was asked by an attendee during the Proformative webinar "Best Practices in Debt Compliance & Case Study" held on March 28, 2013. Join the discussion and add your insights below.

Answers

Jeffrey Wallace
Title: Managing Director
Company: Debt Compliance Services LLC
(Managing Director, Debt Compliance Services LLC) |

If the bank still wants to deal with you, then the waiver fee for the default is usually small, commensurate with how bad the violation is. However, if the default has been outstanding for several quarters, then the 2% penalty interest can be significant. If the bank doesn't want to deal with you, then they can play hard ball with you. It really all depends on current market credit conditions and whether your own credit standing has deteriorated significantly.

Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Yes, at least enough to collect a waiver fee. Frequent occurrence may jeopardize the credit facility by resulting in it being called.

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

In my opinion, banks love these smaller technical defaults. Covenant waiver fees are a good source of revenue with very little increase in risk. I emphasize though the smaller covenants. Defaults by large margins or on especially difficult covenants can never be viewed as "not a big deal". You do not want to have your line of credit pulled with little or no notice.

Michael Eisenstei
Title: Director, Treasury
Company: NewStar Financial
(Director, Treasury, NewStar Financial) |

If you study your docs and negotiate them with proper latitude, you shouldnt run into these situations.

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