Default

A default in a credit agreement context is the occurrence of an event specified in the agreement that entitles the lender to exercise contractual remedies. Defaults fall into two principal categories: payment defaults (failure to pay principal, interest, fees, or other amounts when due) and non-payment defaults or covenant defaults (breach of an affirmative, negative, or financial covenant). Modern credit agreements typically distinguish between "default" (which may be cured) and "event of default" (which authorizes lender remedies).

Default vs. event of default

Modern credit agreements typically use a two-tier structure. A default is the underlying breach (e.g., a missed payment, a covenant breach) that becomes an event of default upon (1) expiration of any applicable grace period without cure; (2) failure to cure following lender notice; or (3) immediate ripening for non-curable defaults like bankruptcy. The distinction matters because lender remedies, acceleration, foreclosure, default-rate interest, are typically triggered only by an event of default, not a default within the cure period.

Common payment defaults

Standard payment defaults include: (1) failure to pay principal at maturity or upon demand; (2) failure to pay interest on the scheduled date; (3) failure to pay fees, costs, or expenses when due; (4) failure to pay amounts due upon acceleration. Grace periods (often 5-10 days) typically apply to interest and fee defaults but not principal-at-maturity defaults. Most credit agreements distinguish principal defaults (immediate) from interest and fee defaults (grace period).

Common covenant defaults

Standard covenant defaults include: (1) breach of affirmative covenant (after notice and cure); (2) breach of negative covenant (immediate); (3) failure to satisfy a financial covenant for a measurement period; (4) breach of representation or warranty discovered post-closing; (5) bankruptcy, insolvency, or general assignment for the benefit of creditors; (6) cross-default on other indebtedness above a threshold; (7) judgments above a threshold not satisfied or stayed; (8) ERISA events; (9) change of control; (10) material adverse change.

Lender remedies on event of default

Standard lender remedies upon event of default include: (1) acceleration, declaring the entire balance immediately due; (2) default-rate interest, increased interest rate (typically 2-5% above the regular rate); (3) termination of commitments, stopping further advances under revolving facilities; (4) cash collateralization, requiring deposit of cash equal to outstanding letters of credit; (5) foreclosure on collateral, exercising rights under deeds of trust, security agreements, or pledges; (6) setoff, applying deposit accounts and other amounts owed to the borrower against the loan; (7) specific enforcement, seeking equitable relief; (8) attorney's fees and costs, recoverable under standard credit-agreement provisions.

Cure rights and waiver

Many credit agreements provide structured cure rights: (1) monetary defaults, cure by payment within stated grace period; (2) covenant defaults, cure by remediation within stated period; (3) financial-covenant equity cures, cure by equity contribution; (4) limited reset rights, opportunity to remediate consecutive breaches. Lender waiver of a default is enforceable but does not waive subsequent defaults; written waivers should be carefully scoped. Course-of-conduct waivers (lender accepting late payments without objection) can create estoppel arguments under Texas law.