Strategic Triage Protocol – When a “Little Problem” Becomes an Event of Default

Financings rarely go haywire in one spectacular moment. Trouble tends to start with something small– a payment that doesn’t appear, a covenant that looks a bit peaky, or someone leafing through the contract and spotting one of those “we promise this was true” statements that, on reflection, may have been feeling a touch ambitious.

On their own, these moments rarely bring the house down. The real tension comes when a harmless-looking Potential Event of Default starts edging towards a full Event of Default – the moment lenders gain a whole new set of powers and the borrower’s calm morning coffee becomes a full-on strategic meeting. A Potential Event of Default is often defined as something that would become an Event of Default if ignored, so spotting where you are on that spectrum really matters.

Here’s how to keep perspective – and control – when the documents start muttering.

Start By Understanding What Has Gone Wrong

Before anyone panics, take a breath. Most defaults begin as perfectly ordinary mix-ups.

If the money didn’t show up…

That’s the simplest kind of problem. English law takes the view that payments are rather like trains: they were meant to arrive, and if they didn’t, that’s that. No one argues about “nearly” or “we tried.” You either paid on time, or you didn’t.

If something else has slipped…

Not all breaches involve missing money. Sometimes it’s a reporting deadline that tiptoed past unnoticed. Sometimes it’s a covenant that didn’t fancy performing this quarter. Sometimes it’s a representation – one of those statements the borrower promised was true – but, in hindsight, was slightly rose-tinted.

These “technical” defaults aren’t always dramatic.Some only become Events of Default if notice is served or a cure period expires, while others cross the line immediately. Knowing whether you’re still in “Default” territory or have tipped into a full “Event of Default” is essential, because the lender’s enforcement rights only attach at the latter stage.

Then Check Whether the Window for Fixing Things is Still Open

Finance documents can feel stern, but most of them make room for everyday human error.

A missed payment caused by a harmless administrative hiccup – wrong account number, a signatory trapped in a meeting that should have been an email – will often come with a short grace period. If the money lands in that window, everyone moves on and pretends nothing happened.

Covenants, however, have less of a sense of humour.Financial covenant breaches usually do not come with a grace period unless the documents include an Equity Cure right (allowing shareholders to inject cash to repair the ratio). Without that, a breach is live the moment the figures fall outside the agreed range.

What matters is whether you’re still in “fix it quietly” territory or whether the situation has already crossed the line into something lenders take more seriously – first blocking new borrowings, and in more serious cases, asking for the whole loan back in one go.

Now Look Sideways: Who Else Might This Worry?

In a modern financing, nothing stays between two parties for long. One little blip can make half the capital structure lift its head like meerkats in a nature documentary.

Some agreements react immediately to trouble elsewhere – the classic cross-default, where one default automatically triggers another.
Others only get involved if the original lender actually demands repayment – known as cross-acceleration, a more measured approach.

A few take a relaxed view until the amount becomes meaningfully large – most documents include a de minimis threshold, which means small or accidental issues don’t trigger anything until they exceed a set value.

And then there’s the derivatives world, which has its own views on when it’s time to step in. Let’s just say they rarely miss an opportunity to be dramatic – under the ISDA Master Agreement, certain related defaults can give the swap counterparty the right to close out hedges early, and they tend to exercise that right at moments when the borrower least needs it.

Before anyone fires off a formal notice, it’s worth mapping the ripple effects. It’s surprising how much calmer the room becomes once everyone knows where the tripwires are.

Be Honest – But Don’t Rush in Before Understanding the Story

Finance documents love a punctual confession. Borrowers are usually required to tell the right people promptly once they realise something has gone wrong.

Who those people are depends on the structure:

• In loans, it’s the Facility Agent.
• In bonds, it’s the Trustee (and possibly the market).
• In derivatives, it’s whatever the ISDA schedule dictates, usually with impressive urgency.

But timing matters. Announcing a default while still working out what’s actually happened is a little like phoning the fire brigade because you burnt your toast. Understand the situation first; then communicate properly.

Finally, Choose How to Fix It

Once everyone knows what the issue is – and how widely it might echo – the job becomes choosing the right remedy.

A waiver is the gentle option, best for one-off slip-ups that aren’t likely to return.

An amendment is for problems that are clearly going to stick around. If the documents no longer mirror how the business operates, it’s kinder to adjust them than to pretend every quarter is a surprise. A forbearance or standstill is the diplomatic pause button. It buys time for a bigger conversation – often the sign that a wider restructuring is quietly taking shape.

Choose well, and the temperature drops. Choose badly, and you’ll be revisiting the same issue far sooner than you’d prefer.

The Last Word

An Event of Default isn’t a catastrophe; it’s a crossroads. Handle it calmly – understand the breach, check the timing, scan for ripple effects, talk to the right people, and choose the right fix – and it becomes a manageable moment rather than a crisis.

In a world full of long documents and even longer email chains, a bit of structure, perspective and humour goes a very long way.