A default under a credit facility represents a moment of high risk to a company. It can result in severe consequences, depending on the nature of the default. However, both sides may hope to mitigate the consequences by engaging in a workout or restructuring of the debt, if that is possible.
When heading into a debt workout or credit restructuring situation, don’t neglect to negotiate. There’s no need to artificially limit your options, or assume things are set in stone. Instead, put as many options on the table as you can. Think creatively about what is possible and what you can offer.
Let’s say your company has a secured line of credit or term loan from a lender. If you are in a default situation, what should you do?
- First, consider what type of lender has made the loan. Some lenders will be more able and/or willing to work things out with you than others.
- Also, consider what you could give up. Can you afford to pay a portion of the payments due but not all? Can you provide more collateral? Can you add a personal guarantee and/or personal collateral? Can you agree to tighten up covenants? All these are negotiating chips you can use.
- Can you obtain financing from other sources? An equity infusion – though expensive - might help solve an immediate cash crunch or might be used to effectively “cure” a default, depending on the terms of your deal.
- Consider what the lender will likely need. They will probably want some assurance of payment, even if it means stretching the payments out over a longer period of time or forbearing for a short period. They also may need additional credit support – potentially additional collateral or guarantees. They may want to charge extra fees and a higher interest rate, in addition to tightening up covenants and adding financial tests.
- Finally, strategize thoroughly with your counsel. There may be options you haven’t thought of that are worth exploring.