Events of Default

What is a Default?

An event default is a breach of a covenant which occurs when one party fails to fulfill their contractual duties. In the context of covenants, when a bondholder provides a loan to an issuer, both parties agree to specific terms laid out in the prospectus. This contract provision often includes specific events of default that outline conditions or circumstances under which the lender can take action if the borrower defaults.

For instance, if an issuer defaults by making a late payment or failing to meet other payment obligations, the bondholder can demand repayment of principal amount and interest payment.

FAQ

• What is the difference between an event of default and a potential event of default?

  
  An event of default is a situation explicitly defined in a commercial agreement that allows the non-defaulting party to take specific actions, such as demanding immediate repayment or seizing collateral. A potential event of default is a condition or circumstance that, with the passage of time or the giving of notice, would become an event of default. This gives the lender time to address the issue in good faith before it fully escalates.

• Is cross-default the same as an event of default?

  
  No, a cross-default is not the same as an event of default, but it can trigger one. A cross-default provision in a commercial agreement stipulates that a default under one obligation with a third party will constitute a default under the current obligation. This ensures that bondholders are protected across multiple agreements if an issuer defaults elsewhere.

• What are the two types of default?

  
  Monetary default occurs when the issuer fails to make a payment when due, such as a late payment or nonpayment of interest or principal under the loan agreement. Non-monetary default involves breaches of other obligations under the agreement, such as failing to meet financial covenants, misrepresentation, or a material adverse change in the issuer's financial condition. This type often involves breaches of contractual duties that do not directly relate to payment. Each type of default has specific triggers and consequences defined in the prospectus, ensuring that both parties understand the implications and can act accordingly to maintain the agreement in good faith.