What happens when a company breaches a debt covenant?
When a company breaches a debt covenant, is it most common for the lender to relax the covenants to allow the company to keep operating if there is a clear path for the lender to be paid? Or will lenders force the company into filing for bankruptcy and sell assets / entire company to pay the entire loan back? Primarily asking this question because I'm trying to understand what all the ways a company could go bankrupt are, and I'm not sure if breaching covenants counts as one, so any insight would be awesome.
if you breach a covenant, the company has defaulted on its obligations and therefore is subject to being forced into a bankruptcy by the lenders. However, in most instances the lender will attempt to reach a solution which includes the Company making many concessions to please lenders. Most of the time lenders know far in advance when a breach is on the horizon and they will reach out and come to a solution before any of this becomes a real problem.
Thanks for your comment! Very helpful
In some cases, the Federal Government prints money, sends it to you, and then all executives can pay themselves a generous bonus
Varies depending on company size. Generally lenders will want to avoid a BK at all costs and are quite amicable to giving the company some breathing room if it looks like there's a clear pathway to getting them paid back.
The guy who has dealt with this 82382 times and will know best is Distressed Industrial Buyer who I'm sure will chime in.
Most of the time if the debt is handled as agreed and continues to be serviced either with interest payments (bonds/revolvers) or P&I in the case of term loans/mortgages, the covenants violations are waived by charging a small fee to the debt holders. Basically a slap on the wrist not to do it again.
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