Curing A Default: When Is It Too Late?

By Adam Wolk, David Duffee and Alexander Warents (October 31, 2017, 12:45 PM EDT) -- Certain cure periods in credit agreements are regularly negotiated. For example, a borrower's failure to pay interest or fees when due normally does not result in an event of default unless the borrower fails to make the payment for some period of time after the due date. Credit agreements also typically afford borrowers a period of time (often 30 days) before the breach of certain affirmative covenants results in an event of default. In these cases, the credit agreement is specific in providing that if the borrower takes the required action within the cure period, though beyond the required deadline, an event of default has not occurred. Similarly, many private companies (particularly those owned by private equity sponsors) are permitted under their credit agreements to cure the breach of a financial maintenance covenant (commonly referred to as an "equity cure") if the borrower receives a capital contribution that, when added to earnings before interest, tax, depreciation and amortization (EBITDA) as of the last day of the test quarter, would be sufficient to cause the borrower to be in compliance with the breached covenant. Here, the event of default occurred, but the credit agreement expressly deems the event of default to have been cured once the capital contribution is received....

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