The Cascading Consequences of a Default

Many Treasurers think they can talk their way out of a default. This is particularly true for Treasurers with no covenant list, so they don’t know how many significant covenants they can breach. And few Treasurers know what GAAP will require the auditors to do in a default.

You can’t keep a default a secret. Before the lenders, auditors, and Board are informed, you will first report the default(s) to your CFO, Chief Counsel, CEO, and outside counsel. Then:

Lenders
1. When did breach first occur?

2. Cross-defaults trip other debt.

3. They will charge penalty interest and may stop providing credit.

4. They will require a thorough covenant review that may uncover other covenant violations, with even minor violations now significant.

5. Remedying the default will incur waiver fees, possibly new, more onerous covenants, or worse.

6. Lender legal fees (paid by you).

7. Outside counsel fees.

Auditors
1. An 8-K announcing the default(s).

2. Per ASC 470, a long-standing breach will require restating LT debt of earlier financials as ST, a new covenant violation.

3. They will also require a thorough covenant review that may uncover other violations.

4. SOX citation.

5. Implementing new controls may delay current financials, another violation.

6. In the worst case, ASC 205 disclosure about whether your company can continue as