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 a going concern.

7. Audit fees.

Shareholders/Board
1. Company’s reputation damaged.

2. Stock declines by 5% or more.

3. Shareholder lawsuits alleging that the CFO and CEO falsely represented that the company was in compliance with its debt.

4. Lawsuit settlement costs and legal fees.

5. Board unhappy.

6. Senior management unhappy.

Other Parties
1. Vendors may reduce credit lines or require COD.

2. Customers may find other suppliers.

3. Employee morale drops.

4. Key employees may leave.

5. Treasurer and staff may leave.

Next Steps

1. Review S&P’s latest analysis on how ratings change over five years and how many companies default.

2. See whether your debt compliance adequately protects you by testing it against our diagnostic matrix.

3. If you are taking too much risk in your debt compliance, ask for a <u>demo</u> of our services.

4. Ask us to provide pricing so you can put improving your debt compliance in your 2020 budget.