Few CFOs and Treasurers will survive if any of these consequences happen:
A. When known, a default must be reported quickly to the lenders per the terms of the agreement, as not reporting would be fraudulent — including reporting to other lenders due to cross-default clauses
B. Lenders will want to know the specifics of the default, when it started, and what steps the company has taken or proposes to take to remedy the default
C. The longer the default period, the more likely the 2% penalty interest is due on the outstanding debt and there’s more justification for higher waiver fees
D. The auditors will also need to be informed, and both the lenders and the auditors will insist on an intensive review for any other covenant violations
E. Auditors will also want to test when the default started because a default occurring over several quarters will cause the financials to be restated
F. ASC 470-10-45-11 requires the defaulted debt(s) to be classified as short-term for any covenant violation, no matter how insignificant
G. If a public company, such a 10-Q/A restatement would incur a material SOX deficiency citation and possibly trigger an SEC investigation for a 1934 Exchange Act violation
H. If there is public disclosure, the stock price will be hit, which will be much more costly than any penalty interest and waiver fees
I. Possible shareholder lawsuits for misleading financial statements
J. Business disruption can occur with vendors, customers, and employees
K. What the lenders will accept in satisfaction in terms of penalty interest, waiver fees, increased pricing, and new, more onerous covenants is a complex calculation of factors that are beyond the company’s control:
- The lenders’ revised evaluation of the company’s management and credit risk against existing pricing and current credit market conditions.
- And, of course, the company may be unable to borrow until the default is remedied.