A company has a covenant breach on its senior secured loan. What are the immediate options for the company, and how would you advise management?
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Immediate options include: (1) seek a waiver or amendment from lenders, often requiring a fee or enhanced covenants; (2) cure the breach by injecting equity or selling assets; (3) refinance the loan with new debt; or (4) if no agreement is reached, the lenders can accelerate the debt and potentially force insolvency. I would advise management to first assess the severity of the breach and liquidity position, then proactively engage lenders with a credible turnaround plan to negotiate a waiver or amendment, avoiding a default that could trigger a downward spiral.
WHAT INTERVIEWERS LISTEN FOR
- ✓Waiver/amendment
- ✓Cure via equity or asset sale
- ✓Refinancing
- ✓Engage lenders early
COMMON MISTAKES
- ✗Ignoring the possibility of lender acceleration
- ✗Advising to hide the breach
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