Identifying and Mitigating Repayment Risks
Q: Can you please provide a sample case for "forbear declaring events of default for a specific time period"?
A: If the Loan Agreement defined an event of default as 60 days overdue for payment of scheduled interest and principal, the lender may decide to forbear declaring an event of default for a specific period of time – 30 days for example – after discussions with the borrower. The discussions presumably convinced the lender that the borrower would pay the overdue amount within the next 30 days, thereby avoiding a declaration of default and all the associated legal issues that would follow as the lender attempted to regain the loan amount outstanding.
Q: Covenant agreement does not guarantee covenant performance.
A: You are absolutely right. This is a key point we wish to drive home. An agreement is one thing. It signals the borrower's commitment to meeting stated performance objectives. But an agreement cannot, by any means, assure performance. The proof of the pudding is in the eating, so to speak, and the eating is borrower performance.