Recourse Invoice Discounting Borrowing Base Adjustments under Dispute
Disputed invoices trigger immediate borrowing base deductions, cross-ageing exclusions, and liquidity calls under recourse discounting facilities.
Debt Covenant Breach
Meaning
Contractual failures happen when a borrower violates a specific financial or operational requirement set forth in a loan agreement. A debt covenant breach occurs if a company fails to maintain a required leverage ratio or misses a minimum net worth target. This event gives the lender the right to take corrective action and stops being a threat only when a formal waiver is granted or the loan is repaid.
Event Notification
Borrowers are legally obligated to inform their creditors as soon as a violation is identified. Following a debt covenant breach, the relationship between the bank and the company moves into a more intensive monitoring phase. This communication starts the clock on potential legal remedies available to the financier.
Cure Period
Many agreements provide a short window of time for the company to fix the violation without penalty. During a debt covenant breach, management might sell assets or raise new equity to bring ratios back into compliance. If the problem is solved within this timeframe, the default is typically forgiven.
Lender Remedy
Creditors hold the power to accelerate the debt and demand immediate repayment if the situation is not resolved. A persistent debt covenant breach often leads to the installation of a restructuring specialist to oversee the company’s cash flow. This outcome is generally a last resort intended to protect the principal investment.
Banks may also choose to increase the interest rate as compensation for the increased risk.