Don't Trip! Why Loan Covenants Matter And How To Avoid An Unanticipated Default

I. Introduction.

Any company that has experience borrowing money is also almost certainly familiar with the voluminous stack of documents that must be executed in connection with the taking out of a new loan. Many borrowers carefully review such documents, perhaps engaging a team of lawyers and accountants to negotiate and explain the terms. Others simply sign without a second thought, with an expectation that everything will work out as long as payments are made. Many, perhaps most, throw the documents in a folder or on a thumb drive without a second look after the loan is closed.

However, corporate borrowers should be aware that each stack of loan documents contains numerous promises that prescribe ongoing obligations that continue for the life of the loan. Due to tightening economic conditions and the current interest rate climate, those ongoing obligations may be more pressing now than they have been for much of the past decade.