Strategic Default Response Protocol for Lenders
When a borrower defaults under a loan agreement, you face a dual challenge: time pressure demands swift action, while legal complexities require precision. Whether confronting missed payments, breached financial covenants, or maturity defaults, your immediate response will either preserve your rights or potentially compromise your position.
Diagnose the Default
First, conduct a comprehensive assessment to determine:
- All applicable events of default specified in your loan documents including the nature and type
- Whether any cure periods remain available
- Potential underlying issues with collateral, guarantors, or borrower operations
Document Review is Critical
Next, conduct a review of your complete loan documentation:
- Examine all loan agreements, security documents, and guarantees
- Identify any intercreditor agreements, participation arrangements, or side letters
- Confirm the current debt holders and their positions, especially in complex capital stacks with multiple tiers
- Determine the available contractual remedies, including rights to cash management control, foreclosure options relating to real and personal property collateral, and account setoff procedures
Communication Strategy Matters
Finally, implement a disciplined communication approach:
- Where possible internal discussions should include counsel to maintain privilege
- Exercise caution before documenting preliminary assessments or exchanging internal email communications
- Ensure external communications are precise, controlled, and include non-waiver language
- Consider the strategic timing of reservation of rights letters and formal notices of default/demand/acceleration
