A Borrower Defaulted: Now What? Your Critical First Steps

Our new insightful and informative series, “Protecting Lenders: Strategic Responses to Borrower Default," is designed to provide comprehensive guidance on managing borrower defaults effectively. This four-part series covers the essential aspects of default management from initial response through various resolution strategies. The first installment outlines the critical first steps needed following a borrower default, including default diagnosis, document review, and communication strategies to preserve your rights and position.

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

Protect your interests now. Contact any of the lawyers listed for a confidential consultation on responding to defaults while preserving your full spectrum of legal and financial remedies or if you’re interested in scheduling a private and customized presentation on navigating borrower defaults, workouts, and enforcement actions.