If you haven’t yet read Part 1 of this series, we recommend you do so in order to build a strong foundation around the vocabulary of restructurings used in Part 2. Click here to read Part 1.
This is the second edition of our blog series related to debt restructurings. This week we will touch on what happens once a default occurs.
In part 1 of this blog series, we explained that a grace (or cure) period is a period of time following a default in which an issuer is contractually permitted to either make a scheduled payment without incurring penalty, or to repair the condition that caused a technical default, as applicable. If a grace period expires before the issuer has remedied (or otherwise obtained a waiver of) the underlying default condition (e.g., non-payment of interest), an event of default occurs under the debt documents and accordingly, certain creditors may have the right to enforce remedies (including the right to accelerate the debt in full, as described is Part 1). Creditors are unlikely to enforce remedies for “minor” or technical defaults, as the costs of enforcing such remedies often dwarf the expected benefits (as compared to a negotiated resolution); however, the occurrence of a significant event of default for which lenders are likely to enforce remedies leaves an issuer with, essentially, two choices: to seek an out-of-court reorganization or to seek protection from creditors through a bankruptcy proceeding.