A default is a legal status, not a verdict. It gives the lender rights, but how those rights are used depends on the facts and on how the parties behave. This entry explains the kinds of default found in private loans, the responses short of enforcement and the main restructuring tools. It describes general market practice in the United States; every loan has its own terms.
Kinds of default
Loan agreements list “events of default.” The most common are:
| Event of default | Example | Typical cure period |
|---|---|---|
| Payment default | Interest or principal not paid when due | Often none or a few days |
| Financial covenant breach | Debt service coverage or loan-to-value test failed | Varies; sometimes an equity cure |
| Reporting or affirmative covenant breach | Financial statements or a borrowing base certificate delivered late | Often a cure period after notice |
| Negative covenant breach | Unpermitted debt, lien, transfer or distribution | Often none |
| Misrepresentation | A representation was materially untrue when made | Often none |
| Cross-default | Default under other material debt | Follows the other debt |
| Insolvency | Bankruptcy filing, assignment for benefit of creditors | None |
| Change of control or key person | Sponsor or manager leaves without consent | Varies |
| Maturity default | Loan not repaid at maturity | None, unless an extension applies |
The distinction between a default (an event that will become an event of default after notice or time) and an event of default (which gives the lender its remedies) matters. Many agreements also distinguish monetary from non-monetary defaults, with shorter or no cure periods for the former. Borrowers should know their cure periods before they need them.
What happens at default
Typical consequences written into loan documents include:
- Default interest, an additional rate on the outstanding balance, commonly a few percentage points above the contract rate.
- Acceleration, the right to declare the whole loan immediately due.
- Cash management triggers, where rents or collections are swept into a lender-controlled account.
- Blocked distributions to owners.
- Funding stops on future advances, draws or revolver availability.
- Guarantee triggers, depending on the guarantee’s terms. See collateral, security and guarantees.
Lenders often send a reservation of rights letter after a default. It preserves the lender’s position while discussions continue and prevents the lender’s patience from being argued later as a waiver.
Responses short of enforcement
Waiver
A waiver excuses a specific default, once. It is appropriate for technical or isolated breaches: a late report, a small covenant miss with a clear explanation. Waivers often carry a fee and sometimes tighter reporting.
Amendment
An amendment changes the terms going forward: resetting a covenant level, moving a construction milestone or changing a reporting date. Lenders usually ask for something in return, such as a paydown, additional collateral, a stronger guarantee or a higher rate.
Forbearance
In a forbearance agreement, the lender agrees not to exercise remedies for a defined period while the borrower pursues an agreed plan. It does not cure the default. A typical forbearance agreement includes:
- The borrower’s acknowledgment of the debt, the default and the absence of defenses
- A forbearance period with an end date
- Milestones: a sale process, a refinance commitment, new equity, a revised budget met
- Enhanced reporting and, often, cash management
- A release of claims against the lender
- Fees, and sometimes additional collateral or guarantees
- Automatic termination if a milestone is missed or a new default occurs
Restructuring tools
When the original plan cannot be met but the collateral and the business are sound, lenders and borrowers can restructure. The common tools:
| Tool | What it does | What the lender usually asks for |
|---|---|---|
| Extension | More time to complete the plan or refinance | Fee, paydown, tests on coverage or value |
| Partial paydown | Reduces loan-to-value to a level the exit can support | Often new sponsor equity |
| Rebalancing | Fresh equity restores the original cushion | Equity contribution by a date |
| PIK toggle | Part of interest accrues rather than paid in cash | Higher total rate, tighter controls |
| Additional collateral | Other assets added to the security package | Mortgages, pledges, guarantees |
| Covenant reset | Financial tests matched to a realistic plan | Fee, reporting, cash sweep |
| Cash sweep | Excess cash flow used to repay principal | Controlled accounts |
| Asset sales | Part of the collateral is sold to repay debt | Release prices above allocated loan amounts |
For more on PIK and interest reserves, see amortization, call protection, PIK and interest reserves.
An illustrative example
The figures below are illustrative arithmetic only. A $20.0M bridge loan on an apartment property was underwritten at 64% of a $31.2M value. Lease-up runs nine months late and the appraised value is now $27.0M, putting loan-to-value at about 74%. Maturity is in four months and the refinance lender will lend only up to about 65% of value, or $17.6M.
A possible restructuring: the sponsor contributes $2.0M of new equity to pay down the loan to $18.0M (about 67% of value), the lender extends maturity by twelve months, part of the extension fee accrues and a cash sweep applies until debt yield reaches an agreed level. The loan is again on a path to refinance, the sponsor keeps the asset and the lender’s cushion is restored. See leverage: loan-to-value, loan-to-cost and debt multiples and coverage and liquidity tests for the ratios involved.
What makes a workout succeed
- Early disclosure. The longer a problem is hidden, the fewer options remain.
- A credible plan with new information. Revised budgets, leasing evidence, buyer interest.
- Shared sacrifice. Lenders rarely accept more risk without new equity or new security.
- Clear documents. A clean set of covenants and an intercreditor agreement where there is junior debt make the negotiation simpler.
- A lender able to wait when waiting is right. We lend our own permanent capital and can evaluate an extension on its merits rather than against a calendar.
When restructuring is not enough
If the plan cannot work at any reasonable basis, or the borrower cannot or will not support it, the next step is a consensual handover or enforcement. See enforcement and remedies and the chapter overview, workouts and enforcement. For a case study of a loan structured around a turnaround, see Project Anvil.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.