The financial statements have barely closed when the bank’s letter arrives: the leverage ratio has breached its covenant and the loan may be recalled early. This is a negotiation situation, not yet an enforcement one — most facilities are saved at the negotiating table if the company follows the right sequence.
What a covenant breach entitles the bank to do
Covenants are the financial and non-financial undertakings a borrower accepts in the credit agreement — maintaining leverage ratios, interest-cover levels, dividend limits or periodic reporting. On breach, the bank’s rights are contractual: require a cure within a set period, raise interest or monitoring fees, demand additional collateral, and ultimately recall the loan early under the agreed clause and the law on credit institutions (Law on Credit Institutions 32/2024/QH15). The key point: recall is not self-executing — the bank must notify, and the process follows each facility’s own documents, so re-reading the agreement matters more than any assumption.
At the table: waiver, reset, and their price
Three negotiation tools dominate: a waiver for the breached testing period, a covenant reset for future periods built on a revised business plan, and a tenor or grace restructuring so cash flow matches debt service again. In exchange, banks typically ask for a package: a renegotiation fee, additional security or shareholder guarantees, a dividend lock during the monitoring phase, and denser reporting. A borrower who arrives with honest numbers and a thirteen-week cash-flow plan consistently does better than one waiting for the bank’s unilateral decision.
If talks fail: the protection order
- Get the bank to confirm in writing the breach, the cure period and the clause triggered — every later step anchors on that letter.
- Prepare a cash-flow scenario and an offer to prepay part of the principal in exchange for keeping the remainder on schedule.
- Screen other facilities for cross-default clauses: one breach can cascade across several banks at once.
Frequently Asked Questions
Does a covenant breach mean instant recall?
Not automatically. Early recall is the bank’s contractual right on covenant breach, typically after a breach notice and expiry of any cure period the agreement allows; read the exact clause of your own facility.
How should we negotiate?
Around three tools: a waiver for the breached period, a covenant reset for future periods, and tenor restructuring; arrive with honest numbers, a cash-flow plan and a concrete proposal rather than a general plea for time.
What happens to collateral?
Collateral is enforced only when the debt falls due — including an effective early recall — and remains unpaid; during negotiation the bank may require top-up security but cannot unilaterally realise assets.
What penalties apply?
Fees and default interest follow the contract: renegotiation fees, a margin uplift during the breach period and prepayment fees on settlement; all are negotiable, especially where the borrower tables its own solution first.
This article has been quality-reviewed by the FLAW AI Legal Council
