A friendship complicated the default clause both sides needed

The situation

Two weeks before the signing date, Rizki called Jacek directly instead of going through either set of lawyers. He wanted one thing changed: if the clinic group had a rough quarter after closing, he did not want the lenders able to call a default before he and Agus had a real chance to fix it. He framed it as a small ask between people who had known each other for over fifteen years.

Jacek had met Rizki in his early twenties, back when Jacek was still driving a school bus route in the mornings and taking evening finance courses, long before either of them had anything resembling the capital involved in this deal. Rizki and Agus had built a small chain of denture and dental clinics across Maple from a single storefront where Agus worked the front desk as a dental assistant while Rizki treated patients. The friendship predated the business, the acquisition, and everyone's current job title, and that history was exactly why Rizki thought a phone call would be enough.

Jacek was now leading acquisitions for a private equity-backed buyer that specialized in consolidating small regional practice groups, and this deal, valued in the mid single-digit millions, was structured as a leveraged buyout: a significant portion of the purchase price would be funded by debt secured against the clinics' own future cash flow, with Jacek's firm contributing the equity portion and taking operational control after closing.

That structure meant the lenders, not just the buyer, had a direct stake in how the clinics performed after closing. Any credit agreement governing that debt would include default triggers tied to financial performance, and those triggers do not bend for friendship. Rizki's request, reasonable as it sounded over the phone, was asking Jacek to promise something the loan documents had not yet been written to allow.

Jacek understood why Rizki was worried. The clinic group's revenue was seasonal, dipping predictably in certain months, and Rizki had watched a competitor's practice group struggle through a bank calling in a loan over what he considered a temporary blip. He did not want the same thing happening to the business he and Agus had spent years building, especially now that repayment obligations would sit on top of the company for the first time. Jacek could not simply say yes on the phone, but he also could not dismiss the concern, since the friendship and the deal both depended on getting this right before signing.

What the law actually said

Once the term sheet reached drafting, the credit agreement's default provisions became the real issue. Leveraged buyout financing typically includes financial covenants, ongoing tests such as minimum cash flow or maximum debt levels the target business must maintain after closing. Miss a test, and the credit agreement treats that as a default, which can give lenders the right to accelerate the loan, meaning demand full repayment immediately, well before the underlying business problem has had time to resolve.

Rizki's assumption, that a soft quarter would simply be discussed and worked through, is not how these agreements operate unless a specific mechanism is written in to allow it. The written terms of the credit agreement govern, and a long personal friendship between Rizki and Jacek does not on its own soften a financial covenant; lenders who are not party to that friendship have no reason to extend the same informal grace Rizki was picturing. That said, a lender must still exercise its rights under the agreement honestly and in good faith, and a lender that has repeatedly let breaches pass without consequence may not be able to insist on strict compliance later without first putting the borrower on notice.

What the agreement could include, if negotiated in advance, was an equity cure right: a contractual mechanism letting the buyer inject additional equity capital after a covenant breach to retroactively treat the test as satisfied, avoiding a formal default. This is a standard tool in leveraged financing, but it is not automatic. It has to be negotiated into the credit agreement itself, and lenders typically limit how often and how much a cure can be used.

We explained to Jacek that securing this right would require going back to the lenders, not just amending something between Jacek's firm and Rizki, because the lenders were the party whose consent actually controlled whether a missed covenant meant default or a manageable pause. Rizki's phone call, however well intentioned, had asked the wrong party for the wrong kind of promise.

There was a second complication worth naming plainly. Because Rizki and Jacek were friends outside the transaction, there was a real risk that an informal side promise, even one made with good intentions, could later be characterized as an understanding that influenced how the written agreement was negotiated, potentially undermining the clarity both sides needed the final documents to have. We advised Jacek that any commitment worth making needed to be made in writing, through counsel, and disclosed to the lenders, not worked out quietly between two people who trusted each other but were not the only parties whose agreement mattered. Lenders in a syndicated leveraged financing also expect any side arrangement between sponsor and seller to be disclosed to them directly, since an undisclosed understanding that affects how a covenant might actually be enforced can itself become a point the syndicate raises later, well after the documents are signed and the friendship is no longer the only relationship at stake.

What we did

1. Explained the mismatch to both sides directly, walking Rizki and Agus through why a friendly understanding with Jacek could not bind the lenders, since the lending syndicate was a separate party to the credit agreement with its own independent approval process for any cure mechanism. This conversation happened before drafting started, so nobody spent time negotiating a term the lenders would simply refuse to honour.
2. Drafted a formal equity cure proposal rather than relying on informal assurances, specifying the number of times the right could be exercised, the maximum cash injection allowed per cure, and the window after a missed covenant test within which the cure had to be completed, giving the lenders a defined risk to underwrite instead of an open promise. A vague request would likely have been rejected outright rather than negotiated.
3. Took the proposal to the lending group for negotiation, where the lenders agreed to the concept but pushed back on frequency, limiting cures to two uses across the life of the loan rather than the unlimited flexibility Rizki had originally wanted, a real constraint we needed both Jacek and Rizki to accept before the term sheet could move forward toward signing.
4. Negotiated pricing for the cure right, since lenders treated the flexibility as additional risk and required a modest increase in the interest margin on the debt, a cost that had to be disclosed clearly to Jacek's investment committee before they would approve the change, since the committee needed to weigh the ongoing cost against the protection the cure right actually bought the deal.
5. Separated the friendship conversation from the contract conversation going forward, advising Jacek to route any future requests from Rizki through counsel rather than informal calls, since an off-the-record commitment made in good faith could otherwise create confusion about what the signed agreement actually required, or be read later as evidence the written terms were never the real deal between the two of them.
6. Drafted notice and cure procedures into the closing documents, setting out exactly how a covenant test failure would be communicated, how much time Rizki and Agus would have to arrange an equity injection, and who calculated whether the cure had been sufficient, closing the ambiguity that had started this entire conversation between Rizki and Jacek two weeks before signing.
7. Confirmed the final terms with all three parties before signing, making sure Rizki and Agus understood the cure right came with a cost and a limit, not the unlimited informal flexibility originally requested, so nobody was surprised by the terms after closing when a covenant test actually came due and the cure mechanism had to be used for the first time.
8. Modelled the seasonal revenue pattern against the proposed covenant tests, using two years of the clinics' actual monthly numbers to confirm the negotiated cure right would realistically cover Rizki's specific worry about seasonal dips, rather than assuming a generic cure structure, borrowed from another deal, would happen to fit this business's particular rhythm without actually checking the numbers against it first.

The outcome

The deal closed with a two-use equity cure right written into the credit agreement, giving Rizki and Agus a real mechanism to protect the business through a genuinely soft quarter without triggering an immediate default. It was not the unlimited flexibility Rizki had asked for on the phone, and the pricing concession meant the debt carried a somewhat higher interest cost for the life of the loan than it would have without the cure right attached.

Jacek's investment committee accepted the higher cost as reasonable given what it bought: a documented, lender-approved process instead of a personal understanding that would have meant nothing to the people actually holding the debt. Rizki, for his part, accepted that the friendship could inform how flexibly Jacek's firm behaved in practice, but could not substitute for terms the lenders had agreed to in writing.

The clinics have had one soft quarter since closing, tied to a temporary staffing gap at two locations, and the cure right was used once, exactly as documented. The friendship between Jacek and Rizki survived the negotiation, in part because the hard conversation happened before closing rather than during an actual default.

Agus, who had been quieter through the negotiation than Rizki, later said the written cure procedure gave her more confidence than the original phone call ever would have, since she now knew exactly what would happen and when, rather than trusting that a friendly relationship would somehow sort itself out under pressure. That was, in the end, the real value of turning an informal understanding into contract language: not that it gave Rizki everything he first asked for, but that it gave both sides a shared, enforceable answer to a question that used to depend on how a phone call went. Jacek has since made it a standing practice on other deals to raise sensitive covenant questions with lenders early, rather than waiting for a counterparty to raise them informally close to signing.

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