Under most credit agreements, changing the date on which interest is due requires the consent of every lender. This “sacred right” exists to prevent borrowers from unilaterally deferring interest. But there’s a catch: the sacred right protects the payment date, not the grace period that follows if the borrower misses it.

Those are two different provisions in two different parts of the agreement. The payment date is typically in the economics section; the grace period is in Events of Default. And while the payment date requires all lender consent to amend, the grace period generally doesn’t. Extend that grace period to maturity and the borrower can skip every interest payment without consequence – no default, no all lender vote, no violation of the sacred right.

This is not theoretical. Borrowers have done it (STG Logistics as the most recent example). We reviewed 40 recent sponsored credit agreements to assess how widespread the vulnerability is and whether current drafting practices protect against it.

Drafting Gap (32.5%)

In nearly a third of agreements, the drafting simply doesn’t answer the question. These provisions list specific carve-outs from the sacred right – default rate amendments, MFN provisions, mandatory prepayments – but are silent on whether amendments to Defaults or Events of Default are also excluded. That silence creates arguments on either side of the issue.

Borrowers will argue the sacred right only protects against postponing “any date scheduled for” payment. The grace period isn’t a payment date; it’s the window after a missed payment before a default is triggered. Amending it doesn’t change when interest is due; it only changes when the remedy kicks in. Borrowers will also argue that these are sophisticated parties who could have expressly included interest payment defaults as a sacred right and chose not to.

Lenders will counter that a scheduled payment date is meaningless if it’s unenforceable. Extending the grace period to maturity lets a borrower miss every payment without consequence, which is the same economic result as postponing the payment date entirely and exactly what the sacred right was designed to prevent. Lenders will also point to the specific, narrow carve-outs in these provisions (for Default Rate amendments, mandatory prepayment waivers, and the like), arguing that the explicit enumeration of those carve-outs implies that other amendments, including to Events of Default and grace periods, are not carved out and remain subject to the sacred right. An example:

• “postpone any date scheduled for, or reduce the amount of, any payment of principal of, or interest on, any Loan or L/C Borrowing or any fees or other amounts payable hereunder, without the written consent of each Lender directly and adversely affected thereby … it being understood that a waiver of any condition precedent set forth in Section 4.02 or the waiver of any obligation to pay interest at the Default Rate, or the amendment of the definitions of any ratio used in the calculation of any rate of interest or fees (or the component definitions thereof), or the amendment or waiver of the MFN Provision, or the amendment or waiver of any mandatory prepayment of any Term Loans shall not constitute a postponement of any date scheduled for or reduction of the payment of principal, interest or fees”

The Gap is Closed — Borrower Friendly (60%)

Most agreements answer the ambiguity directly, but not in lenders’ favor. These provisions state that amendments or waivers to Defaults and Events of Default do not constitute an extension of an interest payment date. Examples:

• “any amendment, waiver or modification of any Defaults or Events of Default (including any grace periods with respect thereto) … shall not constitute an extension of the date of any payment of interest for purposes of this Agreement”
•  “it being understood that an amendment, modification or waiver of any condition precedent, representation, warranty, covenant, Default or Event of Default shall not constitute an extension of any maturity date, date of any scheduled amortization payment or date for payment of interest or fees”

The practical effect is significant. A borrower and majority lenders can freely extend the grace period from a few business days to maturity without triggering the sacred right. Minority lenders have no veto and no recourse.

The Gap is Closed – Lender Protective (7.5%)

A small minority of agreements close the gap in lenders’ favor. These provisions explicitly bring payment defaults within the sacred right, meaning any amendment or waiver that relaxes the consequences of missing an interest payment requires all-affected-lender consent. An example:

• “a waiver of any condition precedent set forth in Section 4.02 or the waiver of any Default (other than a Default under Section 9.01(a)) … shall not constitute a postponement of any date scheduled for, or a reduction in the amount of, any payment of interest or any payment of fees”

The language technically covers only waivers, not amendments. But the explicit reference to Section 9.01(a), the interest payment default provision, makes the intent clear: payment defaults are protected.

Conclusion

The takeaway for lenders is uncomfortable but clear. The interest-payment sacred right, long assumed to guarantee timely payment, does not necessarily do that. In most agreements it protects the payment date on paper while leaving the grace period open to majority lender manipulation. Lenders reviewing existing credit agreements should check which category they fall into. Those negotiating new ones should make sure payment defaults are explicitly named in the sacred right, or assume they aren’t protected.

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