What happens if a covenant is broken effectively, that is technically a default. However, you have to be careful because even though a project has defaulted, it doesn't mean that it's insolvent. Default just means that the borrower hasn't abided by the rules that the lender has put in place.

So for example, a technical advisor could not access a site on demand, however, the project could be performing very well. If you do have a default, then there are three potential actions. Firstly, any existing credit lines like overdraft facilities, standby facilities, or revolving credit facilities will be canceled.

Secondly, the lenders can demand immediate repayment. And finally, even if you don't ask for repayment initially, you can ask for the repayment of the loan at any time. Now, the reality is that these are pretty extreme options, and usually if there is a covenant breach, unless it is very, very serious, these options won't get activated. Instead, the agent bank will first, do a materiality test.

The question they'll ask, does it cause a problem for the lenders? If it doesn't, it really doesn't make sense to accelerate the loan if it is non-material.

However, if it is non-material, they have broken a covenant, and this is an opportunity to charge a fee. If a project breaks the covenant, the banks can charge a fee and increase their return, even if it is just a very small item. So typically, if you are a borrower, you really wanna try to avoid breaching a covenant.

If it is material, then it's a very different situation, and potentially the lenders will call a default. And what that means is that they will demand repayment of the loan, which is known as accelerating the loan, and then the security package comes into force and the lenders can take over. So effectively, the shareholders are sidelined. In reality, what normally happens is there is a big negotiation between the shareholders and the lenders. And if you're managing the process correctly or well, you'll normally make sure that everybody knows there is going to be a covenant breach, well ahead of the actual breach. Because if there is a covenant breach and it becomes a surprise to the lenders, that is a very, very bad signal.