Alert
New LME Strategy Targets Sacred Payment Rights Through Grace Period and Default Amendments
December 5, 2025
Authors
Jill S. Fox
Senior Attorney, New York
jfox@goulstonstorrs.com+1 212 878 5149
Philip A. Herman
Director, Boston
pherman@goulstonstorrs.com+1 617 574 4114
Jesse Rubinstein
Director, New York
jrubinstein@goulstonstorrs.com+1 212 878 5142Market participants are increasingly focused on a developing liability management strategy in which borrowers and majority lenders are exploring whether amendments to grace periods and Event of Default provisions can be used to delay both interest and principal payments (including payments due at maturity) without expressly modifying “sacred rights” under the credit agreement.
Traditionally, timely payment of principal and interest has been treated as a core sacred right requiring unanimous lender consent. Yet many credit agreements distinguish between the payment obligation itself and the separate mechanics that determine when nonpayment becomes actionable. By inserting or expanding grace periods or redefining what constitutes an Event of Default, a borrower may claim that it can defer payment in practice even while leaving the stated maturity date and payment covenant untouched. This creates a structural gap in which lenders technically retain their sacred right to payment, but majority-approved amendments to default and remedy provisions can nevertheless restrict the timing and manner in which those rights are enforced.
These issues are now the subject of active litigation, where minority lenders argue that majority amendments and inaction undermined sacred payment rights by weakening the remedies needed to enforce them.
As courts evaluate these arguments, market participants should reassess how credit agreements treat grace periods, default provisions, and remedy mechanics. Some recent agreements have already begun requiring unanimous consent for amendments that add or extend grace periods, an approach that may signal where the market is heading.
Key Considerations:
- Borrowers may attempt to delay both interest and principal payments, including at maturity, by amending (or adding) grace period and default provisions rather than through direct changes to the payment covenant.
- Timely payment of principal and interest is a sacred right, but many agreements leave room to alter the mechanics that determine when nonpayment becomes actionable.
- Minority lenders may have limited enforcement power, particularly where remedies require action by Required Lenders.
- Pending litigation will shape how courts balance technical payment obligations against amended default and remedy structures.
- Newer agreements are already evolving, with some requiring unanimous consent for any amendment that adds or extends grace periods or that has the effect of postponing payment.
Goulston & Storrs continues to monitor how courts and market practices are responding to these evolving developments. Please contact a member of our Corporate Group, Finance Group or your usual Goulston & Storrs attorney for additional information.
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