Acceleration Rights
Definition
Acceleration rights allow lenders to declare the entire outstanding loan balance immediately due and payable upon occurrence of an Event of Default, rather than waiting for scheduled maturity. Once accelerated, lenders can pursue all remedies—foreclosure on collateral, filing involuntary bankruptcy, or demanding immediate payment—without waiting for the loan's natural maturity date. Acceleration transforms a long-term obligation into an immediate liability, creating maximum pressure on borrowers and maximum optionality for lenders. Most credit agreements allow acceleration upon any Event of Default (payment defaults, covenant breaches, bankruptcy) but require consent of majority lenders (typically 50%+) to accelerate following curable defaults.
Why it matters
Acceleration is the nuclear option in creditor remedies—it shifts power decisively to lenders by eliminating the borrower's time value. A company with $100M term loan due 2028 suddenly faces $100M due today upon acceleration, typically forcing bankruptcy or distressed asset sales. However, acceleration is double-edged: once debt is accelerated, borrowers often file bankruptcy to halt enforcement (automatic stay), converting out-of-court workout into formal restructuring. During 2020, many lenders avoided acceleration despite technical defaults, preferring amendments and waivers that preserved out-of-court control rather than triggering bankruptcy filings. Understanding acceleration timing—when to threaten, when to execute, when to forbear—separates sophisticated workout negotiators from inexperienced creditors.
Common misconceptions
- •Acceleration doesn't happen automatically upon default—it requires affirmative lender action (acceleration notice). Defaults create the right to accelerate, not automatic acceleration.
- •Accelerating debt doesn't guarantee payment—it often triggers bankruptcy filing, halting enforcement through automatic stay. Lenders must weigh acceleration benefits against bankruptcy conversion risk.
- •Not all defaults permit acceleration—some agreements distinguish between payment defaults (immediate acceleration rights) and technical defaults (cure periods before acceleration permitted).
Technical details
Acceleration mechanics and notice requirements
Standard acceleration language: 'Upon occurrence and during continuance of Event of Default, Required Lenders may declare all outstanding obligations immediately due and payable.' 'Required Lenders' typically defined as 50%+ of aggregate commitments, ensuring no single lender can unilaterally accelerate.
Notice requirements: Lenders must deliver formal acceleration notice to borrower and agent. Notice specifies: (i) Event of Default triggering acceleration, (ii) outstanding principal and interest amounts, (iii) date by which payment due (typically 'immediately'), (iv) consequences of non-payment (foreclosure, legal action). Notice starts enforcement clock.
Automatic acceleration exceptions: Payment defaults (failure to pay principal or interest when due) often trigger automatic acceleration without lender action. Rationale: Payment default demonstrates inability/unwillingness to service debt, eliminating need for lender decision. Other defaults require affirmative lender action to accelerate.
Rescission rights: Most agreements allow lenders to rescind acceleration if default cured and lenders compensated for enforcement costs. Rescission restores original maturity schedule. Used when borrower raises emergency capital or defaults prove temporary—lenders prefer preserving ongoing loans over forcing liquidation.
Strategic considerations in acceleration decisions
When to accelerate immediately: (1) Payment defaults where borrower clearly insolvent, (2) Fraud or material misrepresentation discovered, (3) Insider dealing or asset stripping, (4) Borrower in discussions with other creditors suggesting imminent bankruptcy. Immediate acceleration preserves lender position before further deterioration.
When to forbear on acceleration: (1) Covenant defaults where business remains viable (temporary EBITDA miss), (2) Technical defaults with reasonable explanations (late financial statement delivery), (3) Situations where acceleration would trigger bankruptcy destroying all value, (4) When lender-favorable workout possible without acceleration threat.
Negotiating standstill agreements: Upon default, lenders often negotiate 'standstill' or 'forbearance'—agreeing not to accelerate for 30-90 days while parties negotiate workout. Standstill includes: temporary waiver of default, agreement on amendment terms, borrower providing enhanced reporting, forbearance fee (25-100 bps). Preserves optionality while avoiding bankruptcy.
Borrower strategic responses: Upon acceleration notice, borrowers have limited options: (1) Pay in full (rare—usually lack liquidity), (2) Negotiate rescission (offer amendment, equity injection, asset sale proceeds), (3) File bankruptcy (automatic stay halts enforcement), (4) Contest acceleration validity (sue claiming procedural defects). Bankruptcy most common response.
Interaction with bankruptcy and automatic stay
Automatic stay mechanics: Upon bankruptcy filing, automatic stay (11 USC §362) immediately halts all collection activities—including acceleration, foreclosure, and enforcement. Accelerated debt remains accelerated but cannot be pursued during bankruptcy. Lenders must seek relief from stay or wait for plan confirmation.
Pre-petition vs post-petition acceleration: Accelerating pre-bankruptcy provides strategic advantage—claim treated as 'fixed' at acceleration date, potentially limiting post-petition interest accrual. However, benefit often theoretical—bankruptcy court can subordinate aggressive creditors or compel settlements regardless of pre-petition actions.
DIP financing dynamics: If lenders accelerate and borrower files bankruptcy, borrower needs Debtor-In-Possession (DIP) financing for operations. Existing lenders can provide DIP, gaining super-priority and controlling bankruptcy process. Alternatively, new DIP lenders prime existing lenders—reducing recoveries. Acceleration without DIP financing strategy often backfires.
Strategic bankruptcy filings: Sophisticated borrowers file bankruptcy immediately upon receiving acceleration notice—before lenders can foreclose or seize cash. This 'protective filing' uses automatic stay as shield, forcing lenders into bankruptcy court negotiations rather than out-of-court enforcement. Converts lender acceleration into borrower-controlled restructuring.
Foreclosure and enforcement post-acceleration
Secured lender foreclosure rights: After acceleration, secured lenders can foreclose on collateral through: (1) Judicial foreclosure (lawsuit, court order, sheriff sale), (2) UCC Article 9 foreclosure (commercial property—notice to borrower, public or private sale), (3) Strict foreclosure (rare—lender takes title without sale). Foreclosure timeline: 60-180 days depending on jurisdiction and borrower cooperation.
Credit bidding in foreclosure sales: Lenders can 'credit bid' at foreclosure sales—bidding outstanding debt amount without providing cash. Example: $100M debt, collateral sold at foreclosure, lender bids $100M (debt), third party bids $90M (cash). Lender wins, takes collateral, debt extinguished. Credit bidding protects lenders from artificially low bids.
Deficiency judgments: If foreclosure sale proceeds less than debt ($80M sale proceeds vs $100M debt), lenders can pursue deficiency judgment for $20M shortfall against borrower personally or guarantors. Many loans include limited recourse provisions capping deficiency exposure—especially real estate loans where non-recourse common.
Assignment for benefit of creditors (ABC): Alternative to bankruptcy—borrower voluntarily assigns assets to trustee who liquidates for creditor benefit. State law governed, faster than bankruptcy, but less protective of borrower. Lenders sometimes negotiate ABC in exchange for standstill, avoiding bankruptcy's complexity while achieving orderly liquidation.