A technical breach occurs when a financial metric is exceeded, while an actual breach is non-payment of interest or principal. For example, if gearing rises above the covenant threshold, that is a technical breach — even though the company still pays interest and principal on time. Operations continue. But one agreed measurement parameter is outside the contracted range. An actual breach, by contrast, means cash has not reached the bank's account on time.
Technical breach: metric out of range
A technical breach (covenant breach) typically occurs when liquidity tightens and a ratio drifts above its threshold. The company still services debt. The business runs. But the bank now has contractual rights to respond.
In practice: Around 90% of covenant breaches are technical. Only a small proportion escalate to actual payment defaults — often because the bank intervenes early through the technical breach.
Actual breach: non-payment
An actual breach (payment default) is non-payment. Interest or principal has not reached the bank's account on time. This is a far more serious signal — it means the company lacks cash, not just that it fails to meet a metric.
Why is a technical breach still serious?
Because it gives the bank contractual rights. Even without non-payment, the bank can:
- Demand additional security or guarantees
- Raise the interest rate (default interest)
- Restrict dividends, capex or acquisitions
- Require more frequent reporting
- Trigger cross-default clauses in other agreements
- As a last resort: call the entire loan
Cross-default: the hidden risk
Many loan agreements contain a cross-default clause: if you breach one agreement, you are automatically deemed to have breached the others. A technical breach on one bank loan can trigger an actual breach on another facility — if the other has short notice.
What does it mean in practice?
A technical breach is not the end of the world. Banks often handle them pragmatically through a waiver. But that assumes you:
- Discover the breach before the bank
- Contact the bank proactively
- Have a clear plan to get back below the threshold
If the bank is informed first by their own risk system, negotiating power has tipped. If you discover it first, you retain control of the covenant conversation.