Triggers, tests, and performance events
Entity-level triggers
status: draft
Entity-level triggers
Entity-level triggers measure whether the parties operating the deal remain capable of doing so. Unlike performance triggers that track collateral quality or structural tests that measure credit enhancement, entity triggers respond to events at the originator, servicer, or sponsor level. These can be the most immediate existential threat to a deal because they can trigger regardless of how well the collateral is performing.
Originator triggers
Insolvency and bankruptcy triggers
The most severe originator trigger is bankruptcy or insolvency:
"Originator Default" shall occur upon: (i) the filing by the Originator
of a voluntary petition in bankruptcy under any applicable bankruptcy,
insolvency, or similar law; (ii) the filing against the Originator of
an involuntary petition in bankruptcy that is not dismissed within 60
days; (iii) the appointment of a receiver, trustee, or custodian for
substantially all of the Originator's assets...Key variations:
| Trigger Type | Standard Definition | Negotiation Points |
|---|---|---|
| Voluntary bankruptcy | Immediate trigger | None; this is non-negotiable |
| Involuntary bankruptcy | Filing triggers, possibly with cure period | Push for 60-90 day cure before consequence applies |
| Assignment for benefit of creditors | Typically immediate trigger | May negotiate carve-out for orderly wind-down |
| Admission of inability to pay debts | Immediate trigger | Clarify what constitutes “admission” |
Why this trigger exists: A bankrupt originator cannot continue originating, may lose licenses, and creates uncertainty about servicing continuity. The deal structure needs to protect itself from originator-level corporate failure.
Financial covenant triggers
Originators often must maintain minimum financial metrics:
| Covenant Type | Typical Threshold | Measurement |
|---|---|---|
| Minimum tangible net worth | $X million | Quarterly |
| Minimum liquidity | $X million or 30+ days operating cash | Monthly or quarterly |
| Maximum leverage | Debt/equity below 3:1 or 4:1 | Quarterly |
| Minimum EBITDA | Positive trailing 12-month | Quarterly |
Breach consequences:
- Soft breach: Reporting obligation; originator must notify capital provider
- Hard breach: Revolving suspended; no new collateral can be added
- Cure period: Typically 30-60 days to cure financial covenant breaches
Material adverse change (MAC) triggers
MAC clauses are broad triggers covering significant negative developments:
"Material Adverse Change" means any event, circumstance, or condition
that has, or could reasonably be expected to have, a material adverse
effect on: (i) the business, operations, assets, or financial condition
of the Originator; (ii) the ability of the Originator to perform its
obligations under the Transaction Documents; or (iii) the validity or
enforceability of the Transaction Documents or the rights and remedies
of the Noteholders thereunder.Key parsing questions:
- How broad is “material”? Some MAC clauses quantify materiality (>10% revenue decline); others leave it undefined
- Who determines MAC? Capital provider in its “reasonable discretion”? Objective standard? Arbitration?
- What’s the cure period? Many MAC triggers have no cure because the determination is backward-looking
Negotiation point: Push for quantified materiality thresholds. A 15% revenue decline in a quarter is material. A 3% decline probably isn’t. Without quantification, MAC clauses become judgment calls that favor the capital provider.
status: draft
Servicer triggers
Servicer default events
Servicer triggers address operational failures in loan administration:
| Trigger | Definition | Typical Cure Period |
|---|---|---|
| Remittance failure | Failure to remit collections within X business days | 2-5 business days |
| Report delivery failure | Failure to deliver required reports | 5-10 business days |
| License loss | Loss of required servicing licenses | 30-60 days (state-dependent) |
| Material covenant breach | Breach of servicing standards or representations | 30 days |
Servicer replacement mechanics
When a servicer default occurs, the deal structure typically provides for:
- Notice and cure: Servicer receives notice and has defined cure period
- Servicer termination: If uncured, capital provider can terminate servicer
- Backup servicer activation: Backup servicer assumes servicing duties
- Transition period: 30-90 days for systems migration and customer notification
Why backup servicers matter: Servicer replacement only works if there’s a capable replacement ready. Deals without backup servicers face operational gaps during transition.
Servicing performance triggers
Beyond discrete default events, some deals include ongoing servicing performance metrics:
| Metric | Typical Threshold | Consequence |
|---|---|---|
| Call answer rate | >80% within 60 seconds | Reporting; repeated failures trigger cure period |
| Customer complaint rate | <X per 1,000 accounts | Enhanced monitoring |
| Regulatory examination | No material findings | Notification required; cure period for remediation |
| Collection effectiveness | >X% of scheduled payments collected | Cash diversion or servicer fee reduction |
status: draft
Change of control triggers
What constitutes change of control
Change of control triggers respond to ownership or management changes:
"Change of Control" means: (i) any person or group acquires beneficial
ownership of more than 50% of the voting securities of the Originator;
(ii) the sale of substantially all assets of the Originator; (iii) a
merger or consolidation in which the Originator is not the surviving
entity; or (iv) the removal or replacement of the chief executive
officer without consent of the Noteholders.Key variations:
| Trigger Type | Standard Threshold | Negotiation Points |
|---|---|---|
| Ownership change | >50% voting control | Push for >51% or actual control test |
| Asset sale | Substantially all assets | Define “substantially all” (>75%? >90%?) |
| Management change | CEO/CFO departure | Push for key person events rather than blanket management triggers |
| Board composition | Majority change | May not be relevant for all deals |
Why change of control matters
Capital providers underwrote the deal based on the current team and ownership. A change of control introduces:
- Unknown management capability
- Potential strategic priority shifts
- Different risk appetite or servicing philosophy
- Possible conflicts with the new owner’s other businesses
Typical consequence: Revolving period suspends until capital provider consents to new ownership/management.
status: draft
Key person triggers
How key person triggers work
Key person provisions name specific individuals whose departure triggers consequences:
"Key Person Event" means the occurrence of any of the following:
(i) [CEO Name] ceases to be employed as Chief Executive Officer; or
(ii) [CFO Name] ceases to be employed as Chief Financial Officer; or
(iii) both [Founder A] and [Founder B] cease to be actively involved
in the management and operations of the Originator.Common structures:
| Structure | Definition | Consequence |
|---|---|---|
| Single key person | One named individual | Departure triggers consequence |
| ”And” structure | Both named persons must depart | More flexible; either can leave without trigger |
| ”Or” structure | Either named person departing triggers | More restrictive |
| Replacement cure | Departure triggers, but acceptable replacement cures | 60-90 day cure period to find replacement |
Key person trigger consequences
- Notification: Capital provider must be informed within X days
- Cure period: Originator has 60-90 days to find acceptable replacement
- Consent requirement: New hire must be approved by capital provider
- Revolving suspension: No new collateral during vacancy period
Negotiation point: Push for replacement cure periods rather than immediate consequences. Key people leave; that’s normal business. What matters is whether an acceptable replacement is found.
status: draft
Volume and eligibility triggers
Minimum origination volume
Revolving deals require new collateral to replace runoff. Volume triggers protect against originator slow-down:
"Minimum Origination Volume Trigger" means the occurrence of any date
on which the Originator has originated less than $[X] in aggregate
Eligible Receivables during the immediately preceding three calendar
months.Typical thresholds:
| Deal Size | Monthly Volume Trigger | Rolling Period |
|---|---|---|
| $50M facility | $3-5M/month | 3-month rolling |
| $100M facility | $7-10M/month | 3-month rolling |
| $250M+ facility | $15-25M/month | 3-month rolling |
Consequence: Revolving period suspends. The pool begins amortizing passively because insufficient new collateral is being generated.
Eligibility concentration triggers
Concentration limits can also function as triggers:
| Concentration Type | Typical Limit | Consequence of Breach |
|---|---|---|
| Single obligor | <2-3% of pool | Excess above limit is ineligible |
| Geographic | <10-15% per state | Excess is ineligible |
| Product type | <25-30% per product | Excess is ineligible |
| Vintage | <20-25% same origination month | Excess is ineligible |
Repeated eligibility trigger trips may indicate origination quality problems or business model drift.
status: draft
Common pitfalls with entity triggers
Pitfall 1: underestimating entity trigger severity
The most immediate existential threat for many deals is not collateral performance but entity-level triggers. A technical breach at the company level can trigger servicer replacement even when collateral is performing perfectly.
What to do: Read entity-level trigger definitions as carefully as performance triggers. Map each trigger to its consequence and cure mechanics.
Pitfall 2: broad MAC clause definitions
MAC clauses without quantified thresholds give capital providers maximum discretion. “Material adverse effect on business operations” can mean almost anything.
What to do: Negotiate specific carve-outs (general economic conditions, industry-wide changes) and quantified materiality thresholds.
Pitfall 3: cure periods that don’t match capital access
A financial covenant cure right requiring $2M cash injection within 5 business days is useless if you can’t mobilize that capital quickly.
What to do: Negotiate cure mechanics that match your realistic capital access timeline. Push for 30-60 day cure periods on financial covenants.
Pitfall 4: key person triggers on single individuals
Naming only the CEO in a key person trigger creates concentration risk. What if that person leaves for any reason?
What to do: Negotiate “and” structures requiring multiple departures, or replacement cure periods allowing reasonable time to hire.
status: draft
Cross-references
- Triggers overview: severity spectrum and trigger categories
- Performance triggers: collateral-based triggers
- Structural tests: OC/IC test mechanics
- Trigger negotiation: negotiation strategies across trigger types