What is the difference between technical default and financial default? Which is more critical to bondholders?
Default means not performing according to a loan agreement. Financial default refers to the failure to pay interest and/or principal when due. Technical default refers to the failure to adhere to other terms of the agreement, such as providing information, maintaining insurance on collateral, keeping financial ratios within specific boundaries, etc. Since bondholders lend money to companies primarily to earn interest (and retrieve their principal), financial default is by far the more critical.