Noetica’s AI models unearthed a first-of-its-kind tariff-based event of default term. Is this term an ad-hoc inclusion, or the first of many to come in this new macro-environment?
Highlights
- A single credit agreement clause turned a tariff hike into the first public tariff-based loan default.
- Learn what a covenant breach is, how it differs from a missed payment, and why lenders write these terms.
- See how one default led to a $550 million debt-for-equity restructuring in a matter of weeks.
By Dan Wertman, originally published on the Noetica blog, now part of Thomson Reuters. July 2025.
A company can be currently paid up on every loan installment it owes and still be in default. That’s the uncomfortable reality behind a clause that surfaced in a credit agreement amendment in June 2025 — one that made trade policy, not missed payments, the trigger for a loan default. Within weeks, that clause helped push a century-old manufacturer into a $550 million restructuring.
Here’s what a covenant breach actually is, how this one played out, and what it signals for anyone drafting or negotiating credit documents in a tariff-exposed market.
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From default to debt-for-equity
What legal and deal teams should do now
Litigating a breach of contract action
The answers you need and how to proceed when litigating a matter
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What is a covenant breach?
A covenant is a promise written into a credit agreement. It’s a set of things a borrower agrees to do, affirmative covenants, or agrees not to do — negative covenants — for as long as the loan is outstanding.
Common examples include maintaining a minimum interest-coverage ratio, delivering financial statements on time, or not taking on additional debt without lender consent.
A covenant breach happens when the borrower fails to hold up one of those terms. It doesn’t require a missed payment. It’s often called a “technical default” precisely because the loan can be current on paper while still being in default under the contract’s covenant package.
Once a breach occurs, the lender typically gains the right to demand repayment, charge default-rate interest, or push for a renegotiation. In practice however, most breaches end in a waiver or an amendment rather than acceleration.
Background of the deal
Superior Industries was a leading manufacturer of aluminum wheels for the automotive industry. Founded in 1957, the company had grown to become one of the world’s largest suppliers of these wheels. They design, engineer, and manufacture a wide variety of wheels for both original equipment manufacturers (OEMs) and the automotive aftermarket.
One wrinkle about Superior’s business is that it primarily makes wheels in Mexico for U.S. car manufacturers. Since the administration increased tariffs on U.S. goods imported from Mexico, Superior has struggled to maintain viability, running into a liquidity crunch and significant headwinds in early 2025.
From default to debt-for-equity: how it played out
In June 2025, to solve its liquidity crunch caused by new tariff policies, Superior obtained an incremental $70M delayed draw term loan facility through an amendment to its credit facilities, certain key terms of which are highlighted below:
The incremental loan includes the first “tariff-based” event of default in the history of public credit markets (see below). In short, if Superior was subject to tariffs exceeding 20%, and such tariffs could not be passed through to Superior’s customers within 60 days of the levies being imposed, Superior would be in default under their credit facility.
“Tariffs. There occurs any tariffs on any of the shipments of the Borrower or its Subsidiaries into the U.S. exceeding 20.0% of the product value (the “Tariff Threshold”); provided that, if on or prior to the date that is sixty (60) days after the date such tariffs exceed the Tariff Threshold, the Borrower enters into agreements (or otherwise makes arrangements) such that such tariffs are either paid by or otherwise covered by (including as a result of price increases) the customers of the Borrower and its Subsidiaries, then no Event of Default in respect of this section (12) shall be deemed to have occurred;”
Subsequently, on July 8, 2025, Superior announced a significant restructuring and change-of-control transaction, in which Superior would be acquired by a group of its term loan investors, led by Oaktree Capital Management. The restructuring involved a debt-for-equity swap, converting up to approximately $550 million of term loan claims into 96.5% of the new common equity of the indirect parent company.
This transaction reduced Superior’s funded debt from about $982M to ~$125M, while equity-holders will receive, in aggregate, only $3.1M in cash and 3.5% of the new equity.
Market implications
Their lenders were so worried about tariff risk that they actually wrote a “tariff-triggered default term” into the credit documents.
Read that again.
Lenders said: “if tariffs increase higher than a certain percentage threshold, and you can’t pass those costs to your customers, we’re calling your loan.”
Issuers: Your biggest threat might not be your competition. It might be a policy tweet at 3 AM.
Lenders: Are you modeling policy risk scenarios that seem “impossible” today? Superior’s lenders clearly were.
Everyone else: This probably isn’t the last time we’ll see this playbook; it’s critical to keep track of these terms in real-time.
Deal data is now showing tariff risk showing up in credit documents in more than one way: tariff add-backs inside EBITDA definitions (adjusting a company’s earnings metric to exclude tariff costs) and now, tariff-based events of default.
Whether this specific clause becomes standard market language or stays a one-off, it’s a signal that counterparties are actively rewriting supply chain and trade-policy risk directly into deal terms rather than treating it as background macro noise.
What legal and deal teams should do now
- Track emerging terms in real time: Novel covenant language spreads fast once one deal proves it works. Waiting for the next credit agreement survey means you’re negotiating from old data.
- Loop in finance early: Tariff-linked terms sit at the intersection of legal drafting and treasury forecasting, which makes early coordination between legal and finance leadership more valuable than ever.
- Build pass-through flexibility into pricing and covenant language before a tariff shock forces it into an amendment under pressure.
- Know your playbook if a breach happens.:Understand how a breach of contract is typically evaluated and remedied so you’re not building a response from scratch mid-crisis.
Noetica, now part of Thomson Reuters, was the first to flag this clause using its real-time analysis of credit agreement terms. Its transactional term data continues to track how tariff-related language is spreading across the market as more deals get done.
