‘Uncontrolled Events’: How Lenders Are Assuming Risks of Force Majeure and Artificial Intelligence

Over the past decade, lenders and borrowers have faced a run of shocks that no credit model was built to anticipate: a global pandemic, wars in Ukraine and Iran, supply-chain disruption, energy price spikes and a new wave of U.S. tariffs, with AI now reshaping entire sectors.

When these types of events occurred, parties to leveraged loans responded on an ad hoc basis by negotiating accommodations and amendments or agreeing to restructure their deals. There is an emerging trend for borrowers and sponsors to make provision for force majeure events, including the negative impact of AI, in the documents, through “Uncontrolled Event” provisions that exclude specified events from the events of default and for which permitted adjustments to EBITDA may be made.

These provisions can affect both when lenders may intervene and how much contractual flexibility a borrower retains as its business deteriorates. Their expanding scope raises a fundamental question: Which consequences of disruption should lenders agree to absorb, particularly where the impact may represent a lasting change in the borrower’s business rather than a temporary disruption?

This article examines how those provisions work, how the drafting has expanded, and why the effect is to move the risk of the unexpected from borrowers to lenders.
 

The Material Adverse Change, or MAC, clause was once a standard feature of European leveraged loans, a catch-all event of default for any event or circumstances that had or could be expected to have a material adverse effect on the business of the borrower or its ability to perform its obligations under the finance documents. The risk of such events lay squarely with the borrower. It has fallen out of favor as sponsors demanded greater certainty of outcomes and reduced scope for lender discretion.

Lenders have come to accept that the guardrails provided by the covenants and the specified events of default are sufficient. If there was some unforeseen event that resulted in a material adverse change to the business or the borrower’s ability to comply with its obligations, the remaining events of default would give the lenders the right to accelerate their loans or enforce their guarantees and security.

Events of default are carefully drafted so that the occurrence of the specified event or circumstance can be objectively determined. For most events of default, grace periods are allowed for the remedy or cure of a breach reducing the risk of a hair-trigger event of default. The focus of the events of default is on the specified event or circumstance: a failure to pay, breach of the terms of the finance documents, cross-default and insolvency events. They look to the effect and not the cause.
 

Several leveraged loans that Octus has reviewed in the past year have limited the application of events of default and potential events of default by carving out certain adverse events including any pandemic, natural disaster, act of God, force majeure event or war, sometimes defined as “Uncontrolled Events.” In more recent deals the exclusions have expanded the list of enumerated potential threats, including the impact of AI and increase of energy or resource pricing. An example of a carve-out is included in the Appendix at the end of this article. The effect of this carve-out is to reallocate the risk of such an event to the lenders. If the borrower is unable to pay interest or other amounts when due or breaches any of its undertakings, but it attributes that nonpayment or breach to an “Uncontrolled Event,” the lenders will be required to wait to take action until such time as the effects of the event have passed.

In some deals, the “Uncontrolled Event” is drafted as a stay on the grace period applicable to an event of default, an example of which is included in the Appendix. This has a similar effect to a carve-out, although it is more limited in that events of default that do not include a grace period will not benefit from the stay. In both cases, the carve-out or stay is not time limited and makes no allowances for the scale of the impact on the business, even when the event may affect the viability of the business on a permanent basis.

More recent deals have expanded this carve-out further to include a catch all for any other acts or events beyond the control of the borrower or similar wording. See the examples in the Appendix at the end of this article. This drafting is so broad and all encompassing that it could include any action that cannot be directly attributed to the borrower. For instance, this could include any change in law or regulation, any actions by a supplier, contractor or competitor, or the impacts of technological developments, including AI, any of which would be considered to be ordinary operational and market risks of any company. The concern is that relief originally associated with exceptional disruption may extend to ordinary commercial adversity, including technological competition that permanently weakens the borrower’s business.

The occurrence of an event of default is a red flag, signaling that there is a serious issue that needs to be addressed. It is precisely when there is a fundamental change in circumstances that would trigger an event of default, where the borrower is unable or unwilling to remedy or cure the default within the required grace period, that the lenders would expect to have the right to take steps to protect themselves. It is often in the best interests of the lenders to forbear rather than accelerate. Keeping a viable business operating can protect recoveries while accelerating and enforcement can be value destructive. Negotiated forbearance also gives the lenders a chance to seek better information, to restrict value leakage or ask the sponsor to contribute additional equity. The actual occurrence or impending threat of a default or an event of default provides the impetus that will bring a borrower to the negotiating table. Carving out or staying a default or event of default removes that threat and reduces the lenders’ negotiating leverage.

Furthermore, for so long as any default or event of default is excluded or the grace period is stayed, any drawdown or restricted payment that is conditioned on no default or event of default will continue to be accessible.

Some loan agreements Octus has reviewed with a carve-out from defaults have expressly shielded payment and specified insolvency defaults from “Uncontrolled Events.” See the example of the carve-out in the Appendix, which excludes “Material Events of Default” (defined as nonpayment or insolvency events of default). That is a meaningful safeguard, but it leaves other important defaults in play. A cross-default, for example, gives lenders acceleration rights when qualifying debt elsewhere in the group has not been repaid at maturity or has been accelerated. If the cure period for that cross-default can be extended, whether as a result of a stay or a carve-out, other creditors may take action to recover their debts while these lenders are still waiting to exercise their rights. Protecting payment and insolvency defaults alone is not enough.
 

Where “Uncontrolled Events” are included, a carve-out to, or trigger for a stay of, events of default, they will also constitute the basis for permitted adjustments to EBITDA.
 

EBITDA is one of the key metrics underpinning nearly all of the permissions and capacities and leverage and interest coverage ratios in a leveraged loan agreement and high-yield bond. Higher EBITDA could increase capacity for debt, restricted payments and investments, which matters most when a stressed borrower may be preparing to implement a liability management exercise, or LME. Borrowers often include the flexibility to make permitted adjustments and addbacks that would allow them to enhance the EBITDA figure.
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The definition of “EBITDA” typically includes an addback for extraordinary, exceptional or one-off losses or other nonrecurring items. Over time, addbacks have been expanded to include force majeure events such as natural disasters, acts of God, war or similar events outside the group’s control.

The commercial argument for these adjustments is that a temporary disruption can depress earnings without permanently impairing the business’ earning capacity. Excluding its effects may therefore provide a more representative measure of ongoing performance of the business and preserve access to liquidity. That argument is less convincing where the impact is lasting. If AI permanently reduces demand or pricing, adding back the lost earnings may obscure the borrower’s changed economics rather than normalize a temporary distortion. Expenditure on implementing technology also requires separate consideration: it may reflect an ordinary management investment decision rather than an external shock. If it is simply capital expenditure in the ordinary course, the rationale for its exclusion from EBITDA is weak.
 

Force majeure addbacks have expanded over time to explicitly mention specific events and cover other types of events that generate uncertainty. The first expansion came during the Covid-19 pandemic.

The Covid-19 pandemic stress tested the amount of EBITDA addbacks that could be made for force majeure events at scale. Companies began reporting EBITDAC, earnings before interest, tax, depreciation, amortization and coronavirus, adding back lost earnings as well as costs. EBITDA adjustments from the Covid-19 pandemic were sizable. Coty added back $446.4 million (39% of its adjusted covenant EBITDA) when marketing its 2026 secured euro notes.

Because a pandemic that endures is arguably no longer one-off, sponsors have continued to push for the inclusion of explicit Covid-19 addbacks rather than rely on general wording.

The U.S. “Liberation Day” tariffs in April 2025 resulted in turmoil in the financial markets as investors struggled to come to terms with the new economic landscape. The equivocation by the United States as to whether tariffs would apply and at what rate generated significant uncertainty. In response, some borrowers sought to include explicit tariff addbacks into force majeure adjustments. Tariff adjustments were resisted by investors, but ultimately cleared the market in third-quarter 2026. Since then, just over a quarter of European leveraged buyouts and full refinancings included explicit addbacks for tariffs, often included within the definition of “Uncontrolled Events.”
 

In recent deals reviewed by Octus, adjustments were permitted to be made to EBITDA for the negative effects of a laundry list of events listed within the definition of “Uncontrolled Event,” corresponding to the term used for the carve-out to Events of Default. As with the carve-out from events of default, the broad drafting of “Uncontrolled Event” to include any acts or events beyond the control of the borrower in the context of EBITDA adjustments should be concerning to lenders. If a software-as-a-service provider experiences a significant reduction to its revenue due to the impact of AI, for example, a dedicated adjustment would allow this lost revenue to be added back into EBITDA.
 

An example of the EBITDA adjustment for “Uncontrolled Events” is included in the Appendix. The drafting is expansive and includes explicit provision for AI and related new technology and investments as well as other acts or events beyond the control of the company or its restricted subsidiaries.

Upward adjustments from losses, costs, revenue reductions and negative impacts associated with AI are permitted. An adjustment for revenue reduction is particularly sensitive, as adding back lost sales without deducting the costs avoided can overstate the earnings lost. The addbacks allowed for losses from AI are generally uncapped in amount and do not require independent verification. Only one deal included adjustments for “Uncontrolled Events” that were subject to the overall cap on EBITDA adjustments for cost savings and synergies.

The AI-related addback does not expressly provide for adjustments for anticipated AI-generated gains. Any projected benefits from AI, including cost savings from redundancies and efficiencies or increased revenues (to the extent that revenue synergies are permitted) might fall under the adjustments for cost savings and synergies. As such, they would be subject to any applicable cap and look-forward period. One area to watch is whether EBITDA adjustments related to AI will be extended to include the positive impacts, which could allow cost savings and synergies to be added on an uncapped basis.

The timing for the introduction of explicit addbacks for AI comes as no surprise. AI-driven disruption triggered a widespread selloff in the software and technology industry in the first half of 2026. With uncertainty as to how, and to what extent AI will disrupt other sectors, companies in all sectors are focussed on how much investment is required into AI and the potential impact upon their revenue.

In the deals in which they have been included, the exclusion of force majeure and other events outside of the control of the borrower from events of default and the inclusion of such events to make permitted adjustments to EBITDA represents a radical reallocation of what would ordinarily be considered to be operational and market risks from the borrower to the lenders.

Where both forms of protection apply, the same disruption may support default relief and EBITDA adjustments that preserve or enlarge capacity for LMEs. The potential combination matters: A weakening business may retain contractual flexibility while lenders have fewer opportunities to intervene and negotiate protections to their downside.

Temporary, evidenced disruption may justify limited accommodation. Permanent losses from technological competition are much harder to justify.

Lenders considering these provisions should seek to have them deleted or to clearly limit their scope.
 

Example of a carve-out from Events of Default:
 

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Example of a stay on grace periods for Events of Default:
 

Example of addbacks to “Consolidated EBITDA”: