FRISBY IN DEFAULT ON LOAN COVENANTS
Frisby Technologies has received a notice of default from two of its secured creditors. DAMAD Holdings AG and Bluwat AG have notified the company that it is in default of the tangible net worth covenant contained in its respective loan agreements with the lenders. The covenant requires the company to maintain a tangible net worth of not less than $1,250,000 as of the end of each fiscal quarter. A similar covenant is contained in the company loan agreements with its other secured lenders, MUSI Investments S.A. and Fin.part International S.A. As of September 30, 2002, the company’s tangible net worth, calculated as provided in the respective loan agreements, was a negative $663,402.

Required:
1. What is a minimum tangible net worth covenant, and what purpose does it serve in the Frisby loan agreements?
2. Why might lenders be reluctant to waive Frisby’s covenant violation?
3. Among the options available to Frisby’s lenders is foreclosure: shuttering the company and selling off all assets. Why might lenders prefer to avoid this action?