|
|
| (5 intermediate revisions by the same user not shown) |
| Line 1: |
Line 1: |
| {{isdaanat|5(a)(vi)}}''This article is specifically about the {{isdaprov|Cross Default}} provision in the {{isdama}}. For a general discussion of the concept, see [[cross default]]. | | {{newisdamanual|5(a)(vi)}} |
| | |
| ''Want to quickly convert {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}}? Click '''[[Cross Acceleration - ISDA Provision|here]]'''.''<br>
| |
| ===General===
| |
| {{isdaprov|Cross Default}} is intended to cover off the unique risks associated with ''lending money to counterparties who have also borrowed heavily from other people''. If you try to apply it to contractual relationships which aren't debtor/creditor in nature — as starry-eyed young [[credit officer]]s in the thrall of the moment like to — it will give cause trouble. This will not stop credit officers doing that. Note also that it is, as are most ISDA provisions, bilateral. If you are a regulated financial institution, the boon of having a {{isdaprov|Cross Default}} right against your counterparty may be a lot smaller than the bane of having given away a {{isdaprov|Cross Default}} right against yourself.
| |
| | |
| Under the {{isdama}}, if the cross default applies, default by a party under a contract for “{{isdaprov|Specified Indebtedness}}” with a third party in an amount above the “{{isdaprov|Threshold Amount}}” is an {{isdaprov|Event of Default}} under the {{isdama}}.
| |
| | |
| {{isdaprov|Specified Indebtedness}} is generally any [[borrowed money|money borrowed]] from any third party (e.g. bank debt; [[deposits]], loan facilities etc.).Some parties will try to widen this: do your best to resist the temptation.
| |
| | |
| The {{isdaprov|Threshold Amount}} is usually defined as a cash amount or a percentage of shareholder funds. It should be big: be a life-threatening failure - because the consequences of triggering it are dire. Expect to see 2-3% of shareholder funds, or sums in the order of hundreds of millions of dollars.
| |
| | |
| {{isdaprov|Cross default}} imports all the default rights from the {{isdaprov|Specified Indebtedness}} into the {{isdama}}. For example, if you breach a financial covenant in your Specified Indebtedness, your swap counterparty could close you out '''even if the lender of the facility took no action on the breach'''. Cross default is, therefore, theoretically at least, a very dangerous provision. Financial reporting dudes get quite worked up about it. Oddly enough, it is very rarely triggered: It is actually very nebulous, and most credit officers would prefer to act on a clean {{isdaprov|Failure to Pay}} or a {{isdaprov|Bankruptcy}} event. Generally one will be along presently.
| |
| | |
| ===Cross Aggregation===
| |
| The {{2002ma}} updates the {{1992ma}} cross-default so that if the combined amount outstanding under the two limbs of {{isdaprov|Cross Default}} exceed the {{isdaprov|Threshold Amount}}, then it will be an {{isdaprov|Event of Default}}. Normally, under the {{1992ma}}, {{isdaprov|Cross Default}} requires one ''or'' the other limbs to be satisfied — you can’t add them together.
| |
| | |
| As per the above, the two limbs are:
| |
| *a default under a financial agreement that would allow a creditor to [[accelerate]] any [[indebtedness]] that party owes it;
| |
| *a [[failure to pay]] on the due date under such agreements after the expiry of a [[grace period]].
| |
| {{DUST and Cross Default Comparison}}
| |
| ===The difference between the two formulations===
| |
| [[File:Crossing Threshold Hope.jpg|thumb|left|About as much use as a cross default clause]]
| |
| ====Measure of the Threshold====
| |
| *'''{{1992ma}}''': This contemplates default “in an aggregate '''amount'''” exceeding the {{isdaprov|Threshold Amount}} which would justify early termination of the {{isdaprov|Specified Indebtedness}}: that is to say the value of the failed payment, and not the whole principal amount of the {{isdaprov|Specified Indebtedness}} it was owed under, contributes to the {{isdaprov|Threshold Amount}}, ;
| |
| *'''{{2002ma}}''': This contemplates an [[event of default]] under agreements whose “'''aggregate principal amount'''” is greater than the Threshold Amount: that is to say it is the ''whole principal amount'' of the agreement which is picked up, not just the amount of the payment.
| |
| | |
| This change, we speculate, is meant to fix a howler of a drafting lapse from {{icds}}:
| |
| *It can be triggered by any [[event of default]], not just a payment default (i.e. the {{1992ma}} requirement for "an {{isdaprov|Event of Default}} ... ''in an amount equal to...''” impliedly limits the clause to ''payment'' defaults only since other defaults aren't “"in an amount"”...);
| |
| *It captures the whole value of the {{isdaprov|Specified Indebtedness}}, not just the value of the default (if it even ''is'' a payment capable of being valued) itself.
| |
| | |
| For example: if you defaulted on a small interest payment on your {{isdaprov|Specified Indebtedness}} which made your whole loan repayable, under the {{1992ma}} you could only count the value of that missed interest payment to your {{isdaprov|Threshold Amount}}. But the whole loan is at risk of being accelerated — so this is a much more significant credit deterioration than is implied by the missed payment.
| |
| | |
| It is innocuous, that is, unless you are cavalier enough to include ''derivatives or other payments which are not debt-like'' in your {{isdaprov|Specified Indebtedness}}. But if you do that, you've bought yourself a wild old ride anyway.
| |
| | |
| Don't say you weren't warned.
| |
| | |
| {{sa}}
| |
| *[[Cross acceleration]]
| |
| {{ref}}
| |