Cross Default - ISDA Provision: Difference between revisions

{{isdaanat|5(a)(vi)}}

''Want to quickly convert to [[cross acceleration]]? Click '''[[Cross Acceleration - ISDA Provision|here]]'''.''<br>

''This article is specifically about the {{isdaprov|Cross Default}} provision in the {{isdama}}. See: [[cross default]] for a general discussion of the concept.  

The {{2002ma}} updates the {{1992ma}} cross-default so that if the outstanding amount under the 2 limbs of cross-default, added together, breach the {{isdaprov|Threshold Amount}}, then that will trigger cross default. Normally, under the {{1992ma}} , cross-default is only triggered if an amount under one or the other limbs is breached.  

*a default or similar event under financial agreements or instruments that has resulted in indebtedness becoming capable of being accelerated and terminated by a Non-defaulting Party

*a failure to make any payments on their due date under such agreements or instruments after notice or the expiry of a grace period.

*'''The 1992 Version''': 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 defaulted payment contributes to the {{isdaprov|Threshold Amount}}, not the principal amount of the Specified Indebtedness itself;  

*'''The 2002 Version''': 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:

*It can be triggered by any [[event of default]], not just a payment default (I.e. the 1992 wording "''an 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 size of the {{isdaprov|Specified Indebtedness}}, not just the value of the defaulted payment (if it even ''is'' a payment) itself.  

For example: if you defaulted on a (relatively small) interest payment, which made the whole loan repayable, under the 1992 formulation you could only count the value of the missed interest payment to your Threshold Amount. But the risk to you ise whole size of the loan, as that is what could become repayable if the loan is accelerated.  

It is innocuous, that is, unless you are cavalier enough to include ''derivatives or other payments which are not debt-like'' in your definition of {{isdaprov|Specified Indebtedness}}. But if you do that, you've bought yourself a wild old ride anyway.

 

In case it isn't clear, {{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 - as starry-eyed credit officers like to - to apply it to contractual relationships which aren't debtor/creditor in nature, it will give you gyp.