Cross acceleration - ISDA Provision
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“Cross acceleration” is not an actual ISDA Event of Default, but it is what happens to an actual ISDA Event of Default — namely, the much-negotiated, seldom-used Section 5(a)(vi), Cross Default EOD, if you can persuade your credit department to water it down to something sensible.
Cross acceleration: what is it?
Cross acceleration is like cross default, but it only arises when the non-defaulting party has actually accelerated the contract. Therefore it is a higher threshold and a less sensitive trigger, and avoids that weird scenario when the actual creditor has not itself triggered its default rights, but an opportunistic third party holder of a cross default right can jump in and close out anyway (therefore making the benign creditor less likely itself to show leniency for the original default, it being a nasty, brutish and short old world out there).
How to change Cross Default to cross acceleration
You can amend Cross Default to Cross Acceleration by adding the following language:
- Section 5(a)(vi) is amended by deleting “, or becoming capable at such time of being declared,” from subsection (1).
Explain this wondrous drafting to me!
Cross Default, as per the panel to the right, is triggered by two kinds of default:
- General default: a general event of default of any kind at any time during the tenor of any Specified Indebtedness — this could be anything: the borrower’s bankruptcy, a breach of its reps and warranties, a non-payment of interest, any repudiatory breach of the contract of indebtedness, really; or
- Repayment default: the borrower’s failure to fulfil, in full, final repayment of the debt itself when due.
Why draw a distinction between these two general default and repayment default, seeing as both of them are cataclysmic? There is an answer, but it is fussy, word-smithy stuff from the squad, I’m afraid, readers: because a general default entitles the lender to accelerate the debt requiring the borrower to repay it at once, before its scheduled maturity date; a repayment default, logically, falls on that scheduled maturity date, and so can’t be “accelerated” as such. There is nothing to accelerate: the repayment date is already here.
Therefore to convert a cross default to a cross acceleration, you only need to require general defaults to have been accelerated. Repayment defaults can’t be accelerated.
Cross acceleration also avoids the need to muck around allowing for grace periods apply, administrative and operational error and all that utter dreck: if the counterparty has actually accelerated the loan, the grace periods and operational errors are moot. It is too late. The game is up.
Now to be sure legal eagles, especially the lesser-spotted buy-side legal eagle, might start hopping up and down, flapping their wings and squawking restively at this point. “But,” they will say, “what about grace periods and operational errors on that final payment. We must be allowed those before you can close us out!” You may roll your eyes at this — the JC certainly does — and while it might make you feel better for a moment, it won’t make the problem go away. The short answer is that ordinary grace periods are factored in — the event isn’t triggered until they have all expired, and as for contractual affordances that don’t quite count as grace periods (that are dependent on the borrower providing evidence of operational error) — well, on a fair, large and liberal view these count as grace periods anyway, and if you aren’t persuaded of that am I going to die in a ditch about it? It depends how late it is on a Friday, and how sporting I am feeling, is the usual answer.
Is loosening up to cross acceleration wise, though?
There are two schools of thought:
- The sensible, pragmatic, wise, free one you will find in these pages: “Yes. Cross default is totally misplaces in an ISDA so anything you can do either to restrict its scope, or simply to avoid being dragged into a tedious argument about it, is sensible.”
- The learned one, from the learned author of that terrible FT book about derivatives, which is: “All other things being equal, no. One should only weaken cross default reluctantly.”
With respect to my learned friend, his reasoning isn’t massively compelling:
See also
- Cross default generally