Cross default: Difference between revisions

Cross default (view source)

Revision as of 12:13, 6 October 2017

124 bytes removed , 6 October 2017

→‎Cross default in the loan market

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 Now a borrower that is not due to pay anything, can hardly [[Failure to pay|fail to pay]]. Can it?
-This presented our lender with a risk: if, in the meantime, the borrower failed to pay under a loan from ''another'' lender, ''our'' lender would be in a difficult spot: it has good reason to think the borrower is in trouble, but the borrower hasn’t missed any payments — how could it? ''None were due''. Waiting for the next payment to see if the borrower will meet it, won’t do. Our borrower wants to accelerate its loan ''now'' — ideally, before the other lender accelerates its loan: Our lender wants to get in while the going is still tolerably good.
+This presented our lender with a risk: if, in the meantime, the borrower failed to pay under a loan from ''another'' lender, ''our'' lender would be in a difficult spot: it has good reason to think the borrower is in trouble, but the borrower hasn’t missed any payments. (How could it? ''None were due''.) Waiting for the next payment to see if the borrower will pay won’t do. Our borrower wants to accelerate its loan ''now'' — while the going is still tolerably good.
-Whence came the notion of a [[cross default]]:
+Whence came the notion of a [[cross default]]: ''If you default under a loan you have borrowed from someone else, you default under your [[loan]] with me.''
-:''If you default under a loan you have borrowed from someone else, you default under your [[loan]] with me.''
+But this is a drastic measure. It means the borrower and its various lenders are in a Mexican stand-off: The lenders will all tend to be trigger happy: they will want to accelerate before some other blighter does. Therefore some thresholds were put around it: The size of the loan being defaulted on would need to be material enough to threaten the borrower’s very solvency.
-This is a drastic measure. It means the borrower and multiple lenders are in a Mexican stand-off: Each lender is incentivised to be trigger happy, to get in before some other blighter accelerates first. Therefore some thresholds were put around it: The size of the loan being defaulted on would need to be material enough to threaten the borrower’s very solvency.
+Note the key vulnerabilities that [[cross default]] clause is designed to protect against:
+*'''Material indebtedness''': Our lender has significant credit exposure to the borrower;
-Note the key "vulnerabilities" of a lender that a [[cross default]] clause is designed to protect against:
+*'''Infrequent payments''': Our lender is owed infrequent payment obligations and cannot necessarily rely on a [[failure to pay]].
-*'''Material indebtedness''': Our lender's contract is one where it takes significant credit exposure to the borrower;
+*''Material default''': The borrower has taken on ''other'' indebtedness in a size big enough to threaten its own viability.
-*'''Infrequent payments''': Our lender is owed infrequent payment obligations and canot therefore rely on a [[failure to pay]].
-*''Material default''': The borrower may default on ''other'' indebtedness in a size big enough to threaten its own viability.
 ==={{isdaprov|Cross default}} in the {{isdama}}===