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Cross Default - ISDA Provision: Difference between revisions
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''This article is specifically about the {{isdaprov|Cross Default}} provision in the {{isdama}}. See: [[cross default]] for a general discussion of the concept. | ''This article is specifically about the {{isdaprov|Cross Default}} provision in the {{isdama}}. See: [[cross default]] for a general discussion of the concept. | ||
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}}” is an {{isdaprov|Event of Default}} under the {{isdama}}. | 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.) | {{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. | ||
{{isdaprov|Cross default}} imports all the default rights | 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=== | ===Cross Aggregation=== | ||