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Cross Default - ISDA Provision: Difference between revisions
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Cross Default - ISDA Provision (view source)
Revision as of 19:22, 19 January 2020
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''Want to quickly convert {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}}? Click '''[[Cross Acceleration - ISDA Provision|here]]'''.''<br> | ''Want to quickly convert {{isdaprov|Cross Default}} to {{isdaprov|Cross Acceleration}}? Click '''[[Cross Acceleration - ISDA Provision|here]]'''.''<br> | ||
===General=== | ===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 | {{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}}. | 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}}. | ||
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{{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|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 | 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. | {{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=== | ||