Template:M gen 1992 ISDA 5(a)(vi)

Specified Indebtedness

Specified Indebtedness is a simple and innocuous enough provision. Almost redundant, you’d think — why go to the trouble of defining “borrowed money” as another term? (Answer: because many firms, in their wisdom, will wish to change the definition in the Schedule to include derivatives, other trading exposures, things owed to their affiliates, or even any payment obligations of any kind, and for those people, “Specified Indebtedness” is a (somewhat) less loaded term.

Measure of the Threshold Amount

• 1992 ISDA: This contemplates default “in an aggregate amount” exceeding the Threshold Amount which would justify early termination of the Specified Indebtedness: that is to say the value of the failed payment, and not the whole principal amount of the Specified Indebtedness it was owed under, contributes to the Threshold Amount, ;
• 2002 ISDA: 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 from ISDA’s crack drafting squad™:

• It can be triggered by any event of default, not just a payment default (i.e. the 1992 ISDA requirement for “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 value of the Specified Indebtedness, not just the value of the default (if it even is a payment capable of being valued) itself.

For example: if you defaulted on a small interest payment on your Specified Indebtedness which made your whole loan repayable, under the 1992 ISDA you could only count the value of that missed interest payment to your Threshold Amount. But the whole loan is at risk of being accelerated — so this is a much more significant credit deterioration than is implied by the missed payment.

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

Don't say you weren't warned.