Cross-Default Clause
A cross-default clause is a provision in a contract, typically found in loan agreements or bond indentures, that triggers a default in one agreement if there is a default in another agreement. This mechanism is used to protect the interests of lenders or investors by ensuring that a borrower’s failure to meet obligations under one contract can lead to potential ramifications under other contracts.
The cross-default clause operates on the principle that a borrower’s overall financial health is interconnected across various loans and obligations. For example, if a company has multiple loans with different lenders and it defaults on one loan due to missed payments, the cross-default clause may allow the other lenders to declare all loans in default as well. This can lead to acceleration of repayment demands, increased financial strain, or foreclosure on assets pledged as collateral.
In practice, a cross-default clause may be structured to apply to specific types of debt or to all existing and future debt obligations of the borrower. This clause provides an additional layer of risk management for lenders by allowing them to assess the borrower’s wider financial situation and react promptly to any signs of distress.
« Back to Glossary Index