What Is Cross Default?

Cross default is a provision in a bond indenture or loan agreement that puts a borrower in default if the borrower defaults on another obligation. For instance, a cross-default clause in a loan agreement may say that a person automatically defaults on his car loan if he defaults on his mortgage. The cro𓃲ss-default provision exists to protect the interest of lenders, who desire to have equal rights to a borrower's assets in case of default on one of the loan contracts.

Understanding Cross-Default

Cross-default happens when a borrower defaults on another loan contract, and it provides the benefit of the default provisions of other debt agreements. Thus, cross-default clauses can create a domino effect in which an 澳洲幸运5开奖号码历史查询:insolvent borrower may be in default on all his loans from multiple contracts if all lenders include cross-default in their loan documents. Should cross-d🐬efault be tr🌱iggered, a lender has the right to refuse more loan installments under the existing debt contract.

Cross-default is caused by an event of default of a borrower on another loan. Default typically occurs when a borrower fails to pay interest or principal on time, or when he violates one of the negative or affirmative 澳洲幸运5开奖号码历史查询:covenants. A negative covenant requires a borrower to refrain from certain activities, such as having an indebtedness to profits above certain levels or profits insufficient to cover interest payment. Affirmative covenants obligate the borrower to perfo♊rm certain actions, such as furnishing a💮udited financial statements on a timely basis or maintaining certain types of business insurance.

If a borrower defaults on one of his loans by violating covenants or not paying principal or interest on time, a cross-default cl☂ause in another loan document triggers an event of default as well. Typically, cross-default provisions allow a borrower to remedy or waive the event of default on an unrelated contract before declaring a cross-default.

Mitigating Factors for Cross-Default

When a borrower negotiates a loan with a lender, several ways exist to mitigate the effect of cross-default and provide room for financial maneuvering. For instance, a borrower may limit cross-default to loans with maturities greater than one year or over a cert♕ain dollar amount. Also, a borrower may negotiate a cross-acceleration provision to take place first before a cross-default, in which a creditor must first accelerate payment of principal and interest due before declaring an event of cross-default. Finally, a borrower may limit contracts that fall under the scope of cross-default, and exclude debt that is being disputed in good faith or paid within its allowed grace period.