Cross default

Cross default (défaut croisé) is the clause that turns a default by the borrower or by a company of its group on another financial debt into an event of default under the facilities agreement. Lenders seek to remain on an equal footing with the other financial creditors: if another creditor is not paid or demands early repayment, they want to have the same right. The Loan Market Association model covers four situations: non-payment of another debt, its acceleration, the cancellation of a commitment by another lender following a default, and the mere right of another creditor to accelerate. Removing this fourth case turns the clause into cross acceleration: the default then applies only if the other creditor is unpaid or actually demands repayment. The negotiation centres on the threshold: cross default applies only above an amount of defaulted debt set in the agreement. You can ask to limit the clause to the borrowing companies or to material subsidiaries, and to align the grace period with the longer of the two applicable periods, that of the other debt and that of the agreement. Borrowers further ask to exclude interest rate hedging transactions from the scope of the clause.

A group carries €80m of unitranche debt and a €6m property finance lease in a subsidiary. The unitranche agreement sets the cross default threshold at €2m. A €400,000 payment delay on the lease, remedied within ten days, triggers no event of default on the unitranche debt.

• The trigger threshold, as an amount of defaulted debt.
• The choice between cross default and cross acceleration.
• The companies covered: whole group, borrowers, material subsidiaries.
• The alignment of grace periods across the agreements.