Transactional Corner: Cross-Default (Under Specified Transactions?)—Drafting Considerations Related to a “Compound” Event of Default
Background
The governing agreements for a wide range of transactions, from the most basic financing arrangements to the most complex derivatives trading relationships, frequently include a “cross-default” event of default. This type of a default is triggered under one agreement when a party defaults in respect of indebtedness incurred under another agreement (i.e., “other indebtedness”)—hence the name, “cross-default.”
A cross-default provision often includes a monetary threshold that must be exceeded before a default will occur. For example, an event of default will occur if a payment is missed and either the amount of the missed payment, alone or in combination with the principal amount of the other indebtedness, exceeds a specific level.
Cross-Default under the 2002 ISDA Master Agreement
Section 5(a)(vi) of the published form of 2002 ISDA Master Agreement is the cross-default event of default that is most common to derivatives trading relationships. Counterparties to master trading agreements that do not contain a cross-default event of default often incorporate a provision into those agreements that mirrors Section 5(a)(vi) of the ISDA Master Agreement.
An event of default will occur under Section 5(a)(vi) of the ISDA Master Agreement when a counterparty—or its credit support provider (e.g., a guarantor of any obligations under the ISDA Master Agreement) or any identified party (typically, an affiliate)—defaults under an agreement or instrument relating to “Specified Indebtedness,” which the ISDA Master Agreement defines as “any obligation in respect of borrowed money.” Section 5(a)(vi) provides for two different default scenarios: the first scenario applies to any default while the second scenario applies only to a payment default.
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