As I understand from the notes, cross default provision is indicating that default on a contract with one counterparty will default on all counterparties. Also, it’s in favor of creditor and detriment to debtor. Are these two points of understanding accurate?
i’d say you are correct. definitely an advantage to the lender, however any cross default provisions i’ve ever seen are specific to lenders rather than counterparties (perhaps intended to mean the same thing in the text). If a borrower is in default with one of its lenders, cross default provision is triggered and the borrower is in default with all of its lenders.
Could be a stupid question but how is that an advantage to the lender? If you lend someone money and they’re in default (because they defaulted on a separate loan), what benefit do you get out of it?
not a stupid question. But if you were a lender and had a security interest in the borrowers assets and the borrower was in default with another lender who also had a security interest, a default to lender X would allow X to exercise a number of rights depending on its agreement including restricting the borrower from activities such as capital expenditures, paying dividends or even liquidating assets. Assuming the borrower was otherwise not in default with Lender Y, Lender Y’s control would take a back seat to Lender X. The cross default provision allows Lender Y to also claim default, which essentially gives Y a trigger to exert its own controls over the company. Cross defaults are pretty much standard in corporate lending.