Cross Default Acceleration

Contagion Risk

Debt structures that link different instruments together increase the speed at which a minor cash flow issue becomes a bankruptcy threat. When cross default acceleration activates, the borrower must satisfy all linked obligations simultaneously to avoid the seizure of collateral. This creates immense pressure on the management to keep every single covenant within its limits.

Institutional Defense

Bankers use these clauses to ensure they have the same standing as any other lender in the market. The cross default acceleration prevents one creditor from receiving a full payment while others are ignored during a partial insolvency. It protects the junior lenders by giving them an immediate seat at the restructuring table.

The chain of triggers can pull in every bond, credit line and private placement.

Notice Requirement

Enforcement typically requires a formal delivery of default notice. Lenders might wait a few days to see if the borrower can cure the original breach.