What Is Event of Default?
An event of default is a predefined circumstance that allows a lender to lớn dem& full repayment of an outstanding balance before it is due. In many agreements, the lender will include a contract provision covering events of default lớn protect itself in case it appears that the borrower will not be able to or does not intkết thúc khổng lồ continue repaying the loan in the future. An sự kiện of mặc định enables the lender khổng lồ seize any collateral that has been pledged và sell it to lớn recoup the loan. This often is employed if the mặc định risk is beyond a certain point.
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Understanding Events Of Default
An "event of default" is a defined term in loan và lease agreements. The following would constitute a mặc định event in a typical credit agreement clause:
non-payment of any amount of the loan (including interest)material representation inaccuracy or warranty breachmaterial adverse change (MAC)insolvencyThe clause can contain more circumstances that would permit the creditor khổng lồ invoke its rights in the sự kiện of mặc định. These events would be custom-tailored for the quality situation of the borrower. Although a creditor can legally demand immediate repayment in the sự kiện of a default, in practice it rarely does so. Instead, it usually works with the distressed borrower lớn rewrite the terms of the loan agreement. If the parties agree, the lender will produce an amendment lớn the loan agreement that contains tighter terms, and in most cases, raise the interest rate of the loan and collect an amendment fee.
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Example of an Event of Default
On January 10, 2018, Sears Holdings Corp. entered into a $100 million term loan credit agreement with various lenders. Section 7.01 comprises 11 different events of default, including the ones cited above sầu except MAC, for the struggling retailer. Unambiguous terms are customary in a properly-drafted credit agreement, but the agreement for Sears is particularly detailed và restrictive because the lending syndicate is taking extra precaution to lớn protect its interests.
Event of Default in Credit Default Swaps
The three most comtháng such events, as defined by theInternational Swaps và Derivatives Association (ISDA), are 1) filing for bankruptcy, 2) defaulting on payment, & 3) restructuring debt. Less comtháng credit events are obligation mặc định, obligation acceleration, andrepudiation/ moratorium.