Default clause
The default clause ( English default , "default or default") is a clause in international bond conditions or in credit agreements , under which the creditor to be able to make gets granted the right to bond or loan amount due immediately as it becomes available from the debtor given default reasons.
General
In the case of fixed-term loans or bonds that are not yet due , the creditor must have the right to demand early repayment if there is good cause. One of the important reasons that make adherence to the contract unreasonable for the obligee under German law ( Section 314, Paragraph 1, Clause 2 BGB), is the default of the debtor . In order to limit the reasons for default, which should result in an immediate due date, they are precisely defined in the contract. Default clauses are classified as an important reason under German law (see credit termination , credit agreement ); the agreement of default clauses is therefore mostly subject to Anglo-American law, from which these clauses originate. If one of the reasons for the default is present, it automatically triggers a call for payment of the loan without the need for further legal action (“trigger”).
Reasons for delay
In (international) loan agreements ( syndicated loans ) in particular , reasons for default are listed individually in order to make the termination and maturity of the loans operational and to avoid interpretation difficulties. Here following, in particular major delay reasons ( english "events of default" ) are agreed by the Loan Market Association have been normalized (LMA):
- Non-payment ( English "non-payment" ): Payments by the borrower (in particular interest and repayment) are not made on the contractual due dates, unless the delay is due to administrative or technical reasons and the payment is then made within three bank working days after the actual due date;
- The covenants , particularly the financial covenants are not satisfied according to the contract ( English "Covenant breach" );
- Substantial change in the shareholder structure ( English "ownership clause" );
- Significant deterioration in the legal / economic situation ( English "material adverse change" ) (see Significant deterioration in the financial situation );
- Non-compliance with contractual assurances ( English "misrepresentation" );
- Refusal of the borrower to fulfill contractual obligations ( English "repudiation" ) (see breach of contract );
- Maturity by the obligee ( English "acceleration" );
- Non-compliance with laws ( English "unlawfulness" );
- Insolvency or similar sovereign measures ( English "insolvency or insolvency procedures" );
- Cross default (see below).
A bond debtor or borrower is therefore in default if at least one of these reasons for default is present. Each of these reasons for default is precisely defined within the contract (e.g. the key figures for the financial covenants ) so that it is clear to all contracting parties when a reason for default is present. The presence of one of the reasons for default is to be assessed as a prima facie indicator , i.e. it is used in disputes about the interpretation of credit agreements in civil proceedings to determine causality and fault. Some of these reasons for default are also considered credit events in credit default swaps and in credit agreements .
Cross default
The cross default (third party default ) is a clause in credit agreements or loan terms according to Anglo-American law, according to which a default by the borrower in other credit relationships should entitle the creditor to give early termination (default, acceleration) without a separate reason for termination (except cross default) is present. It is a special case of "repudiation", i.e. the borrower's refusal to comply with a contractual obligation in the future. This clause is unknown in German law. The “cross acceleration clause” presupposes the maturity of the claim by a third party, while with cross default the occurrence of a reason for termination is sufficient.
The cross-default clause gives lenders the opportunity to participate in rescheduling negotiations with other unsecured creditors on an equal footing. In addition, the cross default clause prevents debtors from unilaterally changing the repayment priority in the case of several creditors. In terms of content, it ties in with the “ pari passu clause ” (declaration of equality).
A major disadvantage of the clause, however, is that when a single loan is called in, all other liabilities of the borrower (provided they contain the cross default clause) also become due, and this contagion effect can trigger a corporate crisis for the borrower. In order to avoid this, such clauses can be linked to a threshold amount, so that a right of termination according to the “cross default clause” is only triggered when this threshold amount is exceeded. Due to the extensive lack of transparency, especially on the credit market, creditors are largely dependent on their borrowers actually informing them about the maturity of other loans.
Termination due to a deterioration in rating
In the case of credit rating- related interest rate clauses , the creditors are allowed to change the interest or margins retrospectively if there are certain rating-related credit rating changes for the borrower. In the case of creditworthiness-oriented termination clauses, on the other hand, the reason for termination is instrumentalized and substantiated by a specific rating . In particular, international loan agreements contain clauses according to which the creditor is granted a right of termination if the rating determined by a certain rating agency deteriorates below the defined "investment grade" (required minimum creditworthiness). If the borrower is downgraded to below the specified rating by a rating agency ("downgrading"), the reason for termination is automatically fulfilled. This triggers automatic cancellation, which can lead to the borrower's corporate crisis via cross default clauses in other credit relationships.
According to Moody's (2001), acceleration is most common in contractual clauses with a share of 29.1% , followed by “triggering” for loan collateral or guarantee provisions (both 21.6%). Overall, 87.5% of all 771 US debtors surveyed had 2,819 contractual “triggers”, which proves the popularity of this instrument.
Application of law
Such clauses come from Anglo-American law and are not known in this form under German law. Due to conflicting legal norms, such clauses must therefore be waived when German law applies or, conversely, German law may not be used as a basis when these clauses are agreed.
Individual evidence
- ↑ Tony Rhodes / Mark Campbell / Clare Dawson, Syndicated Lending, Practice and Documentation , 2004, pp. 445 ff.
