Adam Hayes is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive sầu derivative sầu trading expertise, Adam is an expert in economics và behavioral finance. Adam received his master's in economics from The New School for Social Research & his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7 & 63 licenses. He currently researches and teaches at the Hebrew University in Jerusalem.

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What Is Event of Default?

An sự kiện of default is a predefined circumstance that allows a lender khổng lồ demand full repayment of an outstanding balance before it is due. In many agreements, the lender will include a contract provision covering events of mặc định khổng lồ protect itself in case it appears that the borrower will not be able to or does not intover to continue repaying the loan in the future. An event of default enables the lender to seize any collateral that has been pledged and sell it khổng lồ recoup the loan. This often is employed if the default risk is beyond a certain point.

An sự kiện of mặc định is a pre-specified condition or threshold that, if met, allows the lender or creditor to dem& immediate và full repayment of a debt or obligation.An event of mặc định may include delinquent or non-payment of principal or interest due, a breach of a bond covenant, or insolvency, aý muốn others.Credit default swaps (CDS) contain specific events of default that can trigger one counterbuổi tiệc nhỏ to lớn the contract lớn pay up lớn the other.

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Understanding Events Of Default

An "sự kiện of default" is a defined term in loan and lease agreements. The following would constitute a default 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)insolvency

The clause can contain more circumstances that would permit the creditor to invoke its rights in the sự kiện of mặc định. These events would be custom-tailored for the chất lượng situation of the borrower. Although a creditor can legally dem& immediate repayment in the sự kiện of a default, in practice it rarely does so. Instead, it usually works with the distressed borrower khổng lồ rewrite the terms of the loan agreement. If the parties agree, the lender will produce an amendment khổng lồ the loan agreement that contains tighter terms, và in most cases, raise the interest rate of the loan and collect an amendment fee.

Example of an Event of Default

On January 10, 2018, Sears Holdings Corp. entered inlớn 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 and restrictive sầu because the lending syndicate is taking extra precaution to lớn protect its interests.

Event of Default in Credit Default Swaps

A credit default swap (CDS) is a transaction in which one các buổi tiệc nhỏ, the "protection buyer," pays the other tiệc ngọt, the "protection seller," a series of payments over the term of the agreement. In essence, the buyer is taking out a size ofinsuranceon the possibility that a debtor will experience an sự kiện of mặc định sự kiện that would jeopardize its ability khổng lồ meet its payment obligations.

The three most comtháng such events, as defined by theInternational Swaps and Derivatives Association (ISDA), are 1) filing for bankruptcy, 2) defaulting on payment, và 3) restructuring debt. Less comtháng credit events are obligation default, obligation acceleration, andrepudiation/ moratorium.

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