A cross-default clause is a provision in a loan, bond or derivatives contract that makes a default by the borrower under any of its other financial obligations an event of default under that contract as well. It lets each creditor act as soon as trouble appears anywhere in the borrower's debt, instead of waiting until its own payment is missed.
The clause appears in almost every corporate credit agreement and corporate bond indenture, in sovereign debt and in the ISDA Master Agreement used for over-the-counter derivatives. It works alongside the negative pledge clause and pari passu clause to keep lenders on an equal footing. Its milder variant, cross-acceleration, is triggered only when another creditor has actually demanded early repayment.
Cross-default clause in plain terms
Picture several friends who have each lent money to the same person. If that person stops paying one of them, the others would want to know straight away and be able to ask for their money back too, rather than wait politely while the first friend takes whatever is left.
A cross-default clause is that agreement written into each loan. It ties the loans together like a row of dominoes: when one falls, the others are allowed to fall with it. That protects each lender from being last in line, but it also means a small problem with one debt can quickly turn into a crisis across all of them.
How a cross-default clause works
A typical clause in a credit agreement makes it an event of default if any other "financial indebtedness" of the borrower or its group:
- Is not paid when due. Including after any grace period in the other contract.
- Is declared due early. Because of an event of default under that other contract.
- Becomes capable of being declared due early. That is, a default exists under the other contract even if the other creditor has not yet acted.
- Has its commitment cancelled or suspended. Because of an event of default.
The third limb is what makes a clause a full cross-default rather than cross-acceleration. Because it bites as soon as another creditor could act, a breach of a financial covenant in one facility can immediately put every other facility in default.
Most clauses carry a threshold amount, so that small debts or disputed invoices do not trigger the whole structure. The threshold is set as a fixed sum or as a percentage of the borrower's equity or assets, and it applies across all the defaulted debt added together.
Cross-default and cross-acceleration
| Feature | Cross-default | Cross-acceleration |
|---|---|---|
| Trigger | Any default under other debt, even if not acted on | Other debt actually accelerated, or unpaid at maturity |
| Timing | Early; lender can act alongside the first creditor | Later; lender acts only once another creditor has |
| Typical home | Bank loans and derivatives | Bonds and covenant-lite term loans |
| Borrower view | Stricter | More forgiving |
Bondholders are numerous and slow to organise, so bond indentures commonly use cross-acceleration to avoid a technical breach of a bank covenant triggering a default across widely held bonds. Many covenant-lite loans use a similar approach, while bank facilities usually insist on full cross-default.
Cross-default in derivatives
In the ISDA Master Agreement, "Cross-Default" is an optional event of default that applies if a party, or a specified entity, defaults on "Specified Indebtedness" above an agreed "Threshold Amount". If it applies, the non-defaulting party can terminate all outstanding transactions, such as an interest rate swap, and close them out at market value. Because a close-out can create a large payment claim at the worst moment, banks negotiate the threshold carefully as part of their counterparty risk management, and derivatives often sit within the same group default picture as a borrower's loans.
Uses and risks
For lenders the clause preserves equality. Without it, a creditor whose own terms were looser could stand by while others enforced and took the assets. It also supports the logic of loan syndication and multi-lender structures, where many parties rely on the same borrower.
The main risk is contagion. A minor or technical breach in one agreement can cascade through the borrower's entire debt stack, leaving it facing demands it cannot meet and forcing a debt restructuring or insolvency. Borrowers therefore negotiate high thresholds, cross-acceleration wording, carve-outs for disputed amounts and grace periods, and seek a loan covenant waiver from all affected creditors at once. The same chain reaction is a concern in sovereign default cases, where cross-default links between many bond series can make a coordinated restructuring necessary. For rating agencies, the presence and wording of these clauses affects how a default on one instrument is read across the issuer's other debt and its credit rating.