Event of default là gì

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Adam Hayes is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive sầu derivative trading expertise, Adam is an expert in economics & behavioral finance. Adam received his master's in economics from The New School for Social Research và 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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Charles is a nationally recognized capital markets speciacác mục và educator who has spent the last three decades developing in-depth training programs for burgeoning financial professionals.

What Is Event of Default?

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

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

Understanding Events Of Default

An "event of default" is a defined term in loan and 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)insolvency

The clause can contain more circumstances that would permit the creditor lớn 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 demand immediate repayment in the event of a default, in practice it rarely does so. Instead, it usually works with the distressed borrower to lớn 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, & in most cases, raise the interest rate of the loan và collect an amendment fee.

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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 mặc định, 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 khổng lồ protect its interests.

Event of Default in Credit Default Swaps

A credit mặc định swap (CDS) is a transaction in which one tiệc nhỏ, the "protection buyer," pays the other buổi tiệc nhỏ, 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 to meet its payment obligations.

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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 default, obligation acceleration, andrepudiation/ moratorium.