Cross-Default — Business Finance Glossary

How cross-default operates

A cross-default clause is a standard event of default in commercial lending agreements. It provides that if the borrower (or any member of its group, depending on the scope) defaults under any other financial indebtedness above a specified threshold amount, the lender under the current facility may also declare an event of default and accelerate repayment of its loan.

The rationale is that a default elsewhere is strong evidence of broader financial distress. Rather than waiting for its own facility to fail, the lender wants the contractual right to accelerate before the borrower's position deteriorates further.

Threshold amounts and scope

To avoid cross-default being triggered by minor or disputed obligations, facility agreements include a materiality threshold — a minimum amount of indebtedness that must be in default before the clause is triggered. A typical LMA-form threshold is expressed as a defined percentage of consolidated EBITDA or a fixed sterling amount agreed at negotiation. Directors should ensure the threshold is set at a commercially realistic level rather than accepting a very low figure that would capture routine commercial disputes.

• Check whether the clause covers defaults by subsidiaries and holding companies — group-wide scope is more onerous than entity-only
• Cross-acceleration provisions (triggered by another lender accelerating, not merely a breach) are less aggressive than pure cross-default
• Disputed obligations may be carved out pending resolution

Cross-default vs. cross-acceleration

Pure cross-default is triggered the moment there is a failure to pay or a technical breach under another debt document, even if that other lender has not yet acted. Cross-acceleration is narrower: it is only triggered when another lender has actually demanded repayment or accelerated. From the borrower's perspective, cross-acceleration is preferable as it provides more time to cure a problem before the domino falls. Lenders prefer pure cross-default. The final drafting is a negotiation point, and the outcome depends on the borrower's credit profile and the competitive tension in the process.