Cross default

A cross default clause provides that a default under other financial indebtedness of the borrower (or a defined group member) is an event of default under the facility agreement. It lets lenders react when another creditor is unpaid, has accelerated, or is entitled to accelerate, so that one lender group is not left standing while another enforces.

How cross default is used on PF and CRE desks

In project finance and commercial real estate facilities, cross default links the credit to the borrower's wider debt stack. Desks map which entities are caught (obligors only, material subsidiaries, or the whole group), which instruments count as financial indebtedness, and what threshold amount applies. A covenant breach or payment miss under a bilateral line can therefore transmit into the syndicated or mortgage facility through this clause.

The ACT Borrower's Guide to LMA investment grade documentation addresses LMA's cross default clause: lenders aim to stay on an equal footing with other financial creditors, so that if another lender is unpaid and accelerates, or has the right to accelerate, the syndicate wants the same option even if the borrower has not otherwise defaulted under the agreement. CABRI draws the same distinction used in negotiation: a default under another financial arrangement constitutes an event of default under the credit agreement (cross default), versus only the acceleration of the other debt constituting the trigger (cross-acceleration).

Mechanics of a cross default clause

Typical LMA-style limbs include triggers where other financial indebtedness:

• is not paid when due
• becomes prematurely due and payable following an event of default
• has commitments cancelled or suspended for default
• becomes capable of acceleration because another creditor is entitled to accelerate

Inclusion of the "entitled to accelerate" limb is what makes the clause a true cross default rather than cross-acceleration. Strong borrowers often seek to delete that limb, confine the clause to obligors or material subsidiaries, require expiry of grace periods under the other debt, and insert a de minimis threshold so small defaults do not trip the facility.

There is usually no separate grace period inside the cross default clause itself for disruption events that may soften non-payment under the facility's own payment default. Definitions of financial indebtedness matter: if derivatives are included, termination or close-out rights driven by counterparty events can widen the trigger unless carved out.

Distinctions

Cross default is a linkage across debt instruments. It is not a ranking rule like pari passu, and it is not a security restriction like a negative pledge. A material adverse change clause is a separate, often more subjective event of default based on deterioration in condition or prospects, not on another creditor's default rights. Payment default under the facility itself is a primary default; cross default imports defaults from elsewhere.