A cross-default clause is a standard provision in loan agreements, bond indentures, and sovereign debt contracts that links the performance of one debt obligation to others held by the same borrower. If the borrower defaults on any covered debt above a specified threshold, the lender under the cross-default clause may immediately declare its own loan in default and accelerate repayment, even though the borrower has not missed a payment on that specific instrument.
The clause exists to protect creditors from being subordinated to faster-acting lenders. Without it, a creditor who waited patiently could find that other lenders had already seized the borrower's assets or restructured on better terms. By contract, all covered creditors gain the right to act simultaneously when financial distress emerges anywhere in the debt stack.
Key design elements typically include:
- A threshold amount (a minimum default size that triggers the clause, often expressed in currency or as a percentage of net assets)
- The scope of covered debt (whether it includes guarantees, derivatives, or only borrowed money)
- Whether the trigger is an actual payment default or the broader cross-acceleration variant, which fires only when another creditor has already accelerated its claim
In sovereign finance, cross-default clauses are particularly consequential because a missed payment on one bond series can theoretically trigger acceleration across an entire external debt portfolio. This dynamic shaped Argentina's prolonged litigation after its 2001 default and was central to creditor negotiations during Greece's 2012 restructuring. Ecuador, Lebanon, Sri Lanka, and Zambia have all faced cross-default exposure during recent sovereign debt episodes.
For corporate borrowers, cross-default provisions interact with bankruptcy law: a single covenant breach on one facility can cascade into firm-wide insolvency. This is why distressed companies often negotiate standstill agreements or covenant waivers to prevent automatic triggering. The clause is closely related to, but distinct from, cross-acceleration, which is generally considered less aggressive because it requires another creditor to act first.
Example
When Argentina missed a coupon payment on its restructured bonds in 2014 following the Griesa court ruling, cross-default clauses raised the prospect of acceleration across multiple bond series held by holdout and exchange creditors.