What results from a borrower defaulting under a cross-default clause?

When a borrower defaults under a cross-default clause, it activates a provision that connects multiple loan agreements. This means that if a borrower defaults on one loan, it triggers a default on all loans covered under that cross-default clause. This can lead to the acceleration of payments or other actions by the lender across all affected loans, not just the one in which the default occurred.

Understanding this mechanism is essential for both borrowers and lenders, as it illustrates the interconnected nature of loan agreements. If a borrower has multiple loans with cross-default clauses, the ramifications of defaulting on a single loan can be significantly more severe, potentially leading to financial distress far beyond the original loan default. Thus, the presence of cross-default clauses serves as an important consideration in risk management for both parties involved in the lending process.