Sudden change in a borrower's credit standing, such as bankruptcy or violation of a bond indenture or loan agreement, that raises doubts about the borrower's ability to repay future obligations. Credit events can trigger a payoff in a Credit Default Swap, a common form of credit derivative, and are clearly defined in the swap agreement between the two counterparties. The defined events refer to changes in the underlying asset, not events affecting either of the contract counterparties.
Credit event
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A credit event is the financial term used to describe either:
A general default event related to a legal entity's previously agreed financial obligation. In this case, a legal entity fails to meet its obligation on any significant financial transaction (coupon on a bond it issued or interest rate payment on a swap for example). The marketplace will recognize this as an event related to the legal entity's credit worthiness. OR
A financial event related to a legal entity which triggers specific protection provided by a credit derivative (credit default swap, credit default swap index, credit default swap index tranche, etc.)
The events triggering a credit derivative are defined in a bilateral swap confirmation which is a transactional document that typically refers to an ISDA master agreement previously executed between the two swap counterparties. There are several standard credit events which are typically referred to in credit derivative transactions:
- Bankruptcy
- Failure to Pay
- Restructuring
- Repudiation
- Moratorium
- Obligation Acceleration
- Obligation Default
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 | Banking Dictionary. Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved. Read more |
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| Wikipedia. This article is licensed under the Creative Commons Attribution/Share-Alike License. It uses material from the Wikipedia article "Credit event". Read more |
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- Acceleration Clause (in banking)
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