Credit Event denotes any well-defined (both from a time-of-occurence perspective and from a legal perspective) situation where a legal entity (for example a physical person or a commercial / public entity) defaults on a significant financial contract.
A credit event is the concrete manifestation (realization) of Credit Risk.
Depending on the type of the contract, the entities involved, the business, regulatory and accounting context, a credit event may be more or less formal and may have different implications.
The term came to prominence with the advent of Credit Derivative instruments. When a bilateral derivatives contract follows the ISDA template there is recognition of the following credit events:
- Obligation Acceleration
- Obligation Default
- Failure to Pay
Issues and Challenges
- Whether a credit event has actually occurred is occasionally difficult to establish, for example when there is a complex nexus of interconnected parties and contractual relationships