Credit Event

From Open Risk Manual

Definition

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 a sudden change in a borrower's credit standing, such as bankruptcy or a violation of a bond indenture or loan agreement, that raises doubts about the borrower's ability to meet current or future obligations

A credit event is the concrete manifestation (realization) of Credit Risk.

Usage

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.

Credit Derivatives

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:

  • Bankruptcy
  • Obligation Acceleration
  • Obligation Default
  • Failure to Pay
  • Repudiation/Moratorium
  • Restructuring


ISDA has combinations of credit event types. These are:

  • Bankruptcy
  • Failure to pay principal
  • Failure to pay interest
  • Obligation Default Obligation
  • Acceleration
  • Repudiation / Moratorium
  • Distressed Ratings Downgrade
  • Maturity Extension
  • Writedown


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
  • The term Credit Event is defined more widely than just in CDS, for example in credit indices or just as business events generally. Therefore some of the CDS-specific terms here won't apply in those other contexts


Disclaimer

This entry annotates a FIBO Ontology Class. FIBO is a trademark and the FIBO Ontology is copyright of the EDM Council, released under the MIT Open Source License. There is no guarantee that the content of this page will remain aligned with or correctly interprets the concepts covered by the FIBO ontology.

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