A credit risk swap (CDS) is a transaction in which one party, the „buyer of the protection,“ the other party, the „protection seller,“ makes a number of payments over the term of the contract. In essence, the purchaser takes out insurance on the possibility for a debtor to experience a default event that would jeopardize his ability to meet his payment obligations. Insolvency events are most often related to loan contracts and are similar to termination rights found in commercial contracts, but with potentially different consequences. A delay event is an event or circumstance related to a borrower or its activities, which will give the lender the right to refuse further advances, demand immediate repayment of a loan, repay a long-term loan on demand and/or impose its guarantee. If a borrower does not pay an amount when it matures in accordance with the loan agreement, this is a delay event. Lenders are very unlikely to negotiate. It may be possible for the borrower to request a reasonable additional period of time in which the amount owed must be paid before the offence becomes a delay event. Normally, such an additional delay would not be more than a few working days. In the event of a delay, the lender has a number of options set out in the „acceleration clause“ of the loan agreement. This usually implies the possibility: with regard to a possible late event, the interpretation provision is rarely changed and the position is quite simple. To give an example, if the borrower does not send a notification on behalf of the lenders before a specific date, but the facility agreement provides that the borrower has additional time before it boils down to a delay event, as long as the borrower submits the notification during the additional delay, he will have corrected the potential payment event and, as such, will no longer be „prosecuted“. In this way, many of the operational consequences of a possible failure depend on the prosecution. Most facility agreements therefore include a mechanism whereby a lender, when it chooses to do so, can take certain steps in the event of the borrower`s non-repayment.
This default event is triggered when a statement made by the borrower under the loan agreement (or sometimes other related financing documents) is found to be false or misleading, or as being made (or sometimes other related financing documents). Statements can only be made on the date of the agreement or may be considered repeated every day during the term of the loan (or certain dates such as draw dates, IPDs or repayment or advance dates).