Credit Cliff

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Credit Cliff

Informal; a situation where a decline in credit availability can make a bad situation for a company even worse. For example, suppose a company has a large amount of debt. It may default on one loan or bond, causing its credit rating to be reduced. This will cause banks and investors to require higher interest rates for further extensions of credit. This increases the company's liabilities and can cause further defaults on loans and bonds. In short, a credit cliff is a compounding of a bad situation caused by credit problems.
References in periodicals archive ?
Such hazards include the tendency to hedge exposures with different counterparties while underwriting one's own risk on the basis of the net exposure (assuming performance by both the initial derivative and the hedged derivative), and the existence of credit cliffs inherent in downgrade triggers or material adverse change clauses that may invoke termination rights on the part of performing derivative counterparties, but not on the part of the party that suffered the downgrade or material adverse change.
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