Credit Cliff

AAA

DEFINITION of 'Credit Cliff'

A slang term referring to the compounding of a company's credit deterioration caused by provisions such as financial covenants, or events that trigger a change in the company's credit rating. These can put pressure on the company's liquidity or its business to a material extent.

INVESTOPEDIA EXPLAINS 'Credit Cliff'

For example, if a company is performing poorly it may get a credit rating downgrade, which gives the company a higher cost of capital. This is because a lower rating increases the company's interest payments on its debt, making its situation even worse.

You can think of a highly leveraged company that is in financial trouble as teetering on the edge of a cliff. One false step and it'll be in a freefall.

RELATED TERMS
  1. Covenant

    A promise in an indenture, or any other formal debt agreement, ...
  2. Death Spiral

    A type of loan investors give to a company in exchange for convertible ...
  3. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Liquidity

    1. The degree to which an asset or security can be bought or ...
  6. Bond Rating

    A grade given to bonds that indicates their credit quality. Private ...
Related Articles
  1. What Is A Corporate Credit Rating?
    Investing Basics

    What Is A Corporate Credit Rating?

  2. Junk Bonds: Everything You Need To Know
    Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

  3. Are Your Stocks Doomed?
    Markets

    Are Your Stocks Doomed?

  4. Finding The Best Yields
    Active Trading

    Finding The Best Yields

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center