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.

BREAKING DOWN '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.

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