DEFINITION of 'Credit Event'

Any sudden and tangible (negative) change in a borrower's credit standing or decline in credit rating. A credit event brings into question the borrower's ability to repay its debt. It is the defining trigger in a credit derivative contract, or credit default swap. If the borrower experiences a credit event, then the buyer of the contract must pay the seller an agreed-upon sum to cover the loss.

BREAKING DOWN 'Credit Event'

Credit events include bankruptcies or violating a bond indenture or other loan agreement. Any decline in the borrower's credit rating can trigger the swap. Credit events always refer to the condition of the borrower pertaining to the underlying asset and not to either the lender or the purchaser of the swap.

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