An action that is triggered by a credit downgrade, i.e., a reduction of, or negative change in, credit rating of a firm/ a security/ an issue (or a borrower) from a level assigned earlier by a certain credit rating agency. It may also imply the failure of an issuer of debt instruments to maintain minimum credit requirements as defined by the issuance agreement or documentation. In a corresponding context, credit downgrade means a reduction of the credit rating of any unsecured indebtedness of a firm or any of its subsidiaries (if of a material size within a group) or a negative change in the outlook of such credit rating of the firm or the respective subsidiary (subsidiaries).

If the credit rating of a counterparty falls below a specific level, the other party (e.g., a financial institution) has the option to close out the respective credit transaction (e.g., debt, derivative, etc.)

Broadly speaking, a credit downgrade trigger allows one counterparty to terminate the credit-extension relationship if the other party’s credit rating or standing deteriorates to a level not acceptable under the agreement. Transacting parties may also agree, for example, that the borrowing party will pay an additional interest rate spread (e.g., 15 basis points) for each one notch downgrade and up to a maximum of 25 basis points (the so-called credit subsidy downgrade fee).

A credit downgrade trigger may also imply any event that “triggers” a credit downgrade (trigger of a credit downgrade).