He or she is unable to honor the terms of the contract entered, and the borrower’s ability to pay comes into question.
The ISDA is a global trade organization for OTC derivatives, and provide the definitions and set the standard for what we consider to be credit events.
These swaps are essentially insurance against non payment to where if a credit event occurs, the seller compensates the buyer.
These swaps are a way for lenders to minimize risk and modify returns as they are provided insurance for the potential negative outcomes.
A restructuring credit event, according to the ISDA, occurs when there is either a reduction in the interest rate or principal amount, a deferment or other postponement for payment, a change that causes subordination to obligations, or if there is any change in the composition of the payments interest and principal.