tag:blogger.com,1999:blog-1138037719967138620.post5844461589476348791..comments2020-08-11T10:31:20.245-04:00Comments on Comments on Credit: I'm Thinking Structural SubordinationTim Delaneyhttp://www.blogger.com/profile/10197685046398173361noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-1138037719967138620.post-47918627586618296912009-06-03T09:27:06.943-04:002009-06-03T09:27:06.943-04:00Seems odd that inter-creditor agreements havent be...Seems odd that inter-creditor agreements havent been tested in a legal system or even that they should have to be tested given that they are supposed to contractually bind all parties to a certain liquidation processPeter Andrenoreply@blogger.comtag:blogger.com,1999:blog-1138037719967138620.post-24491409831686545922009-05-21T07:46:04.345-04:002009-05-21T07:46:04.345-04:00Yes, European LBOs have contractual subordination ...Yes, European LBOs have contractual subordination in form of Inter-creditor agreements, but none of them have ever been tested in any legal system. So thats why investors will always prefer structural subordination.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1138037719967138620.post-28601532589809612142009-03-19T14:54:00.000-04:002009-03-19T14:54:00.000-04:00I believe from October 2008 the UK has abolished w...I believe from October 2008 the UK has abolished white wash procedure suggesting that financial assistance is no longer an issue in UK transactions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1138037719967138620.post-40424787769734479902009-03-18T20:05:00.000-04:002009-03-18T20:05:00.000-04:00Some of the comments above are not entirely accura...Some of the comments above are not entirely accurate, from a technical point of view.<BR/><BR/>> holdco-opco structure is very common in Europe, where you rarely see contractual subordination <BR/><BR/>Holdco-opco structures are indeed very common in Europe, for various reasons, including tax efficiency, management incentive schemes, and lender subordination. However, you will always see contractual subordination, in addition to structural subordination, through the intercreditor agreement, in any LBO.<BR/><BR/>>credit should be expended at either the sub level or at the holdco level but never both.<BR/><BR/>Reality is that typically in major European LBOs, in the structures being discussed here, opco senior loans will typically rank pari passu with holdco senior loans and lenders will go into both holdco and opco borrowers pro rata.<BR/><BR/>>A partial solution is normally to look to refinance any debt in the opcos.<BR/>This is not sufficient to solve financial assistance issues. In most jurisdictions, the only way for the opco to lend or guarantee loans to holdco is to demonstrate that the loan or guarantee serves a corporate purpose to the opco. There are structuring tricks that are standard in European P2Ps to allow this. Other jurisdictions, like the UK, have a "whitewash procedure" which bypass financial assistance issues altogether.<BR/><BR/>I have 8 years experience in European leveraged finance. Feel free to contact me if you have any questions on these matters, and their impact on successful restructurings.<BR/><BR/>jean-philippe maltais<BR/>jpmaltais@hesperiamngt.co.ukAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-1138037719967138620.post-56592263786486075752009-03-18T13:41:00.000-04:002009-03-18T13:41:00.000-04:00Certainly in continental European leveraged/buy-ou...Certainly in continental European leveraged/buy-out transactions, rules on financial assistance prohibit the opcos from providing security or upstream guarantees to holdcos (as this would disadvantage any of the opcos existing unsecured creditors). A partial solution is normally to look to refinance any debt in the opcos, thereby allowing you to benefit from a limited amount of guarantees or security.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1138037719967138620.post-61447994185154854132009-03-16T20:53:00.000-04:002009-03-16T20:53:00.000-04:00With a little embarrassment and a bruised ego, thi...With a little embarrassment and a bruised ego, this was a lesson I learned a quarter of a century ago, when my CCO turned down a holdco loan to a long standing customer. We held, as collateral, the stock of the major subsidiaries but in addition to the holdco credit there was a substantial amount of credit at the subsidiary level. Thus the credit declination. The end result was the company is still operating and to my knowledge none of its subsidiaries have filed Chapter. <BR/><BR/>In a case where a holdco loan is under consideration, the free cash flow of the subsidiaries should be analyzed to ensure that the holdco loan can be serviced through dividends or upstream loans. Notwithstanding, holdco loans to enterprises that do not withstand stressing downward projections of subsidiary performance should be avoided. <BR/><BR/>The upstream guarantees make a nice structure but only come into play in a default situation and if the subs file XI, they can be emasculated. <BR/><BR/>The credit ratings of the agencies should be immaterial and the decision should be based on internal analysis and metrics. <BR/><BR/>If at all possible, all credit should be expended at either the sub level or at the holdco level but never both. However, this is not a perfect world and I agree with the suggestion that holdco lenders limit the amount of sub debt.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1138037719967138620.post-51178555756100400142009-03-16T20:40:00.000-04:002009-03-16T20:40:00.000-04:00This holdco-opco structure is very common in Europ...This holdco-opco structure is very common in Europe, where you rarely see contractual subordination (I think it is a legal thing).Anonymousnoreply@blogger.com