Tool J4
To mitigate structure risk, it is necessary to identify the key assets, cash flows and contracts which the bank either needs to
- Legally and perhaps physically control (if negotiation position allows) or
- Prevent other stakeholders controlling
Choice of Legal Counterparty
The choice of legal counterparty is a key factor in this process. As there is no legal recourse to the Credit Base in the stress scenario it will
- Not be possible to legally or physically control any of the Credit Base’s assets, cash flows or contracts
- Only be possible to restrict the actions of other stakeholders to the extent that the Credit Base is linked to the structure (Refer Tool I2)
In general, you will be seeking control over the Legal Counterparty’s operating assets, cash flows and contracts. There can be occasions when during the tenor of the transaction you will want to control non operating assets, cash flows and contracts e.g. debt / equity proceeds, insurance proceeds etc. The table below sets out a range of covenants you could consider to improve your control.
| Assets | – Ownership of Assets – Take collateral. Be clear whether it really represents an alternative e repayment source (Refer Tool K) – Group wide negative pledge – No disposals clause |
| Cash Flows (CF) | |
| Operating CF | – Amortisation schedule – Cash sweep – Cash flow through the bank’s accounts – Prevention of asset securitisation, factoring and bill discounting – Cross default / acceleration |
| Non-operating CF | – Mandatory prepayments from 1. Disposals 2. Insurance proceeds 3. Debt and Equity Capital Market issues |
| Refinancing from new debt / Equity | – Financial covenants |
| Contracts | |
| Refer Tool K2 | – Assignment of contracts – Event of Default if (key) contract terminated or changed – Notify bank of (major) changes to terms |
