TOOL I2
The purpose of this tool is to give some ideas on how to link credit bases to the structure of a deal.
The preferred option is to make them into a legal counterparty with full recourse via a guarantee / joint & several liability / co-debtorship
(Refer Tool K3) (Refer Tool K4)
If this is not possible, the next best option is for the credit base to sign the documentation promising to fulfil certain conditions. These direct covenants make the credit base into a legal counterparty, but we only have legal recourse if these specific conditions are not met.
Otherwise the link to the structure is usually based on a specified event which triggers an Event of Default. This indirect covenant is not as powerful as a direct covenant. It only triggers an Event of Default and does not give legal course to the Credit base. Ultimately reliance is placed on the commercial interest of credit base in the stress scenario.
| Credit Base | Link to the structure | Link to the structure |
| Direct covenant | Indirect covenant | |
| Parent Company | Direct maintenance of ownership clause | – Change of ownership clause – Distribution limitations (ringfencing) (Refer Tool L9) – Cross default – Financial covenants on consolidated group numbers – Financial covenants on unconsolidated legal counterparty’s financials |
| Individual shareholder | Direct maintenance of ownership clause | – Change of ownership – Dividend lock / distribution limitations |
| Other group companies – Wholly owned subsidiaries – Partially owned subsidiaries – Joint Ventures – Associated companies – Related parties | – Group wide negative pledge – Group cross default – No barriers to upstreaming of cash – Financial covenants on partially consolidated group – Financial covenants on unconsolidated subsidiary financials – Limit on investments / loans and intercompany transactions – Notify changes in joint venture agreements or changes in key intercompany contracts | |
| Concentration customer | Assignment of contracts | – Event of default if above (or below) X% turnover – Down rating clause – Notify changes in contract terms – Notify disputes |
| Concentration supplier | Assignment of supply contract Buy back guarantee | – Down rating clause – Event of default if contract terminated – Notify changes in contract terms – Notify disputes |
