TOOL F4
This tool will help you select the appropriate covenants to mitigate group structure risk, especially when you do not have good mitigation from a guaranteed structure.
| Group Risks | General Mitigants | Lending to HoldCo | Lending to OpCo |
|---|---|---|---|
| 1. HoldCo Risk | The group is financially strong Holdco has its own operating asset & activities Holdco has most of the group debt Take third party collateral | Take upstream guarantees from all OpCos (”due consideration) Joint and several liability with all Opcos Restrict debt at Opco level Ensure Holdco lends to OpCos rather than invests Prevent intercompany loans being surbodinated Set unconsolidated financial covenants on Holdco Ensure that there are no barriers for upstreaming cash from OpCo to Holdco | |
| 2. Intra-group Assets / Liabilities | Restrict intercompany loans Restrict intercompany guarantees Include guarantees in any gearing / leverage covenant | Ensure Holdco lends to OpCos rather than invests Prevent intercompany loans to OpCos being subordinated Prevent Holdco issuing downstream guarantees | If Holdco lends to OpCo , ensure those loans are subordinated and not repayable until senior debt has been repaid. Prevent OpCo issuing upstream or cross guarantees |
| 3. Transfer pricing | All intercompany transactions to be on an “arms-length” basis Set unconsolidated financial covenants on LCP based on EBITDA There is a track record indicating that the LCP has access to surplus cash flows within the group | Check interest arrangements on intercompany loans and other financing Ensure that there are no barriers for upstreaming cash from OpCo to HoldCo Take upstream guarantees, joint & several liability or collateral | Are transactions commercial? Rationale or TP? Length of credit to and from related companies? Interest terms on intercompany financing? “Ring fence” OpCo by preventing distributions from being up streamed to Holdco Restrict upstream guarantees Set unconsolidated financial covenants on Copco |
| 4. Change of Ownership / Control | Consider change of ownership above & below LCP Maintenance of ownership clause Restrict change of management | Restrictions on change of HoldCo ownership (with quoted co’s use ownership concentration clause) Holdco not to dispose of key OpCos No group co to dispose of operating assets Upstream guarantees (to survive change of ownership) | OpCo to remain in same ownership during the life of the bank’s commitment OpCo not to dispose of key cash generating assets (including its own subsidiaries) Downstream guarantee (to survive change of ownership) |
| 5. Change of Group Structure | No change of Structure clause Restrictions on sale and transfer of asset (incl. between related parties) | Restrict formation of new group companies Restrict formation of a sub-HoldCo Restrict new investments | Restrict formation of new OpCos |
