Seniority: security vs guarantee?
Gents, had a quick question on credit - say a subsidiary (company a) has (I) granted security over its assets to a lender to raise debt at this / subsidiary level, and have also (II) provided an upstream guarantee for debt raised at its holdco (company b). Assuming both the debt at holdco and subsidiary have cross default clauses and are in default - which would rank more senior? How would the cash waterfall work?
appreciate any views!
Quick view (may be wrong) is that the opco debt is senior secured (docs should explicitly point this out), so it will have priority over the holdco debt to the extent of the value of the security. The opco upstream gtee ensures that any unsecured debt raised at hodlco level is pari with unsecured debt at opco level, i.e. the security is the difference maker here.
Also by security I assume you mean actual assets, not the usual share pledge language.
thanks and yes - I meant security over assets.
but you alluded to a good point - If it was security over opco shares, how would that change things? Would the opco debt still be senior?
Can you describe the two pieces of debt? Whos the borrower? Where are the guarantees, and whats the specific security interest for each piece of debt?
Just confused because opco can't grant a security interest in opco shares because opco doesn't own opco shares (holdco does)
(1) opco debt is structurally senior and also secured. (2) Holdco debt is unsecured and, by virtue of the sub guarantee, if holdco defaults it becomes opco unsecured debt. (3) if holdco debt had a share pledge, if holdco defaults then HoldCo lender get’s the shares in the sub (i.e. becomes owner), sells it, and whatever is the deficiency claim becomes an unsecured liability of the sub. At least that’s the way I see it, but haven’t worked on real default scenarios fortunately!
Hi All thanks for the above, so in summary, the debt at the holdco (in the scenario described in the post) is junior to debt at the opco, because the if the holdco defaults, the guarantee provided by the opco effectively results in this being an unsecured liability (vs the more senior secured debt) - is this understanding correct?
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