opco/propco and all that october 2008. today’s session opco/propco structure lease default ...
TRANSCRIPT
Opco/Propco and all thatOctober 2008
Today’s session
Opco/Propco structure Lease default Themes Opco/Propco scenario Conclusions
Opco/Propco Structure
Opco and Propco in same group
Common directors Propco is an SPV Opco is a trading
company Sale and lease back Separate financings Separate security Common lenders?
Sponsors
Holdco Holdco
Propco Opco
OpcoLenders
PropcoLenders
SecurityLoan
Lease
Purchase Price
Sale of Properties
LoanSecurity
Parent
Rent
Linkage between Propco and Opco
The lease Individual or master lease Lease guarantee from Opco Holdco or Parent? Option to buy Opco assets?
Common directors Intra-group subordinated loan Costs and expenses indemnity Corporate and tax group:
SDLT and CGT degrouping charges Tax deed?
Lease default
Main remedies are to sue for unpaid rent or to forfeit Forfeiture is a bit of a blunt weapon:
Ends the future rent stream - no entitlement to accelerate future rent
Probably need court to order possession Tenant, subtenants and their mortgagees can apply to
court for “relief” from forfeiture Timing uncertain Forfeiture may end subleases
Themes
Number of parties Fragmentation of investor base Internal conflict within banks Who’s in control? Rise of special servicing Keeping the lights on
Who’s in control?
Whoever can sanction workouts and enforcement Intercreditor and servicing arrangements Distinguish between:
“UK Model”: Senior and junior lenders have independent rights set out in the intercreditor agreement
“US Model”: Whole loan servicing – special servicer has discretion to work out and enforce
UK Model
Junior lender rights: Cure rights Right to buy-out the senior debt at par Veto against changes to fundamental loan terms Right to enforce:
Standstill period Security cover test
UK Model relies on secured creditor consensus for pre-enforcement workout
US Model
Servicing and special servicing Servicer’s authority is regulated by:
Obligation to comply with the Servicing Standard Consultation and approval rights of the Controlling Party (Possibly) veto rights in favour of other creditors
Controlling Party will be the most junior class of lenders, subject to a control valuation test
Junior lenders will have cure and purchase rights Servicer may have purchase right at par or fair value US Model capable of binding all secured creditors to
a common pre-enforcement solution
Keeping the lights on
Impact on realisable value Takeover costs Ownership of trading assets Employees Impact on regulatory and trading licences Impact on material contracts Impact on ownership rights
And then…
Trading falls off…
Opco Lenders: opening position
Opco is (or will soon be) insolvent Part of the business viable as a going concern Want to structure a sale to leave the buyer of the
viable part with a clean position Buyer may be Sponsors and/or Opco Lenders Do Opco Lenders care if Propco is left in the lurch? Can Propco frustrate or control the terms of a sale?
Opco: opening position
Little choice but to allow Opco Lenders (or an administrator) to lead the negotiation
Directors: Likely to be conflicted Nervous about their personal position – risk of wrongful
trading?
Propco Lenders: opening position
Propco loan in (or about to) default Adverse market conditions Propco is (or will soon be) insolvent Desire (need) to keep the lights on
Should Propco fund Opco in the interim?
No security or control over Opco trading assets Linkage with Opco is principally through the lease Don’t want to be left with the rump of the Opco
business
Propco: opening position
Little choice but to allow Propco Lenders to lead the negotiation
Directors: Likely to be conflicted Nervous about their personal position – risk of wrongful
trading?
Sponsors: opening position
May be out of the game, but…
The action hots up
Opco goes into administration Moratorium on forfeiture of the lease Opco administrators identify the viable part of the
Opco business Asset sale likely to be preferred to share sale Buyer will “cherry-pick” the Opco portfolio Opco likely to default on the remainder of the
portfolio Propco forced to provide relief to Opco
administrators
Propco’s hand
Can Propco frustrate a sale? Does the sale require landlord consent:
Prohibition on assignment? Renegotiation of rent and/or other lease terms?
Can Propco forfeit all or only the defaulted leases? Are the leases cross-defaulted? Single lease v. individual leases?
Opco Holdco or Parent lease guarantee? Will the sale trigger contingent tax claims?
Some conclusions
At the end of the day, the debt/equity ratio and rent will need to be reset
Opco administrators control the Opco business Propco has most to lose but its hand is forced by an
Opco insolvency Propco may have a blunt weapon in forfeiture If Opco has found the best deal going, why would
Propco frustrate a sale?
Speakers
Ian Field, Partner Banking – Restructuring
Telephone: +44 20 3088 2671 Email: [email protected]
Arthur DysonArthur Dyson, PartnerBanking – Global Loans
Telephone: +44 20 3088 2134 Email: [email protected]
Ian Field
Opco/Propco and all that
These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.
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