Permitted Investments Credit Agreement

As more and more companies face liquidity problems and short-term debt maturities, they are carefully reviewing commitment and credit agreements to achieve a full or partial restructuring of their capital structure. Investments in “unlimited subsidiaries” are an exception to the investment pacts used to provide flexibility in restructuring a company`s capital structure. Two recent and well-published examples of a change in value to an unlimited subsidiary refer to the financing agreements of iHeartCommunications and J.Crew Group Inc. Before buying debt, troubled investors should pay attention to what an unrestricted subsidiary is and how they can affect a company`s total credit or debt collection. A particularly effective use of unlimited subsidiaries is that a group wishes to finance a specific commercial entity and that this sector of activity, on a stand-alone basis, can make more debts than would be available under the Restricted Group`s debt association. Unlimited subsidiaries can, for example. B, be useful for project financing or securitization structures for individual activities, since these financing structures would generally require guarantee and guarantee agreements as well as dividend restrictions on activities that may not be authorized by Restricted Group`s funding. In addition, joint venture investments (in which the company is majority- and the financing of these investments by an unlimited subsidiary may be more easily structured, since the joint venture partner may not be subject to Restricted Group financing restrictions, and any financing of the joint venture would likely again have its own guarantee and guarantee agreements and dividend restrictions at the joint venture level. For the reasons mentioned above, we note once again that these financing structures are operationally feasible only if the sector of activity concerned can be operated on the edge of the fence. Customers often ask us if an “Unrestricted Subsidiary” can be used to close a transaction that is not otherwise authorized by its imputation of high-yield bonds or by a credit contract with high-yield style-case agreements.

In this caveat, we outlined a few key factors to consider in the use of an “unrestricted subsidiary” and some of the pitfalls that are often not taken into account when structuring transactions. Agreements in a financing agreement generally apply to the company and its “restricted subsidiaries.” Non-binding subsidiaries are not bound by the agreements and restrictions of the financing agreement. As a result, an unrestricted subsidiary is free to take on debt, grant pawn rights and make investments, limited payments and asset sales, even though the financing agreement would prohibit it from the company and its restricted subsidiaries. In addition, unlimited subsidiaries do not guarantee the stock of debt capital, they do not grant pawn rights as part of a set of guarantees (in the case of a guaranteed debt) and, in some cases, the parent company of the unlimited subsidiary is free to grant shares to third parties in the stock of the unlimited subsidiary. The disadvantage of an unrestricted subsidiary for a business is that the result of an unrestricted subsidiary is not included in earnings before interest, taxes, depreciation and amortization (EBITDA) and that, therefore, these revenues cannot be used by the company in calculating financial definitions and alliances in the financing agreement.