Transcript Slide 1
Opco/Propco and all that
October 2008
Today’s session
Opco/Propco structure
Lease default
Themes
Opco/Propco scenario
Conclusions
Opco/Propco Structure
Sponsors
Parent
Holdco
Holdco
Sale of Properties
Purchase Price
Propco
Opco
Rent
Lease
Security
Loan
Propco
Lenders
Loan
Security
Opco
Lenders
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?
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
Ian Field, Partner
Banking – Restructuring
Telephone: +44 20 3088 2671 Email: [email protected]
Arthur Dyson
Arthur Dyson, Partner
Banking – Global Loans
Telephone: +44 20 3088 2134 Email: [email protected]
Opco/Propco and all that
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constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
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term partner is used to refer to a member of Allen & Overy LLP or an employee or
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