Transcript Slide 1

Opco/Propco and all that
October 2008
Today’s session
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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?
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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
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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:
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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
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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
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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
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.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The
term partner is used to refer to a member of Allen & Overy LLP or an employee or
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equivalent status in one of Allen & Overy LLP's affiliated undertakings.
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