The purpose of this Note is to set out the recent trends, key features and issues in relation to HoldCo Financings in the Irish market. “HoldCo Financing” is the provision of loan facilities to a holding company (“HoldCo”), which sits above an operational company or group of companies (“OpCo Group”) and which has secured senior debt at the operational group level (“Senior Debt”).
1 Recent Trends
1.1 Traditionally, HoldCo Financing has been a common feature of infrastructure and energy projects where the OpCo Group has a revenue stream which can be relatively accurately forecasted (and, as a result, the distributions that will be made available to the HoldCo can also, to a large degree, be accurately forecasted). However, recently we have seen a number of commercial banks and alternative investment providers making facilities of this nature available to strong cash generating OpCo Groups.
1.2 Typically, the lenders under the HoldCo Financing arrangements are different to the lender or syndicate of lenders providing the Senior Debt. However, in recent transactions we have seen a member of the syndicate of lenders under the Senior Debt also make available the HoldCo Financing to the OpCo Group. In such cases, there may be a benefit to the lender from their existing relationship and knowledge of the borrower and the lender can take comfort from such borrower’s performance and compliance pursuant to the Senior Debt arrangements.
2 Key Features
We set out below the key features which we typically expect to see in HoldCo Financing.
2.1 HoldCo Financing provides a mechanism allowing the HoldCo and its subsidiaries to increase the leverage of the wider group. Given the debt is being provided above the OpCo Group level, financial and other covenants (including the leverage covenant) under the Senior Debt arrangements should not be impacted as a result of the HoldCo Financing. The capital provided pursuant to a HoldCo Financing is often used for one of the following purposes (or any combination of them):
2.1.1 to make a distribution to the sponsor / shareholder of the HoldCo (usually in circumstances where the ability to make distributions at OpCo Group level is prohibited or restricted pursuant to the Senior Debt finance documents);
2.1.2 to finance an investment in the OpCo Group to be made by the HoldCo; or
2.1.3 to finance an investment to be made by the HoldCo of certain assets outside of the OpCo Group.
2.2 Given there are usually restrictions or prohibitions on making distributions by the OpCo Group to the HoldCo pursuant to the Senior Debt arrangements:
2.2.1 the HoldCo Financing will have a final maturity date which is beyond that of the Senior Debt;
2.2.2 there are flexible interest payment provisions under the HoldCo Financing (including cash interest payments, traditional or variations of “payment-in-kind” interest provisions or any mixture of these); and / or
2.2.3 principal repayments may be made as a bullet payment on maturity, in instalments or any combination of these.
2.3 On the basis that the indebtedness incurred by the HoldCo falls outside of the OpCo Group, no consents or waivers should be required pursuant to the Senior Debt finance documents. In addition, intercreditor arrangements are not usually entered into with the Senior Debt finance parties. To the extent there is any shareholder or sponsor loans made available to the HoldCo, such loans should be subordinated to the HoldCo Financing arrangements.
2.4 Pursuant to the Senior Debt arrangements, members of the OpCo Group will not be able to grant security in favour of the lender(s) under the HoldCo Financing. In addition, the HoldCo may have granted security in favour of the Senior Debt finance parties over (a) any shareholder loans made to a member of the OpCo Group and (b) any shares it directly owns in the OpCo Group. As a result, the security package provided pursuant to HoldCo Financings is often more limited than a typical secured financing transaction and usually consists of one or more of the following security documents:
2.4.1 share charge granted by the shareholder / sponsor over the shares in HoldCo;
2.4.2 all asset debenture granted by the HoldCo (excluding any assets already secured pursuant to the Senior Debt arrangements);
2.4.3 account charge granted by the HoldCo over a bank account in which distributions from the OpCo Group are to be made; or
2.4.4 bespoke guarantees or security granted by the shareholder / sponsor or related parties.
2.5 Undertakings and covenants under the HoldCo Financing usually apply to HoldCo and the corporate group below the HoldCo (including members of the OpCo Group). While members of the OpCo Group will not be party to the relevant finance documents, the HoldCo, as the ultimate parent of these entities, undertakes and covenants that it will procure compliance by these entities with the relevant provisions of the HoldCo Financing arrangements. Typically, we see the following features in respect of such undertakings and covenants:
2.5.1 the financial covenants will require greater headroom than those under the Senior Debt finance documents (as both the HoldCo Financing and the Senior Debt will need to be taken into account in calculating such covenants);
2.5.2 the provisions under the HoldCo Financing should not require any member of the OpCo Group to do any act that it would be precluded from doing under the Senior Debt arrangements (in order to ensure a default is not triggered thereunder);
2.5.3 in order to ease the administrative burden in complying with the provisions of the finance documents under both the HoldCo Financing and the Senior Debt, borrowers may seek to align the representations, undertakings and covenants under the HoldCo Financing with those already agreed in the Senior Debt;
2.5.4 the lenders under the HoldCo Financing may seek to pare back any flexibility the borrower has negotiated in the Senior Debt arrangements which may result in a risk of distributions by the OpCo Group to the HoldCo being diverted (e.g. flexibility in respect of capital expenditure or acquisitions by the OpCo Group); and / or
2.5.5 the lenders under the HoldCo Financing may seek to restrict any amendments (without consent) to the Senior Debt arrangements which may be prejudicial to its interests (e.g. any increases in principal amounts, extension to the maturity dates, revisions to the distribution conditions or financial covenants etc.).
3.1 Given HoldCo Financing is provided at holding company level, the debt is structurally subordinate to the Senior Debt or any other indebtedness incurred at OpCo Group level.
3.2 As noted above, the security available to be provided in connection with a HoldCo Financing is often limited. Even where the lenders have the benefit of security over the shares of the HoldCo, the enforcement of such security will likely trigger a “change of control” mandatory prepayment event under the Senior Debt arrangements. In such cases, to the extent the assets of the OpCo Group are not sufficient to discharge the Senior Debt, such equity interests would be of no or limited value.
3.3 Given the HoldCo is a holding company only and does not generate cash, it is reliant on distributions from the OpCo Group in order to discharge payments due under the HoldCo Financing. A prospective lender to the HoldCo should be familiar with any distribution conditions under the Senior Debt arrangements and be comfortable that the revenue stream will be sufficient to discharge any payments due under the HoldCo Financing.