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 PropcoOpco Opco Lenders Propco Lenders Security Loan Lease Purchase Price Sale of Properties Loan Security 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: Arthur Dyson Arthur Dyson, Partner Banking – Global Loans Telephone: 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. 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 consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.
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