1. Opco/Propco and all that October 2008
Presentation made to RBS real estate group on 29 May Document BK: Second in a series. First presentation can be found on BK
Opco/Propco and all that October 2008

2. Today’s session Opco/Propco structure Lease default Themes
Opco/Propco scenario
Conclusions
This session will focus on some issues that can arise when a real estate loan that is supported by an underlying business comes under stress. Think pubs, hotels, care homes, motorway service stations, car dealerships, hospitals etc. A classic example of the sort of deal we will be talking about is the opco/propco, but many of the points we will touch on are equally relevant to loans that have been made direct to property rich opcos e.g. hotel companies. Whatever the deal structure, the common component is the reliance that the real estate lender has on a single operating business in order to maintain the value of the real estate.
This session builds on some of the themes that we covered in the last talk we gave. That session focussed on the dynamics of the arrangements between the financiers – refresher quiz.
We’ll start with the briefest of summaries of some relevant laws - UK insolvency laws and the laws relating to the termination of UK leases - and then move on to some general themes before playing out a possible scenario.
So, with no more ado…

3. Opco/Propco Structure
Sponsors
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?
Parent
Holdco
Holdco
Sale of Properties
Propco
Opco
Purchase Price
Rent
Lease
Security
Security
Loan
Loan
Propco Lenders
Opco Lenders

4. 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?

5. 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
Most relevant remedies are likely to be litigation and forfeiture.
Neither is a particularly subtle remedy in itself. Both lead to Armageddon outcomes if seen through to the end. But, they are what gives the landlord a negotiating position and, in most cases, these will be negotiated outcomes.
Interaction between insolvency laws (particularly administration) and law of forfeiture.

6. Themes Number of parties Fragmentation of investor base
Internal conflict within banks
Who’s in control?
Rise of special servicing
Keeping the lights on
Keeping the lights on:
Trading obligations – motorway service stations
Hotel management contracts
Takeover costs may include:
statutory compliance – premises upgrade, lose grandfathering
taking responsibility for capex and other investment obligations
Impact of borrower’s insolvency: head leases, hotel management contracts
Third party creditors: tax man. Pressure of threatened litigation.
Contingent tax liabilities: s179, SDLT clawback, shareholder loans and CGT groups

7. 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

8. 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

9. 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

10. 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

11. And then…
Trading falls off…

12. 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?
Buyer may be a true third party or, just as likely, a newco formed by the Opco group and funded by the Opco lenders.

13. 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?
Is there enough in the deal for Opco Lenders to be interested?

14. 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 loan in default – rent not paid, LTV default.
Security or control over Opco trading assets – call options? Security unlikely?
In which case, it’s down to the lease etc

15. 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?
How does Propco get a seat at the negotiating table? Has no direct contact with Opco. Do Propco lenders need to enforce?
Propco directors – come back to this.

16. Sponsors: opening position
May be out of the game, but…

17. 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
Moratorium: timing and outcome uncertainty.
Asset sale v. share sale. Who is the buyer?
Cherry picking.
Odds are favouring Opco at this stage.
Just at this moment, it’s not looking good for Propco. But it’s too early to fold. Propco and Propco lenders have the most at stake and there is more play to come.

18. 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?
Propco fights back…
The lease is likely to provide most of Propco’s weaponry. Asset sale may require Propco consent for assignment and other changes sought by buyer:
Absolute prohibition?
Qualified consent?
Is it reasonable to withhold consent if there are rent arrears?
Is it reasonable to withhold consent if tenant is insolvent?
Parent company guarantees and tax guarantees may also generate significant pressure on the Opco.

19. 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?
Endless variety of paths and outcomes
It’s a lot easier when you don’t have much to lose
It’s a lot harder when you have most to lose

20. Speakers Ian Field Arthur Dyson
Ian Field, Partner Banking – Restructuring Telephone:
Arthur Dyson
Arthur Dyson, Partner Banking – Global Loans Telephone:

21. 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.

22. New York CLE
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