Octus Radio Americas Core Credit: Webinar Replay - Covenants 101: Value Leakage (Oct. 29, 2021)
35 snips
Nov 1, 2021 Topics discussed in this podcast include value leakage in credit agreements, transfers to non-guarantors restricted subsidiaries vs transfers to unrestricted subsidiaries, the significance of proceeds baskets, and ways to address value leakage in retail companies.
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What Value Leakage Is
- Value leakage occurs when borrowers shift assets outside the restricted group, reducing collateral and guaranty strength.
- This weakens secured creditors by releasing liens and shrinking guarantors' asset pools.
Dividends As Direct Leakage
- Dividends are the simplest form of value leakage, moving cash or equity up to sponsors.
- They let an op-co fund parent obligations and reduce assets backing creditor claims.
Non‑Guarantors Vs Unrestricted Subs
- Non‑guarantor restricted subsidiaries differ mainly by EBITDA inclusion and negative covenant coverage.
- That technical difference crucially affects whether transfers remove collateral protection.