Unrestricted Subsidiary
Corporate Credit Analysis glossary · Distressed Debt & Restructuring
Definition
A subsidiary designated outside the covenant perimeter. Permits the borrower to engage in transactions and incur debt at the unrestricted-sub level without counting against parent-level covenant baskets — a major source of recent covenant-leakage controversies (e.g., J. Crew, Serta).
Unrestricted Subsidiary in plain English
Big companies are usually made of many smaller companies (subsidiaries) they own. When a company borrows money, it signs a contract (covenants) promising to limit its risky moves — but those promises only cover the subsidiaries inside a fenced-off 'perimeter.' An 'unrestricted subsidiary' is one the company deliberately parks OUTSIDE that fence, so it can pile on new debt or move valuable assets there without breaking any promises to its lenders. It's like a teen who promised their parents they wouldn't spend from the family account, then quietly opens a second account the rules never mentioned — which is exactly how famous deals (J. Crew, Serta) let owners shift prized brands away from the very lenders who were counting on them.
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