hard · Debt Capital Markets credit-ratings-risk
In a widely studied 2016 restructuring, a specialty retailer's sponsors caused Restricted Subsidiaries to transfer valuable trademark IP to a newly designated Unrestricted Subsidiary, drawing on permitted-investment capacity under the existing credit agreement. That IP was then pledged as collateral for new money debt that effectively primed the existing term lenders.
Which covenant mechanism was the primary enabler of this asset-stripping maneuver?
- The negative pledge's purchase-money-lien carve-out, which let the new secured debt attach only to assets bought with its own proceeds.
- The unrestricted-subsidiary designation basket, which removed the IP from the credit group's collateral package and covenant coverage.
- The cross-default clause's materiality threshold, which excused the IP transfer from counting as an event of default under the term loan.
- The maintenance covenant's EBITDA add-back for anticipated licensing synergies, which freed up headroom under the leverage ratio test.
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