Baker Botts Partner, Tomas Gärdfors examines how Holdco financing provides flexibility: it can be deployed vertically across the capital stack as well as horizontally over the life of an asset, a project or a business, in particular on a portfolio basis.
More challengingly, however, a holdco borrower has no operations and therefore no independent cash flow. All debt service is dependent on distributions coming up the corporate structure. Holdco lenders are typically not directly secured by the underlying assets but depend on (a share of) project cash flow being distributed up the structure to the sponsor, the holdco lenders shaving such distributions and, in some instances, blocking them from being paid further up the corporate structure outside the holdco finance ringfence. This impacts non-payment default mechanisms, equity cure provisions and account structures.
There is huge potential in markets where holdco finance has not previously been widely used. However, for someone considering lending or borrowing on this basis, but with limited previous experience, the concept can seem daunting. Our whitepaper looks at what holdco financing is, how it can be applied in Europe in the current market, the purposes for which it can be used and how it works.