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• Holding Company is the converging company at the top level of a Group Holding Structure that directly and indirectly has majority ownership (largely full ownership) in all the companies of a Group. Usually, the ultimate shareholder owns the Holding Company which in turn has ownership in subsidiaries.

 

• Holding Company’s purpose, as the name implies, is to hold the equity interests in other companies. Some of the subsidiary companies it owns do manufacture, sell, or otherwise conduct business. These are called operating companies. Other subsidiaries could hold real estate, intellectual property, vehicles, equipment, or anything else of value that is used by the operating companies.

 

• Holding Company consolidates all the operations of the Group. Subsidiaries are formed under holding company to conduct different business activities and sometimes to meet with local regulatory requirements.

 

• Typically, Holding Company does not conduct any operational activity. Its sole income is the dividend income from its subsidiaries.

 

• Each subsidiary has its own management  who run the day-to-day business. The holding company’s management is responsible for overseeing how the subsidiaries are run.

 

 

HoldCo – Where is it used

• Holding companies are used by businesses of all sizes and in all industries. Many of the best known publicly traded corporations are actually holding companies.

• A holding company structure is popular with large enterprises with multiple business units. 

• The company’s trademarks, equipment, and real estate may be placed in separate subsidiaries, with the operating companies paying to use the trademarks, lease the equipment, and rent its offices.

• Holding companies can also be used by much smaller businesses—even by single entrepreneurs.

 

 

 

Features of Holding Company (HoldCo) Financing

• HoldCo Financing is provided at holding company level, the debt is structurally subordinate to the Senior Debt, or any other indebtedness incurred at Operating Group Companies (OpCo Group) level.

• Typically, the lenders under the HoldCo Financing arrangements are different to the lender providing the Senior Debt. However, certain lenders providing Senior Debt to the OpCo Group also make available the HoldCo Financing.

• HoldCo Financing provides a mechanism allowing the HoldCo and its subsidiaries to increase the leverage of the wider group. Given the debt is being provided above the OpCo Group level, financial and other covenants under the Senior Debt arrangements could be avoided to be impacted because of the HoldCo Financing.

• The indebtedness incurred by the HoldCo typically falls outside of the OpCo Group, consents or waivers that are required pursuant to the Senior Debt finance documents could be avoided. In addition, intercreditor arrangements are not usually entered into with the Senior Debt finance parties.

• Given the HoldCo is a holding company only and does not generate cash, it is reliant on distributions from the OpCo Group in order to discharge payments due under the HoldCo Financing. A prospective lender to the HoldCo should be familiar with any distribution conditions under the Senior Debt arrangements and be comfortable that the revenue stream will be sufficient to discharge any payments due under the HoldCo Financing.

• Undertakings and covenants under the HoldCo Financing usually apply to HoldCo and the corporate group below the HoldCo (including members of the OpCo Group). While members of the OpCo Group will not be party to the relevant finance documents, the HoldCo, as the ultimate parent of these entities, undertakes and covenants that it will procure compliance by these entities with the relevant provisions of the HoldCo Financing arrangements.

 

HoldCo: Advantages

• Liability protection

            Placing operating companies and the assets they use in separate entities provides a liability shield. The debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.

 

• Control assets for less money

            A holding company needs to control its subsidiaries but doesn’t necessarily need to own all shares or membership interests. That allows the holding company to obtain control of another company and its assets at a lower cost than if it had acquired all of the subsidiary’s ownership interests.

 

• Lower debt financing costs

A holding company that has financial strength can often obtain loans for a lower interest rate than its operating companies could themselves avail.

 

• Central Control

            Usually, the management of the holding company and the subsidiary companies is controlled by the directors of the holding company. This provides a cohesive and centralised management structure that allows the holding company to maximise its performance and growth.

 

• Flexibility for Growth and Development

            Having the assets held by the holding company allows the group to diversify more efficiently, invest in new ventures; and exit ventures if needed.

 

 

• Succession Planning

            A holding company, with a centralised board of directors, can ensure continuity of the business when key people from the operating companies leave.  

 

 

HoldCo: Disadvantages

 

• Complexity

The use of holding companies and subsidiaries adds an element of complexity not found in the single-entity structure

 

• Management challenges

            Holding companies typically prefer to influence the operating company's policies and management decisions. If the operating company does not agree with the parent company's decision, this frequently leads to a management conflict.

 

• Cost

            The cost for using such a structure is a bit steep. 

 

 

HoldCo Financing: Security

 

The security package provided pursuant to HoldCo Financings usually consists of one or more of the following security documents:

 

• share charge granted by the shareholder / sponsor over the shares in HoldCo;

 

• Share charge over HoldCos investment in OpCo Group.

 

• all assets granted by the HoldCo (excluding any assets already secured pursuant to the Senior Debt arrangements).

• account charge granted by the HoldCo over a bank account in which distributions from the OpCo Group are to be made; and

 

• bespoke guarantees or security granted by the shareholder / sponsor or related parties.

 

 

HoldCo Financing: End Use

 

 The capital provided pursuant to a HoldCo Financing is often used for one of the following purposes:

• to make a distribution to the sponsor / shareholder of the HoldCo (usually in circumstances where the ability to make distributions at OpCo Group level is prohibited or restricted pursuant to the Senior Debt finance documents);

 

• to finance an investment in the OpCo Group to be made by the HoldCo; or

 

• to finance an investment to be made by the HoldCo of certain assets outside of the OpCo Group; or

 

• to finance an acquisition.