Structural subordination: Difference between revisions
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#The ownership structure of the borrower, for example in a group of companies; and | #The ownership structure of the borrower, for example in a group of companies; and | ||
#Holding a claim against the 'wrong' legal entity. | #Holding a claim against the 'wrong' legal entity. | ||
For example, the claims of the creditors of a holding company may become structurally subordinated to the claims of creditors of the subsidiary companies in the same group. | For example, the claims of the creditors of a holding company may become structurally subordinated to the claims of creditors of the subsidiary companies in the same group. | ||
Revision as of 06:25, 6 April 2015
Risk management.
An effective reduction in the ranking of the claim of a lender or other creditor resulting from a combination of:
- The ownership structure of the borrower, for example in a group of companies; and
- Holding a claim against the 'wrong' legal entity.
For example, the claims of the creditors of a holding company may become structurally subordinated to the claims of creditors of the subsidiary companies in the same group.
This is because the claim of the holding company itself - as a shareholder of the subsidiary - is generally subordinated to the claims of the other creditors of the subsidiary.
This can be particularly problematic where the subsidiary is in a different country from the holding company, where local legal and other claims may effectively erode the position of the holding company's creditors.
