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Abstract
Holdco PIK loans are typically structured so that accruing interest is capitalised periodically into the principal of the loan, with payment being made at the instrument's maturity. Since the loan is incurred by the holdco, the liability will sit above the operating group 'downstairs' and not affect the leverage ratio when tested at the operating group level itself. [...]the more removed the holdco is from the operating group, the more precarious is its creditors' position in relation to repayment. Subordinated creditors need to ensure that they rank ahead of the sponsor's equity. [...]as well as placing restrictions on upstream distributions, subordinated creditors should consider how the sponsor's money might be round-tripped directly to the operating group, such as via loan or debt repurchase. [...]although a share pledge will allow the secured party to force the issue (and therefore might prove a valuable tool in a restructuring negotiation), it is nonetheless conceivable that a sponsor might act in the same manner in both scenarios.