Mai
Nguyen
Dawn of Finance
70
Structural subordination subsidiaries' dividends paid upstream to a parent
company are subordinate to interest payments.
Despite
structural subordination, a parent company's credit rating may be superior
to subsidiaries' ratings because the parent can benefit from having access to
multiple cash flows from diverse subsidiaries.
o
Complex corporate structures A company has intermediate holding companies that
carry their own debt and do not own 100% of their subsidiaries' stock
These companies are typically a result of mergers, acquisitions, or leveraged buyouts.
o Default of one subsidiary may not necessarily result in cross default.
o
To analyze these companies, analysts should calculate leverage ratios at each level of debt
issuance and
on a consolidated basis
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