Loan agreements commonly assume that all borrower subsidiaries are original borrowers (i.e., obligors), which may be of particular concern when a borrower has a large number of subsidiaries. Where necessary, the definition of “Subsidiary” can be narrowed to include only those material subsidiaries that are identified as having key importance for the parent company or that are material in terms of profits, turnover or gross assets of the group.
A material company, which is any affiliate of a company group that is likely to be important in the context of a financing, may be defined to limit the scope of key provisions that otherwise would apply to all members of the group. The material company definition is use to exclude immaterial subsidiaries from being captured as an obligor. The list of material companies that qualify as such at the date of the agreement is usually agreed and included as a schedule.
| Material Company Definition in the LMA Leveraged Agreement |
| “‘Material Company’ means, at any time … a Subsidiary of the Parent which … has [earnings before interest, tax, depreciation and amortisation calculated on the same basis as EBITDA … ] representing [ ] per cent. or more of][EBITDA …] or has gross assets, net assets or turnover (excluding intra-group items) representing [ ] per cent., or more of the gross assets, net assets or turnover of the Group …” |
| Source: LMA |
The material subsidiaries of the borrower may also be guarantors of the borrower’s loan under loan agreements. Loan documentation may assume all subsidiaries of the principal borrower to be guarantors, whereby the facility agreements specify that the financing is guaranteed by all members of the company group to which the principal borrower is affiliated.