A trapdoor maneuver in financial restructuring refers to a technique that moves collateral into unrestricted subsidiaries and out of reach of existing creditors, particularly the movement of intellectual property.[1] By transferring assets to a new subsidiary and licensing it back to the parent, new debt can be raised on the collateral stripped from the original creditors.[2]
The maneuver takes advantage of weak covenants in existing debt agreements. Companies first identify investment capacity in their existing covenants and then utilize this capacity to transfer collateral into a restricted, non-loan-party subsidiary. From there, the collateral is moved to an unrestricted subsidiary, making the collateral inaccessible to existing lenders.[3]
The trapdoor was pioneered by retailer J.Crew in its 2016 restructuring to move US$ 250 million of trademarks to the Cayman Islands, where it was beyond the legal reach of existing lenders.[2][4] The new subsidiary was then used to raise US$300 million of incremental debt from Blackstone.
Since then, other companies in distress have also used the financial maneuver, including Travelport, Revlon, Neiman Marcus, Party City, and Cirque du Soleil.[5] As of 2024, European companies have also begun using the maneuver in debt-management.[6]
References
edit- ^ Al-Muslim, Aisha (2020-08-26). "Distressed Borrowers Sneak Collateral Through 'Trapdoors'". Wall Street Journal. ISSN 0099-9660. Retrieved 2024-12-15.
- ^ a b "The J.Crew "trap door" and its implications for the future of leveraged finance | Insights | Torys LLP". www.torys.com. Retrieved 2024-12-15.
- ^ "J. Crew, Nine West, and the Complexities of Financial Distress". www.yalelawjournal.org. Retrieved 2024-12-15.
- ^ "A "Trap Door" Intact: Fixing the J.Crew Blocker". www.orrick.com. Retrieved 2024-12-15.
- ^ "Hedge Funds Smell Blood as Lenders Turn on Each Other". Bloomberg.com. 2024-08-11. Retrieved 2024-12-15.
- ^ Fox, Sabrina (2024-04-16). "Comment est-ce qu'on dit "J Screwed"?". Financial Times. Retrieved 2024-12-15.