The Aleph Blog » Blog Archive » On Operating Company Defaults

On Operating Company Defaults

From an e-mail from a reader:

Hi, David. I hope this e-mail finds you well. I am a long-time reader of your blog and have learned an immense amount about markets from your writings.

I am a stock analyst and am just starting to learn the nuances in the operating vs. holding co. relationship.

I saw your brief explanation here:

Could you point me to any websites, books, or articles that really delves into this? Specifically, there are lots of bonds issued on both the opco and holdco levels ( EIX, CZR, and many others).

I know distressed guys do this all day and I’ve already read Stephen Moyer’s Distressed Debt Analysis.  I understand structural vs. contractual subordination, cross guarantees, and other basics, but, I’d like to know how it would impact the publicly traded shares at the holdco level.

 For example, if holdco A has publicly traded shares and has opcos B and C. B is a profitable company while C is loss-making company. B and C both have publicly traded debt.

What would happen if C defaults?  Nothing is clear cut but I’m trying to find a good way think about these things.

I have been here already.  If company C defaults, company A has no obligation to make you whole.  In my case with Teleglobe, the bondholders got zero.  The parent, BCE, is still doing well.

This is a major aspect of being a bondholder.  You must analyze the relationships, so that you do not rely on those that do not legally need to pay you.  Implicit support is always suspect.  In a crisis, it goes away.

Bonds, Portfolio Management | RSS 2.0 |

Comments are closed.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

 Subscribe in a reader

 Subscribe in a reader (comments)

Subscribe to RSS Feed

Enter your Email

Preview | Powered by FeedBlitz

Seeking Alpha Certified

Top markets blogs award

The Aleph Blog

Top markets blogs Bull, Boards & Blogs

Blog Directory - Blogged

IStockAnalyst supporter

All Economists Contributor

Business Finance Blogs
OnToplist is optimized by SEO
Add blog to our blog directory.

Page optimized by WP Minify WordPress Plugin