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:

http://alephblog.com/2009/03/25/holding-and-operating-companies/

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.