Corporates

Corporates EMEA Treatment of Junior Corporate Special Report Debt in Europe European HoldCo PIK and Shareholder

Analysts Executive Summary Cecile Durand‐Agbo This report identifies characteristics which allow Fitch Ratings to exclude HoldCo +44 20 3530 1220 [email protected] PIK (payment‐in‐kind) loans or notes and Shareholder Loans when determining a group’s IDR. Fitch assesses if these types of debt instruments increase the Matthias Volkmer probability of the default of the wider corporate group, as reflected in the relevant +44 20 3530 1337 [email protected] IDR.

Edward Eyerman Features which support exclusion of these debt instruments in the Restricted +44 20 3530 1359 Group’s IDR (see page 2 for definition) perimeter include: [email protected] • the loans are unsecured and contractually subordinated, or more frequently Related Research structurally subordinated when issued by an entity outside the Restricted • Definitions of Rating and Other Rating Group; Opinions (August 2010) • the loans are PIK‐for‐life (without cash‐pay obligations or options) during the • European Leveraged Credit Review ‐ Stabilisation in Performance as Refinancing life‐time of the transaction; Approaches (January 2011) • the loans’ effective final maturities are longer dated than any of the more • Rating Approach to PIK Loans in Restructurings (June 2009) senior ranking debt elements in the group’s , and lenders do • European Holdco PIK ‐ Evolution and not possess independent enforcement rights in respect of them. Formidable Growth (May 2007) • Coercive Debt Exchange Criteria Factors which would, in contrast, favour inclusion of these debt instruments in the (March 2009) Restricted Group’s IDR perimeter include the inverse of the features noted above, plus the following (mostly relevant for Shareholder Loans): This report replaces the previous Criteria Report “Rating European • marketability and transferability of the ; Holdco PIK”, published on 11 July 2007 and further expands its scope to • large relative size of the loan in relation to the group’s overall capital include Shareholder Loans. structure. Shareholder Loans can be found in many corporates, notably in privately held companies. HoldCo PIKs are more common in so‐called leveraged (LBO) capital structures. Where they co‐exist, they often share similar characteristics, though Shareholder Loans are typically further subordinated to Holdco PIKs.

Figure 1 Defined Terms in This Report “HoldCo PIK Issuer” Refers to the entity which issues the Holdco PIK, outside the Restricted Group “Junior Debt Issuer” Refers to the entity which issues the high‐ instrument within the Restricted Group “Senior Secured Refers to the entity which issues the senior secured Loans, within the Restricted Issuer” Group and generally owns the operating entities or is the debt issuer the closest to the operating entities “Restricted Group” Refers to an effectively ring‐fenced group of entities including the Senior Secured Issuer and the Junior Debt Issuer and all operating subsidiaries below them. It includes all the debt (and issuing entities) referenced in the intercreditor agreement. “Ring‐fencing” Refers to contractual and structural mechanisms that create a Restricted Group of borrowing entities, separate from other entities within the group. NB: Throughout this report, the agency uses the above defined terms to refer to the different issuing entities within a theoretical HoldCo PIK issuing group of borrowers. The below diagram is a graphic representation of these definitions. They are used for greater ease of reference in this report. The Junior Debt Issuer could be either a second lien issuer, a mezzanine issuer or a high‐yield issuer Source: Fitch www.fitchratings.com 8 April 2011 Corporates

Figure 2 Theoretical HoldCo PIK and Shareholder Loan Issuing Group

Shareholder Loan Shareholder Loan Issuer Parent

HoldCo PIK Issuer HoldCo PIK Debt

Junior Debt Issuer Junior Debt

Senior Secured Issuer Senior Secured Debt

Operating Subsidiaries

“IDRs opine on an entity’s Restricted Group relative vulnerability to Source: Fitch default on financial obligations. The “threshold” default risk addressed by Restricted Group’s IDR Perimeter the IDR is generally that of The Issuer Default Rating (IDR1 ) assesses the likelihood of a payment default of an the financial obligations issuing legal entity on its debt obligations. For the purpose of the IDR, all secured, whose non‐payment would unsecured and subordinated debts that may trigger a default at the rated entity best reflect the uncured under the loan documentation are included in the ratings assessment. Where the failure of that entity. As rated entity is part of a group of borrowing entities with cross‐guarantees and/or such, IDRs also address cross‐default mechanisms in place, the perimeter of debt obligations relevant to relative vulnerability to the rated entity’s IDR would be widened accordingly — thus the IDR may be the bankruptcy, administrative relative default probability of a specified group that will include the rated entity. receivership or similar concepts . . , Throughout this report, we use “Restricted Group IDR” to represent the specified group’s IDR, even though the IDR is applied to one entity. “Definitions of Rating and Other Forms of Opinions” In groups with heavily engineered capital structures, such as LBOs or high‐yield issuers, this specified group may be deliberately “restricted” contractually or structurally to stratify collateral availability.

“. . . non‐payment on an Corporate analysis sets a perimeter of operating assets, cash flow and debts which instrument that contains a form the basis for estimating vulnerability to default. Fitch’s principles on this are deferral feature or grace that the perimeter is normally set at conservatively broad levels for debts, and period will generally not be conservatively narrow levels for assets and cash flow. HoldCo PIKs and Shareholder considered a default until Loans represent two of the few situations where debt instruments will on occasion after the expiration of the be treated as excluded from this perimeter. deferral or grace period, If a loan agreement explicitly provides that non‐payment of the loan is not an event unless a default is otherwise of default, Fitch may not treat a non‐payment as a default for its rating purposes. It driven by bankruptcy or is likely, however, that non‐payment would be reflected in the accompanying other similar circumstance, distressed financial profile of the rated entity, and hence in lower IDR and senior or by a coercive debt debt instrument ratings. The treatment of the non‐payment as a default will exchange.” depend on Fitch’s view whether it is a Coercive Debt Exchange or not (see Fitch’s “Definitions of Rating and Other Coercive Debt Exchange Criteria, dated 3 March 2009). Forms of Opinions”

1 For additional information please refer to Fitch’s rating definitions on http://www.fitchratings.com/creditdesk/public/ratings_defintions/index.cfm

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PART 1: Rating Approach to HoldCo PIK – the Effect on an Issuer’s IDR The individual loan ratings reflect the ranking and/or of a particular loan within the relevant group’s capital structure, and hence its expected recoveries in a default scenario. The ultimate purpose of determining whether a Holdco PIK meets Fitch’s criteria is to evaluate whether a new Holdco PIK could have any adverse impact on the IDR of the rated entity (ie, increase the probability of default on the Restricted Group). In this regard, Fitch considers the terms of the Holdco PIK itself to consider whether such terms could make a default of the Restricted Group debt more likely. In particular Fitch will consider: 1. how a default on the Holdco PIK could affect the Restricted Group itself and its existing debt; and 2. if such a default could impact the Restricted Group, whether the Holdco PIK itself is more likely to default than the existing Restricted Group debt, thus lower the IDR of the Restricted Group, and the more instrument ratings. Step 1: Ring­Fencing Structural Subordination: Issued by a HoldCo Outside the Restricted Group This is key to analysing the impact that a HoldCo PIK default may have on the • If the HoldCo PIK is Restricted Group. In theory, if the issuer is outside the Restricted Group, then structurally subordinated effective structural subordination and ring‐fencing can exist (ie, the Restricted and has explicit language Group and its assets can be legally separated from other related companies in the preventing cross‐default, group and grant enforceable security over their assets in respect of the holders of the note can be excluded the senior debt and the junior debt). Also, if there is no cross‐default to the from the Restricted Restricted Group, a default at the HoldCo PIK Issuer level should not affect the Group’s IDR perimeter Restricted Group debt, so the IDR of the Restricted Group entities should not be affected. In addition, if effective ring‐fencing exists, then the non‐Restricted Group debt is not legally an obligation of the Restricted Group and does not increase the probability of default of the Restricted Group. Only an Equity Claim Structural subordination of the HoldCo PIK is reinforced if the only assets of the HoldCo PIK Issuer are shares in the Restricted Group (rather than an intercompany loan) and HoldCo PIK proceeds are paid out directly to shareholders as a dividend or used to acquire new shares in the Restricted Group, as then the HoldCo PIK Issuer (and its creditors) has only a residual equity claim on the Restricted Group. Intercompany Loan Claim In some cases, pre‐existing syndicated Holdco PIKs have been used as part of a • The effect of group’s capital structure at the time of the initial LBO, or have been used to fund Intercompany loans can be acquisitions at the Restricted Group level. In such cases, cash is generally down‐ excluded from the streamed from the HoldCo PIK Issuer to the Restricted Group via intercompany Restricted Group’s loans, which creates a more senior claim on the Restricted Group than that of pure perimeter if they are equity. However, provided that these intercompany loans are subordinated to all sufficiently subordinated other claims within the Restricted Group and are effectively deeply subordinated in explicit intercreditor shareholder loans, then these loans are closer to an equity rather than a debt agreements claim, and the Restricted Group’s IDR would not be affected by them. In this regard, the terms of the intercreditor agreement will typically be a crucial determinant in Fitch’s ratings analysis. Fitch expects to review the terms of this document and any legal opinion provided as to the enforceability of the

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intercreditor terms, especially the subordination arrangements, as the enforceability of intercreditor terms (especially with regards to the subordination) varies from jurisdiction to jurisdiction. Enforceability is a key component of Fitch’s analysis to determine if a Holdco PIK should be included in leveraged and refinancing considerations. Security and Guarantees Unsecured and Unguaranteed Any security or guarantees from the Restricted Group for the benefits of HoldCo PIK would enable a lender to claim on Restricted Group entities other than the individual HoldCo PIK Issuer, or to influence insolvency or restructuring proceedings. In most cases, no such security or guarantee exists. Structural subordination of the HoldCo PIK lenders — by having the Holdco PIK issued by a HoldCo PIK Issuer combined with no upstream security or guarantees from any of the Restricted Group members — further reinforces the ring‐fencing of the Restricted Group and ensures HoldCo PIK lenders cannot enforce security or cause a default within the Restricted Group. Security Granted Over the HoldCo PIK Issuer In certain cases, the HoldCo PIK lenders may be granted security over shares in the • Security over HoldCo HoldCo PIK Issuer itself, which gives the HoldCo PIK lenders additional comfort that shares brings little added they can enforce their rights as shareholders in the HoldCo PIK Issuer. However, in value most cases this in itself does not increase the risk of default of the Restricted • Change of control could Group and therefore will not have an impact on its IDR. provoke a liquidity problem for the Restricted Possible Contagion Through “Change of Control” Clause in Restricted Group Group in some cases, but It should be noted that if Holdco PIKs were somehow to experience a default whilst is considered event risk the Restricted Group is still performing, then enforcing on the HoldCo PIK Issuer share security may constitute a “change of control” at the Restricted Group level. This could trigger a mandatory prepayment event for the secured debt (considered event risk) and a change of control put option for a high‐yield instrument (again event risk). The agency typically reflects event risk through a Rating Watch action at the time that the event materialises. As acquisitions, whether for LBOs or any other listed corporates, are event risks, they are excluded from the rating calculus. However, to the extent that Fitch observes problems at a HoldCo, the implied additional liquidity threat may exercise downward pressure on the IDR of a Restricted Group as such distress increases. Pledge on Shares of Limited Value As a further constraint on the value of any pledge over shares to HoldCo PIK lenders, the Restricted Group lenders, and in particular the senior secured lenders, will generally have been granted security over the assets of the Restricted Group, including over shares in the Restricted Group companies. This means that should a default scenario involving the Restricted Group occur the HoldCo PIK investors will not necessarily be able to achieve greater recoveries on the basis of their security, as the senior secured lenders can enforce their claims closer to the operating assets and entities in the Restricted Group, if necessary. The HoldCo PIK lenders remain “last in line” (barring shareholders) to recoup any value in the Restricted Group. Junior‐Ranking Security Over Restricted Group Assets In a few cases, Fitch has seen HoldCo PIK instruments which are issued by a HoldCo but which have the additional benefit of junior‐ranking security over assets within the Restricted Group (eg, third‐ranking after first priority senior secured loans and second‐secured mezzanine loans). This could effectively bring the HoldCo PIK instrument within the ring‐fencing of the Restricted Group, and therefore the instrument would be considered as an obligation of the Restricted Group (albeit

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possibly an off‐balance sheet obligation) and could potentially affect the Restricted Group IDR, in the same way that a zero coupon note issue would. This will be assessed in each instance on a case‐by‐case basis. If the access to the security package is granted without any independent acceleration or enforcement rights whatsoever, then the agency would most likely consider that sufficient subordination still exists to protect the senior lenders (provided that the security package and the subordination arrangements are enforceable within the relevant jurisdiction). However, though this instrument may resemble a deeply subordinated shareholder instrument, it may still be included in leverage and refinancing risk considerations due to the short‐dated par call options which encourage the refinancing of these instruments ahead of their stated maturity (increasingly including coupon step‐ups). In essence, the probability of a payment default would not necessarily be increased, although this would also be dependent on the factors below regarding the PIK terms of the instrument, as well as the final maturity. However as the HoldCo PIK investors’ access to the security package brings this obligation within the Restricted Group, the refinancing risk is increased and the degree to which this affects the IDR is considered as part of the issuer‐specific liquidity analysis. Step 2: PIK­for­Life or Cash­Pay at Issuer’s Option PIK‐for‐Life If an instrument does not impose any obligation on an issuer to pay cash for the life of the instrument (including non‐eligibility to pay in cash (toggle)), and the instrument is a bullet repayment instrument, then the risk of a payment default does not materialise until the final maturity date (see below). In this case the HoldCo PIK instrument does not impose any additional cash obligations on the Restricted Group or the HoldCo PIK Issuer itself until final maturity, so the risk of a Restricted Group default is not increased, assuming a later final maturity. Furthermore, given the incurrence‐style financial covenants typical of HoldCo PIK deals, and provided that the HoldCo PIK documentation has been drafted to be no more restrictive than the Restricted Group documentation, in theory a non‐ payment default should also be almost impossible if there is no such default within the Restricted Group. Therefore, a HoldCo PIK default is less likely than a Restricted Group default, and the overall risk of default is not increased. Cash‐Pay Option Although HoldCo PIK notes issued in Europe are generally PIK‐for‐life, there may be periods of interest in HoldCo PIK instruments that become payable in cash if the HoldCo PIK Issuer makes a “permanent cash‐pay election”, which means that they may at some point become cash‐pay and therefore increase the HoldCo PIK Issuer’s cash obligations. In most cases Fitch believes it to be unlikely that this election will be made, as once the company is in a position to service more cash‐pay debt, it should be more economical to refinance the HoldCo PIK notes with senior secured debt or cash‐pay high‐yield notes at a lower cost of debt. The source of payment of any cash interest in the case of a HoldCo PIK instrument switching to cash‐pay would be the Restricted Group, as the HoldCo PIK Issuer has no operations or cash flows of its own and would be reliant on the upstreaming of dividends or other forms of restricted payment out of the Restricted Group. In practice, the Restricted Group documentation will usually include limitations on the ability of the Restricted Group entities to upstream cash to the detriment of the Restricted Group lenders or investors (there may be some debt leverage threshold). Depending on the drafting of such limitations, this would either limit or entirely prevent the upstreaming of cash for the purposes of dividends or payment of cash interest on a subordinated instrument such as the HoldCo PIK instrument, and makes the use of this issuer option a more remote possibility.

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Given Fitch’s experience of the market thus far (ie, that few, if any, of these instruments have so far turned cash‐pay) and Fitch’s belief that it would probably be more efficient for the borrower to refinance with a cheaper cash‐pay instrument, Fitch views an optional switch to cash‐pay interest as event risk. Furthermore, for as long as the instrument remains a PIK instrument, it will continue to meet this report’s considerations and will not have an impact on the Restricted Group’s IDR. Should the issuer make a cash‐pay election in relation to its PIK instrument, this • Cash‐pay election for the would mean it would be possible to incur a payment default on this instrument PIK note may lead to before the final maturity, and then the ring‐fencing of the Restricted Group and the inclusion in the Restricted intercreditor arrangements would determine how the HoldCo PIK instrument Group’s perimeter if ring‐ lenders would be treated. Assuming that there is adequate ring‐fencing (see Step 1 fencing is not sufficiently above), the HoldCo PIK Issuer would be assessed separately on the basis of the cash strong flows available to it to fund its debt service. The Restricted Group would be rated according to its Restricted Group debt, but taking into account the dividend policy which would service the debt at the HoldCo PIK Issuer level. Again, this is analogous to the way in which Fitch treats other investment‐grade corporates, where Fitch assumes that a certain level of dividends will be made by companies in going‐concern situations. The marginally lower flexibility implied by the HoldCo’s cash needs, however, may result in a change to the IDR, depending on the resulting level of financial flexibility still available to the Restricted Group. If the ring‐fencing is not sufficiently strong (see Step 1 above), then the HoldCo PIK instrument would be considered an obligation of the Restricted Group and the switch to a cash‐pay obligation would increase the probability of default accordingly. Treatment of Discount Notes, Zero Coupon Notes and Toggle Notes This differs from the treatment of discount notes which are issued within the Restricted Group and which have a mandatory switch from PIK to cash‐pay interest, zero coupon notes which are also issued within the Restricted Group, or toggle notes, which are issued within the Restricted Group and typically begin as cash‐pay instruments with an issuer option to switch to PIK (see below). All the above are considered obligations of the Restricted Group and do affect the IDR when issued. Additional Considerations Final Maturity When examining the impact of the issuance of a HoldCo PIK instrument on a Restricted Group’s IDRs, the final maturity of the instrument is also considered. Final Maturity Longer Than Restricted Group Debt As a practical matter, in most cases, the maturity of the PIK instrument will be set after the final maturity of all Restricted Group debt instruments. Should the latter be refinanced, it is expected that the PIK note maturity will be extended accordingly. Simply put, if the final maturity is beyond all the other Restricted Group debt, then it is a straightforward analysis for the agency that the contractual terms of the HoldCo PIK instrument will not affect the cash flows of the Restricted Group until after all the existing debt has been redeemed. Therefore, it does not increase the risk of payment default of the Restricted Group debt. Final Maturity Shorter Than Restricted Group Debt Should the HoldCo PIK instrument fall due for repayment while other debt obligations are still outstanding, this could increase the risk of the issuer group defaulting during the lifetime of its existing debt instruments. In practice, if the HoldCo PIK instrument is ring‐fenced, then the options for the group and/or its ultimate shareholders would be as listed below.

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1. To allow the HoldCo PIK instrument to default. Assuming that the Restricted Group is performing adequately, Fitch expects that shareholders will take steps to prevent this occurring. If the Restricted Group is already performing badly, this is likely to be already reflected in its IDR and the default of a HoldCo PIK instrument, if structured as a subordinated instrument and provided the Restricted Group and the security ring‐fencing arrangements are effective, would probably not have a further detrimental impact on the IDR. 2. To arrange to refinance the HoldCo PIK instrument with a similar, longer‐dated instrument outside the Restricted Group. This would be a credit‐neutral event for the Restricted Group and therefore would not affect the IDR. 3. To repay the HoldCo PIK instrument from equity sources outside the Restricted Group by either an IPO or a direct equity injection from shareholders. 4. To refinance the HoldCo PIK instrument by refinancing all of the group’s debt, including at the Restricted Group level. 5. To repay the HoldCo PIK instrument by selling the group to another owner and prepaying all group debt, including at the Restricted Group level. Item (1) above could result in a change of control event within the Restricted Group if the HoldCo PIK investors enforce their security over HoldCo PIK Issuer shares, however this would be considered event risk and would result in a refinancing event (as per (2) to (5) above). Items (2) to (5) above constitute event risk for an issuer, which is not generally included in the assessment of an IDR. In cases where event risk is clearly increasing (eg, as the final maturity date of a short‐dated HoldCo PIK instrument approaches), the agency may decide to comment in more detail on the risks, or to apply a Rating Watch where there is some visibility of potential specific events. Therefore, provided that the other terms of the HoldCo PIK instrument are sufficient to allow the agency to determine it has no impact on a Restricted Group IDR, then a shorter maturity at outset will not change this determination. However, there will be a greater degree of event risk as the final maturity date of the HoldCo PIK instrument approaches. HoldCo PIK Proportion of Total Debt Structure Where Holdco PIKs constitute a significant portion of the broader capital structure Fitch would consider the • of a company, combined Restricted Group and other entities (at its outset, rather materiality of the HoldCo than after cumulative interest payments), Fitch may not treat this subordinated PIK debt instrument in the instrument as a HoldCo PIK loan given its weighting in the corporate structure and debt structure in its potential negotiating stance with other creditors. Typically, Fitch would begin to analysis consider the materiality should HoldCo PIK instruments exceed 20%‐30% of the debt component of the capital structure. This would not be the case if the HoldCo PIK holders have also become the shareholders of the issuers, as was the case in a few of the restructuring cases observed by Fitch. In this situation Fitch considers that HoldCo PIK holders’ and the HoldCo shareholders’ considerations are likely to be aligned. Practicalities: Rating European Holdco PIK Instruments Very few European HoldCo PIK instruments have ratings. However, Fitch’s methodology can be applied to rate these instruments as for any other instrument in the capital structure. HoldCo PIK Issuer IDR The HoldCo PIK Issuer is an entity outside the Restricted Group and it does not have any operations of its own and it does not typically receive cash flows, even in the form of dividends (if there are the usual restrictions preventing or limiting upstreaming of dividends to the HoldCo from the Restricted Group). If the HoldCo

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PIK Instrument is properly ring‐fenced from the Restricted Group, it cannot be usefully analysed on a standalone, deconsolidated basis to provide a standalone IDR. Yet, in order to rate this HoldCo instrument, the issuer’s IDR is required. Of the three main ties (legal, operational and strategic) evaluated under Fitch’s “Parent and Subsidiary Rating Linkage” criteria, dated 13 July 2010, a HoldCo PIK Issuer does have strategic ties with its subsidiaries, but the IDR would have to reflect the conditionality of cash flows up to the HoldCo. At best the HoldCo PIK Issuer’s IDR would be rated one notch lower than the Restricted Group’s IDR. To date, separate IDRs have not been assigned to HoldCo PIK Issuers in Europe. Should there ever arise a situation whereby the HoldCo PIK instrument is in default but the Restricted Group is not, and the Restricted Group is effectively ring‐fenced (including no cross‐default provision), then the IDR of the HoldCo PIK Issuer could be downgraded to ‘D’ without impacting the IDR of the Restricted Group. Should the HoldCo PIK instrument become a cash‐pay instrument, where there is effective ring‐fencing of the Restricted Group, at best the HoldCo PIK Issuer’s IDR is still likely to be at least one notch lower than the Restricted Group’s IDR. HoldCo PIK Recovery Rating The HoldCo PIK instrument itself will be considered as the most subordinated element of external capital of the Restricted Group — although it is not an obligation of the Restricted Group directly, any value left over in a distress or default scenario within the Restricted Group after all Restricted Group debt has been paid will flow to the HoldCo PIK Issuer. The agency can assign a Recovery Rating to the HoldCo PIK instrument notched down from the IDR accordingly (see Fitch’s “Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers”, dated 24 November 2009), or up to a maximum of three notches. Default of the HoldCo PIK Note Fitch respects the definitions of non‐default in the documentation, thus if non‐ payment of interest or principal is explicitly not an event of default this would be a fundamental characteristic of the instrument and its ratings accordingly. Non‐ payment events of default (such as non‐delivery of the annual accounts within a certain number of days) would, consistent with Fitch’s ratings elsewhere, not result in ‘RD’ or ‘D’ ratings. The principal cause of default of a HoldCo PIK issuer would be conclusive inability to pay because of Restricted Group or HoldCo PIK issuer insolvency, or non‐payment of the note at final maturity. In the latter cases of bankruptcy or insolvency the IDR of the relevant entities would be lowered to ‘RD’ or ‘D’. The HoldCo PIK instrument would be lowered to a rating reflecting its likely terminal recoveries, as discussed in “Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers”, dated 24 November 2009, as would instruments within the Restricted Group. If just the HoldCo PIK Issuer was put into insolvency, although the HoldCo PIK itself is likely to remain in place accruing non‐payments, the IDR of the Restricted Group could remain unchanged although it would probably already be in the speculative‐ grade rating categories, probably reflecting the operational distressed performance which prompted the HoldCo insolvency.

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PART 2: Shareholder Loans In their basic form, Shareholder Loans evidence amounts payable by one entity to • Shareholder Loans only its shareholder. Given tax‐deductible treatment of interest payments, they are excluded from Restricted viewed as debt by the tax authorities, whereas senior debt holders regard them as Group’s IDR perimeter equity where they exhibit subordinated status, accrual or non‐cash interest when: payments, a longer‐dated maturity than senior debt, lack of enforcement rights • subordinated (by until all senior debt is repaid, and explicit (structurally or contractually) provisions contract or structure) which prohibit cross‐default. • non‐cash‐pay Some investors may also view Shareholder Loans as additional “skin‐in‐the‐game” • longer maturity than all from a supportive shareholder. Concerning the quality of the sponsor, Fitch has not other debt included sponsor quality or reputation in the Restricted Group IDR perimeter • non‐transferable (enhancement or otherwise) since, to date, evidence is not conclusive that a particular sponsor, or its fund’s time‐horizon, has consistently treated its • courts do not treat them as debt investment or the Restricted Group’s senior creditors adversely. In Fitch’s experience, each sponsor has reacted to events based on the merits of each transaction. The Shareholder Loan shares similar characteristics to the HoldCo PIK.

• Ring‐Fencing: To be excluded from the Restricted Group’s IDR perimeter, Fitch expects Shareholder Loans to be explicitly (contractually or structurally) subordinated to senior debt of the Restricted Group. Consistent with this, their enforceability provisions are not expected to impair Fitch’s assessment of the IDR or recovery prospects for the Restricted Group. If there is a HoldCo PIK instrument in the debt structure, the Shareholder Loan is likely to be subordinated to it, both structurally and contractually. • PIK‐for‐Life: To be excluded from the Restricted Group’s IDR perimeter, Fitch would also expect Shareholder Loans to be effectively PIK‐for‐life. • Final Maturity: To be excluded from the Restricted Group’s IDR perimeter and reinforce the concept of perpetual equity, the maturity date of the Shareholder Loan is expected to be after all other debt in the group. • Non‐Transferable Instrument: Here, Fitch expects the shareholder to remain the holder of the debt obligation, otherwise creditor composition considerations (voting upon restructuring provisions, ownership of other tranches of debt in order to force certain rights) may distort expected behaviour of the creditor hierarchy tree. Consequently, Fitch would not expect a Shareholder Loan to be capable of being transferred or sold to a non‐shareholder. • Impact of Jurisdiction: If Fitch knows of a jurisdiction where courts have treated Shareholder Loans as debt, they may be included in the Restricted Group’s leverage and refinancing analysis, particularly if Fitch believes that a court process is the most likely route in case of enforcement of the loan. Practicalities: Rating Implications for Shareholder Loans Fitch would expect all the above characteristics to be in place in order not to include these debt‐ and equity‐like, ring‐fenced, instruments in its assessment of the Restricted Group’s IDR. Otherwise they would be treated as junior debt of the Restricted Group and, if rated, be subject to recovery rating notching. Default upon a Shareholder Loan (however defined) would not affect the Restricted Group’s IDR, as non‐payment would not trigger any cross‐default provisions, and any shareholder action to force an insolvency of the relevant holdco would be an unlikely (perverse) scenario. If there is a form of Shareholder Loan that does have an impact on the Restricted Group, then non‐payment would result in an IDR of ‘RD’ or ‘D’ accordingly.

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It is not uncommon for shareholders to restructure Shareholder Loans into equity. Whether viewed as debt or not, Shareholder Loans would be unlikely to trigger a coercive debt exchange (CDE) under Fitch's criteria. The line between equity injection and Shareholder Loan forgiveness is inevitably indistinct. Equally, coercion is a major element of the CDE determination — it is difficult to construct a case where a shareholder exercises coercion on itself. It is unlikely that Fitch would rate a Shareholder Loan, as this type of instrument is fundamentally an equity instrument, as opposed to a debt obligation.

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Treatment of Junior Corporate Debt in Europe April 2011 10