Unrestricted subsidiary
What is an unrestricted subsidiary, and why do lenders worry about one?
ONE OF 416 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
An unrestricted subsidiary is a group company the borrower has designated, under its facility agreement or bond terms, as outside the covenants: it may borrow, grant security and pay out freely, gives no guarantee, and its earnings and debt are usually left out of the ratios. The mechanism comes from US high-yield bonds and appears mainly in sponsor-backed leveraged loans, rarely in bank lending to mid-sized businesses. The risk is transfer: investment baskets can let valuable assets move into it and secure new lenders, so lenders negotiate caps on designation and blockers on moving material assets, such as intellectual property.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// THE FULL PAGE
Unrestricted Subsidiary: How Value Leaves the Covenants →
Designate the company, and its assets leave the lenders' reach.
// WORKED IN
// NEXT TO IT
- Covenant headroom
- Negative pledge
- Condition precedent (CP)
- Event of default
- Covenant waiver
- Reservation of rights
- Term sheet
- Condition subsequent
- Review event
- Repayable on demand
- Material adverse change (MAC) clause
- Cross-default
- Change of control clause
- Cure period
- Compliance certificate
- Information undertakings
- Liquidity covenant
- Equity cure
- Springing covenant
- Covenant reset
- Covenant mulligan
- Covenant-lite (cov-lite)
- Incurrence covenant
- Test date (covenant)
- Permitted baskets
- Distribution lock-up
- Mandatory prepayment
- Clean-up period
- Certain funds
- Yank-the-bank clause (replacement of lender)
- Capex covenant
- Guarantor coverage test
- Frozen GAAP
- Covenant step-down
- Restricted group
// SUBSCRIBE
The Lab.
One case file and one question, in your inbox every Tuesday morning, New Zealand time. The senior banker's read opens only after you answer.
FREE WITH IT · THREE PDFS
An interview case, an annotated credit paper, and a one-page loan application sheet.
No spam. Unsubscribe anytime. Educational content only.