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Worthless options that severed a guarantee
Every bond and loan at the operating company was guaranteed by the parent. That guarantee gave the operating company's creditors a claim on whatever sat at the parent, which included the original equity Apollo and TPG had put in.
Apollo sold options on shares that were effectively worthless, since the company was about to go bankrupt. The buyers included investors like Paulson, all of whom stood to gain from owning other parts of the company.
Those options meant someone besides the parent now held a potential ownership stake in the operating company, which had been 100 percent owned by the parent. Apollo's thesis was that this legal dance severed the guarantee, and that creditors at the operating company had no recourse.
Why does a parent guarantee its subsidiary's debt?
Lenders to a subsidiary often want a second source of repayment. A guarantee makes the parent legally responsible if the subsidiary cannot pay. It lets the lender claim against the parent's own assets, including its stakes in other companies. Guarantees are written into the credit agreement or the bond indenture.
How can an option change a company's ownership?
An option gives its holder the right to buy shares at a set price by a set date. Until it is exercised, the holder owns no shares. Exercising it turns the right into actual ownership. Employee stock options are the most familiar example.
Why do guarantees depend on ownership percentage?
Credit documents often release a subsidiary guarantee when the subsidiary stops being wholly owned by the guarantor. Lenders accept this because a partly owned company is no longer fully controlled by the parent. The trigger is written as an ownership threshold in the contract. Lawyers on both sides read the exact wording of that threshold.
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