A holding company has notes outstanding and owns three operating subsidiaries, each with its own debt. In a liquidation, what do the holding company noteholders recover?

The holding company noteholders recover about 76.7%. Each subsidiary pays its own lenders first. OpCo A passes Rs 150 crore up, OpCo C passes Rs 80 crore, and OpCo B passes nothing, its lenders taking a 75% recovery. That is Rs 230 crore against Rs 300 crore of notes. A guarantee of OpCo B's debt would cut the notes to about 65.7%.

A holding company owns shares, not factories. Its lenders can only be paid from what is left after every subsidiary's own creditors are paid in full, which is structural subordinationLenders to a parent company rank behind the creditors of its subsidiaries, because the parent only owns equity in them.. It works like a family where each sibling runs a separate shop: a lender to the parent gets only what each shop has left after its own suppliers are settled.

Netting says the group is worth Rs 650 crore, owes Rs 470 crore at the subsidiaries, and leaves Rs 180 crore, 60% for the notes. That treats OpCo B's Rs 50 crore shortfall as if it reduced A's and C's surplus, which limited liability does not allow. The shortfall stays at OpCo B as a loss for OpCo B's lenders, so the notes do better than the consolidated figures suggest.

If Meridian had guaranteed OpCo B's debt, OpCo B's lenders would claim their Rs 50 crore shortfall at the holding company alongside the notes. Rs 230 crore is then shared across Rs 350 crore of claims, about 65.7% each, so the notes lose value and OpCo B's lenders move up to about 91% overall. This is why the first question on any capital structure is who guarantees whom.