A trapdoor maneuver in financial restructuring refers to a technique that moves collateral into unrestricted subsidiaries and out of reach of existing creditors, particularly the movement of intellectual property. By transferring assets to a new subsidiary and licensing it back to the parent, new debt can be raised on the collateral stripped from the original creditors.
The maneuver takes advantage of weak covenants in existing debt agreements. Companies first identify investment capacity in their existing covenants and then utilize this capacity to transfer collateral into a restricted, non-loan-party subsidiary. From there, the collateral is moved to an unrestricted subsidiary, making the collateral inaccessible to existing lenders.
The trapdoor was pioneered by retailer J.Crew in its 2016 restructuring to move US$ 250 million of trademarks to the Cayman Islands, where it was beyond the legal reach of existing lenders. The new subsidiary was then used to raise US$300 million of incremental debt from Blackstone.
Since then, other companies in distress have also used the financial maneuver, including Travelport, Revlon, Neiman Marcus, Party City, and Cirque du Soleil. As of 2024, European companies have also begun using the maneuver in debt-management.
References
- Al-Muslim, Aisha (2020-08-26). "Distressed Borrowers Sneak Collateral Through 'Trapdoors'". Wall Street Journal. ISSN 0099-9660. Retrieved 2024-12-15.
- ^ "The J.Crew "trap door" and its implications for the future of leveraged finance | Insights | Torys LLP". www.torys.com. Retrieved 2024-12-15.
- "J. Crew, Nine West, and the Complexities of Financial Distress". www.yalelawjournal.org. Retrieved 2024-12-15.
- "A "Trap Door" Intact: Fixing the J.Crew Blocker". www.orrick.com. Retrieved 2024-12-15.
- "Hedge Funds Smell Blood as Lenders Turn on Each Other". Bloomberg.com. 2024-08-11. Retrieved 2024-12-15.
- Fox, Sabrina (2024-04-16). "Comment est-ce qu'on dit "J Screwed"?". Financial Times. Retrieved 2024-12-15.