Nearly three months after UK hotels and pubs group Six Continents demerged, the thorny issues that the split threw up surrounding successor companies and credit derivatives have not gone away.
In September 2002, Six Continents started weighing up how best to deal with its outstanding debt before splitting its hotels business, which was to become InterContinental Hotels Group (IHG), from its pubs and bars, now Mitchells & Butlers. In particular, IHG would have inherited £250 million ($400 million) of debenture notes maturing in 2016 secured on pub assets.
Six Continents decided to repay the debenture notes and buy back around £275 million of medium-term notes. It then used a £3 billion syndicated loan facility to finance its demerger. On separation, each of the new businesses drew on a syndicated loan of its own to repay this bridge.
So far, so simple. But in trying to organize its business split in the most effective way, Six Continents became a subsidiary of IHG. Six Continents now had little debt to speak of, with only around £18 million-worth of MTNs not signed up to the buy-back. It was correspondingly less likely to default.