Drop-down financing
Financing involving assets transferred to an entity outside an existing credit group and used to support new borrowing. Its effect on original lenders’ collateral and recourse depends on the documents, liens and applicable law.
Also called Trap door, Trap-door financing
Drop-down financing in round numbers
Hypothetical, in US$ millions on one stated asset-valuation basis: a group starts with 100 of assets and transfers 30 to another entity, leaving 70 in the original group before other effects. Assume valid transfer and release arrangements remove original lenders’ recourse to those transferred assets. New borrowing of 20 against them is financing, not a valuation of the assets.
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| Measure | Amount / qualification |
|---|---|
| Initial asset value | 100 |
| Transferred asset value | 30; assumed valid transfer and relevant release |
| Remaining original-group assets | 100 − 30 = 70 before other effects |
| New financing | 20; separate from asset value |
Terms Related to Drop-down financing
Sacred rights · Double-dip · Liability management exercise (LME) · Covenant · First & second lien · All of the glossary