Chapter X, C. Key Considerations in Nonconsolidation Opinions

• Jurisdiction: United States

C. Key Considerations in Nonconsolidation Opinions

When providing a nonconsolidation opinion, the borrower typically seeks to make the opinion as narrow as possible by assuming away most of the risk. The lender, on the other hand, generally pushes back on those assumptions to broaden the scope of the opinion. One key area of dispute typically involves which parties should be included as "debtor parties" in the opinion. In other words, when accounting for the risk of consolidation with a bankrupt affiliate of the SPE, which of the SPE's affiliates must be included? Fortunately, the answer to this question is provided by Standard & Poor's U.S. CMBS Legal and Structured Finance Criteria, published on May 1, 2003 (the "S&P Guidelines"), the relevant portions of which are included as Appendix D.

The S&P Guidelines generally require that any entity or group of related entities that owns more than 49% of the equity in the SPE should be included in the nonconsolidation opinion.³⁵⁰ This analysis would also require the inclusion of corporate grandparents and entities even further up the chain if their indirect interests in the SPE resulted in them ultimately owing more than 49% of the SPE. Depending on the type of entity used to create the SPE, other entities may also need to be included in the nonconsolidation opinion. For example, any general partner of a limited partnership that is not also an SPE and any affiliated property manager also must be included in the opinion.³⁵¹ The law firm giving the opinion can always include more entities than what is required by the S&P Guidelines, but best practices would require the law firm to limit its opinion only to the required entities.

The S&P Guidelines also contain a number of rules regarding permissible and impermissible assumptions.³⁵² They require that nonconsolidation opinions address certain bad facts if they are present in the deal structure.³⁵³ The primary bad fact is the presence of a guaranty by a direct or indirect owner of the SPE.³⁵⁴ These guaranties should be reviewed by counsel giving the opinion, and if the guaranty is being provided by a debtor party (i.e., an entity owning more than 49% of the equity in the SPE), the opinion should address "why the existence of the guaranty does not create an undue risk of consolidation."³⁵⁵ If, however, the guaranty does not provide recourse to the guarantor in the event of a bankruptcy by the borrower, that guaranty need only be identified in the opinion.³⁵⁶ Many structured-financing transactions...