Subordination – Poof, Just Like Magic

You hold Senior Secured Notes in a European leveraged buyout. A holding company above the operating group has issued Senior Notes that fall due before yours. Despite being senior in multiple ways, you’re still subordinated…so the question is:

What subordination do you have, and where should you be looking to find protection against it?

In Merlin Entertainments we learn the cold, hard truth – subordination arises in four different ways.

Merlin's 2019 buyout financing included £635m equivalent of Senior Notes due 2027, issued by Motion Bondco DAC. Senior is in the notes' name, but it’s not their position in the capital structure. Bondco and its parent, Motion Midco Limited, hold nothing but shares and intercompany loans. Every operating subsidiary's creditors are paid before those two companies see anything.

And while the post-buyout Senior Secured Notes are senior and they are secured, they still suffer subordination temporally, and structurally at every subsidiary that doesn't guarantee them: per the January 2025 offering memorandum, the guarantors accounted for 78% of consolidated EBITDA.

The same operating subsidiaries guarantee the Senior Secured Notes on a senior basis and the Senior Notes on a senior subordinated basis. The guarantor is the same; the ranking isn't. That ranking is what the word "senior" describes.

The Senior Notes benefit from first-ranking security over Midco and Bondco. On the shares of the acquisition company, where the value is, they rank second behind the term loans and the Senior Secured Notes. Outside the United States, the Senior Secured Notes' own security is share security, bank accounts, receivables and a floating charge over a holding company. No attraction is secured in favor of any existing creditor.

By design the Senior Notes were the longest-dated instrument in the structure: eight years, against seven for the term loans and six and a half for the revolver. That’s how temporal subordination is supposed to work. The secured debt was then refinanced in 2020, 2023, 2024 and 2025, and by the end of 2025 every secured instrument matured between 2029 and 2032. The Senior Notes had gone from the longest-dated instrument to the shortest. They fall due on November 15, 2027, first.

On September 10, Merlin's parent, Motion JVCO Limited, announced "commitment documentation for a new senior secured term loan financing," "combined equivalent to approximately £657 million," to refinance debt including "the Group's approximately £630 million (equivalent) Senior Notes due 2027." Completion is "expected to occur by the end of 2026." As reported by Bloomberg, citing the company's statement to creditors, the new loans rank alongside Merlin's existing secured debt. The same report says they also have security over the London Eye, SEA LIFE London, Shrek's Adventure! London and the UK Dungeons – assets that do not secure the existing debt.

A lender secured on the London Eye ranks ahead of the Senior Secured Notes to the extent of the Eye's value. Where it also shares the existing collateral pari passu, the existing secured creditors are diluted there too. Where does £657m of lien capacity come from without a vote? Not from one basket. The Liens Covenant has three routes to security over assets that aren't collateral, and a separate one for sharing the collateral itself. The offering memorandum's own risk factors say the value of such assets "could be significant."

Every secured instrument included a springing maturity keyed to the Senior Notes. All three series of Senior Secured Notes and the SFA term loans fall due on August 15, 2027 if any 2027 Senior Notes are then outstanding; the revolver on July 15, 2027. A springing maturity governs when the junior debt is dealt with. The covenants govern how they are dealt with, and here they left the door open. The Senior Secured Notes' Restricted Payments covenant contains a window for payments on subordinated debt maturing within one year. For the 2027 Notes it opens on November 15, 2026, inside the announced closing period.

"Senior" describes one ranking, at one company, against one set of claims. It doesn't describe who owes you, what's secured in favor of you or anyone else, or when your claims fall due.

We’ve created a new case study course, "Merlin Entertainments: How Did They Do It, and Could It Happen To Me?" to go through these issues step by step. In about two hours of study time it teaches the four types of subordination at Merlin: structural, contractual, effective and temporal. Each module has a Clause Lab on the executed documents' own words and closes with the questions to ask in your own analysis, and the diligence list ships as a downloadable PDF. Click here to access the new course for free for two weeks.

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