Unrestricted Subsidiaries: Definition & Meaning | Bondfish
Unrestricted subsidiaries are subsidiaries that a bond issuer formally designates outside the covenant group: they are not bound by the bond’s covenants, and their assets and cash flows do not stand behind the bonds.
What it means
Bond indentures let a company move a subsidiary outside the covenant fence, usually subject to conditions — the transfer must fit within “restricted payment” capacity, and the subsidiary must not hold certain core assets. Once designated unrestricted, that entity can borrow, grant liens, sell assets and pay dividends freely, because your covenants no longer apply to it.
The flip side: its earnings no longer count toward the issuer’s covenant ratios, and it typically provides no guarantee to bondholders.
Why it matters for bond investors
Unrestricted subsidiaries are one of the classic routes for value leakage in high-yield bonds. In well-known U.S. cases, retailers moved brand and intellectual-property assets into unrestricted subsidiaries and borrowed against them — leaving the original bondholders with a weaker asset pool and higher credit risk. Before buying a corporate bond, check how much room the indenture gives management to designate subsidiaries unrestricted, and whether prized assets could legally walk out of your credit group.
Related terms
- Restricted subsidiaries
- Limitation on transactions with affiliates
- High-yield bonds
- Credit risk
- Secured bond
- Corporate bond
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.