or HGI Funding may decide to withdraw (to the extent it may do so under the guaranty documents) or not to provide any other forms of credit support to Compass in the future. See Part I, Item 1A. “Risk Factors—Risks Related to Compass’ Business—Compass has a substantial amount of indebtedness, which may adversely affect its cash flow and ability to operate its business, remain in compliance with debt covenants and make payments on its debt and distributions to us. HGI Funding has provided credit support for such indebtedness in the past but may choose not to do so in the future.” contained in our 2015 Annual Report.
In addition, our liquidity and ability to pursue business opportunities may be impacted by the capital needs of our subsidiaries. Such entities may require additional capital to operate, maintain or grow their businesses, make payments on their indebtedness or other commitments, and/or make upstream cash distributions. For example, given the recent declines in oil and gas prices, Compass may require capital contributions if current period earnings and cash on hand at Compass are not sufficient to reduce debt levels and remain compliant with applicable covenants in Compass’ financing agreement. As another example, Front Street will require additional capital in order to engage in reinsurance transactions, and may require additional capital to operate or maintain its business or meet regulatory capital requirements.
Furthermore, these restrictions on our subsidiaries ability to pay dividends or distributions may limit our ability to incur additional indebtedness or refinance our existing indebtedness in the future as well. Our ability to refinance our indebtedness will depend on our ability to generate future cash flow, and we are dependent on our subsidiaries’ ability to pay dividends or pay distributions to us in order for us to generate cash flow.
We may and our subsidiaries may incur substantially more indebtedness. This could exacerbate the risks associated with our leverage.
Subject to the limitations set forth in the indentures and terms of our other agreements, we and our subsidiaries may incur additional indebtedness (including secured obligations and additional first-lien obligations) in the future. If we incur any additional indebtedness that ranks equally with the 2022 notes, the holders of that indebtedness will be entitled to share ratably with the holders of the 2022 notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. If we incur additional secured indebtedness, the holders of such indebtedness will be effectively senior to the holders of the 2022 notes to the extent of the value of the collateral securing such indebtedness. This may have the effect of reducing the amount of proceeds paid to holders of the 2022 notes. Additionally, if our subsidiaries incur additional debt, the 2022 notes will be structurally subordinated to such debt.
Similarly, if we incur any additional indebtedness that ranks equally with the 2019 notes, the holders of that indebtedness will be entitled to share ratably with the holders of the 2019 notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. If we incur additional secured indebtedness, the holders of such indebtedness will share in the collateral securing the 2019 notes. If new indebtedness is added to our current levels of indebtedness, the related risks that we now face, including our possible inability to service our debt, could intensify.
We may be unable to repurchase the notes upon a change of control, as required by the indentures.
Under the indentures, each holder of notes may require us to repurchase all of such holder’s notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if certain “change of control” events occur. However, it is possible that we will not have sufficient funds when required under the indentures to make the required repurchase of the notes. If we fail to repurchase notes in that circumstance, we will be in default under the indentures. If we are required to repurchase a significant portion of the notes, we may require third party financing as such funds may otherwise only be available to us through a distribution by our subsidiaries to us. We cannot be sure that we would be able to obtain third-party financing on acceptable terms, or at all, or obtain such funds through distributions from our subsidiaries.
Fraudulent transfer statutes may limit your rights as a holder of the notes.
Federal and state fraudulent transfer laws as previously interpreted by various courts permit a court, if it makes certain findings, to:
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• | avoid all or a portion of our obligations to holders of the notes; |
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• | subordinate our obligations to holders of the notes to our other existing and future creditors, entitling such creditors to be paid in full before any payment is made on the notes; and |
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• | take other action detrimental to holders of the notes, including invalidating the notes. |
In that event, we cannot assure you that you would ever be repaid. There is also no assurance that amounts previously paid to you pursuant to the notes or guarantees (if any) would not be subject to return.
Under federal and state fraudulent transfer laws, in order to take any of those actions, courts will typically need to find that we or the guarantors (if any) received less than fair consideration or reasonably equivalent value for incurring the indebtedness represented by the notes, and at the time the notes were issued:
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• | were insolvent or were rendered insolvent by reason of the issuance of the notes; |
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• | were engaged, or were about to engage, in a business or transaction for which our capital was unreasonably small; |
