LMA agreements assume that all borrower subsidiaries are original borrowers and original guarantors (i.e., obligors), which may be of particular concern when a borrower has a large number of subsidiaries.  Where necessary, the definition of “subsidiary” can be narrowed to include only those material subsidiaries that are identified as having key importance for the parent company or that are material by reference to a percentage of profits, turnover or gross assets of the group.  Those subsidiaries that fall under the thresholds are “carved out”, such that they are not captured by relevant provisions.

Paragraph (c)(ii) defines “Material Companies” by reference to an agreed percentage threshold of EBITDA, gross assets, net assets or turnover.

The “Material Company” definition in the Leveraged Facilities Agreement – any affiliate of a company group that is likely to be important in the context of the facilities – is used to limit the scope of key provisions that otherwise would apply to all members of the group, especially to exclude immaterial subsidiaries from being captured as an obligor.  The list of material companies that qualify as such at the date of the agreement is usually agreed and included as a schedule.

A carve out is a special exception in loan agreements where a provision might be disapplied, it being used primarily for exclusion of specific subsidiaries from being captured by the provision commonly for issues arising out of due diligence.  They are often included in the restrictive and/or financial covenants.

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