When you lend to a group structure you run the risk of a phenomenon called “structural subordination risk”. What this means is that you might lend to a holding company, for example, but then later find that you struggle to get repaid because the holding company only receives dividends from its operating subsidiaries and doesn’t actually have any physical assets or cash flow that is independent of the group.
The real danger is that the operating subsidiaries that do have cash flow and, maybe, some physical assets may subsequently borrow from another lender and the cash flows that did go to the holding company then get diverted to the new lender to repay that debt. That means that you can’t get your debt repaid by the holding company because it doesn’t have the cash flow any longer.
In that case, your exposure to the holding company would be structurally subordinated to the other lender and you could have no recourse to the operating subsidiary’s assets.
The most obvious solution is to make sure that you always have guarantees from the operating subsidiaries if you lend to a holding company or to another company in a group structure that has no cash flow or assets.
It would also be sensible, when lending to a holding company, to impose a condition in the facility letter that restricts the ability of any of the group’s companies to raise further debt or in any way encumber their assets without your prior approval; this is usually known as a negative pledge.