Programme limit: Difference between revisions

{{a|contract|{{stupidbanker}}}}Ordinarily — and as we will see, here, “ordinarily”, in the sense of “as long as you are not in America”, is an important caveat — the programme limit inserted in an [[Medium term note|MTN programme]] is a mere bagatelle: an arbitrary number included only out of a time-honoured sense of it being the right thing to do, since generations of legal eagles before us have always done it — that being the most compelling reason any legal eagle ever does anything.

The idea was that investors in a medium term note want some comfort that the corporate issuer of that note is not proposing to go batshit crazy and rack up trillions of dollars in indebtedness under the programme, levering its operation to breaking point and, thereby, prejudicing the value of existing notes. Thus, a limit: you may only issue up to, say, $10bn in MTNs at any time.

This is of course a blunt and rather useless tool since it does not stop an issuer levering up its balance sheet other ways (through bilateral loans or standalone bonds), generally the limit was no kind of negative pledge in any case (the Issuer could agree with its trustee or fiscal agent to raise it if need be, without noteholder consent) and as there are much more sophisticated means of noteholders monitoring this sort of risk, it has increasingly become less important ''in the financial world outside America''. (Important caveat). Especially with limited recourse SPVs running repackaging programmes it is totally pointless, since the SPVs are not levering up their balance sheets at all.

“Ordinarily” doesn’t count for anything if your programme is an SEC-registered [[shelf]], however. In that case, your programme limit could not be ''less'' of a bagatelle. Inattention to it may bankrupt you. On the question of “why you don’t mess around with the [[Securities Act of 1933]]”, here is a choice little titbit.