Fish or cut bait

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“Use it or lose it”, in the vernacular.

To carry on the rugby metaphor, when you have a good maul going forward, but momentum stalls and it looks like someone might have their hands on your ball, you might call “fish or cut bait!!” to stop an untriggered termination event hovering indefinitely over you and freaking your out your investors.

Let’s say you’ve had a wonky month — Coronavirus, right? —and there’s been a market drawdown on your AUM — so much so that you have blown through NAV trigger you were forced into when you were a two-person start-up above a shoe-shop in Camden. (I know, right?) Suddenly, out of nowhere, your broker seems to have a gun to your head, but she doesn’t seem to have much better an idea than you do what to do about it. She keeps muttering nervously and changing the subject whenever you mention it.

Now you could ask for a NAV trigger waiver, but the moment you blow through an ATE never feels like the best time to crave your broker’s indulgence. It would be much better to sort this out upfront, from a position of (relative) strength when you are negotiating docs: the weather’s fair, the wind is filling your sail, and all is well in the world.

In these favourable conditions you might ask for a “fish or cut bait” provision: this is to say, “all right, have your stupid NAV trigger but, when it happens, be prepared to put your money where your mouth is. You have a month: shoot, or put your gun away.”

Presented with this suggestion, your broker will say, “um —”. For, quietly, risk officers quite like the idea of a silent, festering, trigger they can pull at any later stage should something unmentionable happen and there isn’t a better alternative.

But carry on. Say, “look, I don’t want a Sword of Damocles hanging indefinitely over my head. If I am in the shtook, at least be prompt about putting me out of my misery. And look — if I have made it this far without blowing up, can’t we assume I out of the woods?”

But a credit officer’s lot is not a happy one: she has wound up working in credit, for one thing. That can hardly have been the plan. Plus, she is generally overworked, under-appreciated, under-resourced and, by natural disposition, beset by existential doubts — that is in large part why she became a credit officer in the first place. She will say a fish or cut bait clause makes her life harder: the cut-off time is inevitably arbitrary (true — but isn’t life arbitrary?); what counts as an ATE is often ambiguous (was it an ATE? Did they exceed the Threshold Amount?) and in any weather, it is hard to calculate (is it 30 days from the actual event, or when you knew of the event, or when you ought reasonably to have known about it, and so on).

Undoubtedly some bright spark will want a grace period, or to carve out securities financing settlements — an infinitude of pedantries one can strew in a credit officer’s path — and, even if your ATEs are not beset with deplorable contortions, at the time when one comes about, the world tends to be off its axis, the head of risk will have his hair on fire and the acrid fog of war will be filled with enough choking confusion, angst and resentment to delay your close-out decision long enough to run down a fish or cut bait period. No-one will be quite sure whether it is an ATE or not, and no one will want to be the one to pull the trigger.

And in any case, if you have committed an event of default, you are hardly the one who should be calling shots about when and whether I close you out, are you?

Since no-one exercises NAV triggers anyway — well, have you ever? — You are best to just shoot yourself before the negotiation starts.

The JC’s fish or cut bait trick

Well, we’ve got a cunning trick to break this deadlock. Here it is:

Make the fish or cut bait clause run from the point when the defaulting party gives written notice that it has committed an event of default and wishes the fish or cut bait period to start running.

This gets all incentives the right way around.

• The defaulter must categorically concede that it’s in default. The cut bait period doesn’t start until this happens. This dispels most of the doubts and difficulties a broker might agonize over when wondering whether it can pull the trigger or not. The defaulting has to say, “Look, friend, you’ve got me. Bang to rights.” Of course, the defaulter might not want to do that. But ask yourself: do you feel lucky?
• The duration of the period is crystal clear. There is no sneaking around, keeping a low profile and hoping the innocent party is asleep at the switch.
• It encourages clear, open and early communication. It opens a channel of communication that is often strangely shut at a time of stress. Often a broker will want to help a distressed client to reduce its positions to avoid a close-out. Brokers don’t actually want to close their clients out. That is the last thing they want: a fact lost on many buy-side negotiators.
• The credit officer’s steampunk machination to go through its motions — whilst at the same time making them as straightforward to go through as possible. “we know we have a default event, we know we can close out, we have a line of dialogue to the client, we have 25 days left to make and communicate the decision.”

See also

• Credit officer
• Commercial imperative