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Asset-backed securities field guide: Difference between revisions
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But, as ever the immovable object of [[substance]] meets the irresistible force of [[Substance and form|form]]. Simply securitising a bilateral contract doesn’t take away the natural nervousness counterparties have to its customised terms. If they are connected bilaterally and a lender can see the whites of the borrower’s eyes it can intervene, push back and make representations should the borrower go about exercising its rights, calculating its rates, or performing its obligations in an unconscionable way. There is a communication channel through which such differences of opinion can be aired and resolved. | But, as ever the immovable object of [[substance]] meets the irresistible force of [[Substance and form|form]]. Simply securitising a bilateral contract doesn’t take away the natural nervousness counterparties have to its customised terms. If they are connected bilaterally and a lender can see the whites of the borrower’s eyes it can intervene, push back and make representations should the borrower go about exercising its rights, calculating its rates, or performing its obligations in an unconscionable way. There is a communication channel through which such differences of opinion can be aired and resolved. | ||
But once that relationship is intermediated by a traded note, that channel goes away. The borrower need not even know who its lenders are. Its lenders may change, at any time, and there may be a ''host'' of them. | But once that relationship is intermediated by a traded note, that channel goes away. The borrower need not even know who its lenders are. Its lenders may change, at any time, and there may be a ''host'' of them. Before the advent of clearing systems, notes could just be lost forever. And even if you do know who all the holders are, what if they disagree? What if some care, and some do not? What if you can’t get some of them to pick up the phone, or to present themselves at the offices of the Luxembourg [[paying agent]] for a meeting of Noteholders? | ||
When notes were [[definitive]] physical format this problem was truly insurmountable. Now they are [[electronically cleared]], there is at least a way of reliably communicating with all holders for the time being, but it is cumbersome, and getting them all to understand, or agree is something else. | |||
The traditional solution has been to appoint a [[trustee]] or [[fiscal agent]] of some sort to represent noteholders interests. This isn’t really much use as trustees won’t lift a finger except to take action that is categorically in the interests of all noteholders — they don’t get paid enough, they say — and the sorts of arguments parties to bilateral contracts get into are shaded, nuanced, and not the sorts of things [[trustee]]s can get [[comfortable]] with taking a position on. The other parties to the structure who might have a view, and the capability to make complicated calculations, tend to have interests that are not aligned with Noteholders’. A swap counterparty, for example, is generally the other side of the trade to the Noteholders. | The traditional solution has been to appoint a [[trustee]] or [[fiscal agent]] of some sort to represent noteholders interests. This isn’t really much use as trustees won’t lift a finger except to take action that is categorically in the interests of all noteholders — they don’t get paid enough, they say — and the sorts of arguments parties to bilateral contracts get into are shaded, nuanced, and not the sorts of things [[trustee]]s can get [[comfortable]] with taking a position on. The other parties to the structure who might have a view, and the capability to make complicated calculations, tend to have interests that are not aligned with Noteholders’. A swap counterparty, for example, is generally the other side of the trade to the Noteholders. | ||
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This is a fairly insurmountable problem for widely-held, really publicly traded ABS transactions like [[securitisation]]s and [[CLO]]s. Noteholders just have to take a view, that the people originating and sponsoring the deal are good people, and will not take the proverbial. | This is a fairly insurmountable problem for widely-held, really publicly traded ABS transactions like [[securitisation]]s and [[CLO]]s. Noteholders just have to take a view, that the people originating and sponsoring the deal are good people, and will not take the proverbial. | ||
But in smaller scale repackaging deals, things are | But in smaller scale repackaging deals, things are different. These tend to be tailored deals made to order for a specific investor. They are not listed, they are not publicly quoted, the original investor takes down the whole deal and, for the most part, sits on it, perhaps [[securities financing|financing]] it in the market, but staying long the economic risk of the transaction. These trades are ''in concept'' tradable, but no-one in her right might would actually buy one in the [[secondary market]] without all the [[due dilly]], [[negotiation]] and documentation you’d expect for an OTC [[novation]]. | ||