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Asset-backed securities field guide: Difference between revisions
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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 usually listed or 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. | 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 usually listed or 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 | These products are ''in concept'' tradable, the same caravans in a trailer park are mobile: they don’t really trade: no-one in their right might mind would buy one of these things in the [[secondary market]] without all the [[due dilly]], [[negotiation]] and documentation you’d expect for an OTC [[novation]]. | ||
Remember the basic proposition of tradable public securities: they are homogenous, standardised, and their failure risk comes down to the ongoing business prospects of the issuer. There is a term, an interest basis, a coupon cycle. Aside from that, it's all about the issuer ’s financials. | |||
''None'' of that is true of an asset-backed security. The one thing that ''won’t'' happen — literally, can’t — is issuer insolvency. The rate will be generated from a raft of interacting assets, all of which has its own idiosyncrasies, credit exposures, volatilities, and liquidity profiles. And overlaying that will be the legal terms, which are guaranteed to be Byzantine. All of that needs careful examination by trained professional credit ninjas. | |||
To the purchaser is most likely stuck with the note. But it ''expects'' to be. The note format is a convenience not for liquidity but internal booking, trading mandates, accounting policies and so on. Really, this is a bilateral trade, just dressed up as a pantomime dromedary . | |||
Using the cumbersome note mechanics to manage valuation disputes, amendments, and unexpected contingencies of the sort that often arise on early unwind is possible, but there’s generally a better means of resolving these, bilaterally, with the original purchaser standing in for “the noteholders for the time being”. This is ''theoretically'' problematic — what if the original purchaser has in the mean time on-sold all or part of its holding? — but not in the ordinary course practically so as, for the reasons given, it won’t have. And it can be resolved by some representation, required at the time of any consultation, that it ''is'' the sole noteholder, or speaks for all outstanding noteholders, or in any event [[indemnifies]] the arranger and transaction parties for lossed caused from anything done at its suggestion should it turn out not to be. | Using the cumbersome note mechanics to manage valuation disputes, amendments, and unexpected contingencies of the sort that often arise on early unwind is possible, but there’s generally a better means of resolving these, bilaterally, with the original purchaser standing in for “the noteholders for the time being”. This is ''theoretically'' problematic — what if the original purchaser has in the mean time on-sold all or part of its holding? — but not in the ordinary course practically so as, for the reasons given, it won’t have. And it can be resolved by some representation, required at the time of any consultation, that it ''is'' the sole noteholder, or speaks for all outstanding noteholders, or in any event [[indemnifies]] the arranger and transaction parties for lossed caused from anything done at its suggestion should it turn out not to be. | ||