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Asset-backed securities field guide: Difference between revisions
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===Repackagings=== | ===Repackagings=== | ||
This is a fairly insurmountable problem for widely-held, really publicly traded ABS transactions like [[securitisation]]s and [[CLO]]s. | This is a fairly insurmountable problem for widely-held, really publicly traded ABS transactions like [[securitisation]]s and [[CLO]]s. Here there really are lots of noteholders, they do not act en masse, so individual noteholders just have to take a view, that they have no realistic seat at the table should things go wrong. Theirs is the bet that those sponsoring the deal are good people, and will not take the proverbial. This trust was found to be misplaced in the [[global financial crisis]]. | ||
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. | ||
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''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. | ''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. | To the purchaser is most likely stuck with the note. But it ''expects'' to be. Generally, it has commissioned the note format not for the liquidity it offers — for a repack note, it doesn’t — but to ease troubled minds in its operations team responsible for booking, risk managing, hedging and complying with accounting policies and so on. | ||
Using the cumbersome note mechanics to manage valuation disputes, amendments, and unexpected contingencies of the sort that often arise on early unwind is possible | Really, this ''is'' a private, bilateral, over the counter contract, just dressed up, like a [[pantomime dromedary]], to look like something it is not. | ||
Using the cumbersome note mechanics to manage valuation disputes, amendments, and unexpected contingencies of the sort that often arise on early unwind is ''possible'' — anything’s ''possible'' — but there’s generally a better way, 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 its holding? — but not, in the ordinary course, practically so as, for the reasons given, it ''won’t'' have. And the risk it has — again, anything’s ''possible'' — can be resolved by 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, trustee and transaction parties for losses caused from anything done at its suggestion should it turn out not to be. | |||
Another excellent application for an [[indemnity]], by the way: as long as you are telling the truth, it presents no risk at all. | |||
{{Sa}} | {{Sa}} | ||