Fish or cut bait
“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.
When NAV triggers attack
Let’s say you’ve had a wonky month — Coronavirus, right? —and there’s been such a marked drawdown on your AUM that you’ve blown through that preposterous NAV trigger your broker forced you to agree when you were a two-person start-up above a shoe-shop in Camden. I know, right?
And now this. From nowhere, your dopey broker has a gun to your head, but apparently not much better an idea than you do what to do about it. She keeps muttering nervously and changing the subject whenever you mention it.
The fish or cut bait gambit
You realise now how much better it would have been had you sorted this out at the start of the relationship, when you were handsome, the salesguy was frisky, the weather was set fair, the wind filled your sail, and all was well in the world.
And so was born the “fish or cut bait” negotiation gambit. This is to say, “all right, have your stupid NAV trigger but if it happens — it won’t, of course, but for the purposes of argument let’s just say it did — be prepared to put your money where your mouth is. You have a month, soldier: shoot, or put your gun away. For good.”
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, fair enough, put me out of my misery, but at least be prompt about it. And look — if I do make it to the end of the period without blowing up, can’t we assume I will be out of the woods?”
Now we know 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).
She will also hold it as an article of faith that thrashing out fish or cut bait clauses is a pain. Some wise-guy — in this case, you — will insist on a grace period, or to carve out securities financing settlements, or to be served with a notice of publicly available information — there is 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 reaction easily 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.
The JC’s fish or cut bait trick
Which is where the JC comes in, to de-escalate, with a cunning trick to break this deadlock:
- 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.
- It lets the broker’s steampunk machine to go through its motions as quickly 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.”
- And you should, just for the perverse satisfaction of knowing you have initiated a petulant war between the broker’s legal and credit teams about whose job it is to prepare and send the NAV trigger waiver. On a day when your fund is tanking, take a moment to enjoy the little pleasures life offers.
- A credit officer may well think this but will never say it.