Limited recourse: Difference between revisions

{{a|contract|}}Of a {{tag|contract}}, that the [[obligor]]’s obligations under it are limited to a defined pool of assets. You see this a lot in [[repackaging]]s, [[securitisation]]s and other structured transactions involving [[espievie]]s.

===In a nutshell===

[[Security]] and [[limited recourse]] are fundamental structural aspects of contracts with [[Special purpose vehicle]]s and [[investment fund]]s.  

'''[[Security interest|Secured]], [[limited recourse]] to [[repackaging|multi-issuancevehicles]]''': In the world of multi-issuance repackaging [[SPV]]s, secured limited recourse obligations are ''de rigueur''. They save the cost of creating thousands of new vehicles, and really only do by [[contract]] what establishing a brand new [[espievie]] for each deal would do through the exigencies of coporastion law and the [[corporate veil]]. There is a ''quid pro quo'': noteholders agree to limit their claims to the liquidated value of the assets underlying that specific deal, but in return, the issuer creates a fist-ranking security over those assets, stopping any interloper happening by and getting its mitts on them. Over the years the technology has been refined, standardised, and it plays little part in the life of a modern-day structured finance counsel, though, at his mother’s knee, he might once have been told fairy stories about what became of poor Fidgety Phillip when he carelessly put “extinction” rather than “no debt due” in on his way home from school and burned to death.<ref>Come to think of it he may have forgotten to file a [[Slavenburg]].</ref>

'''Limiting recourse to the funds entire pool of assets''': A provision which says "once all the fund’s assets are gone, you can’t put it into bankruptcy, is essentially harmless, seeing as once all the fund’s assets are gone there’s no ''point'' putting it into bankruptcy. So, if you are feeling especially ornery, and have the urge to challenge these provisions, do yourself and everyone else on the deal a favour: don’t.  

'''Limiting recourse to assets managed by an agent''': On the other hand, imiting recourse to a pool of assets managed by a single agent or investment manager — being a ''subset'' of toe total number of assets owned by the fund — is a different story altogether. This, by sleept market convention, has become a fairly standard feature of the market, but to the [[JC]] and his friends and relations, seems ''batshit insane''.

===Limited recourse and [[investment fund]]s===

Investment funds tend to be single corporations which and issue shares or units to investors and use the issue proceeds to buy securities investments and enter swaps, loans and other transactions with brokers. Here the brokers, being creditors, are [[Capital structure|structurally senior]] to the fund’s investors, who rank as [[Shareholder|equityholder]]s. So the main reason for limiting the [[broker]]’s recourse to the [[SPV]]’s assets is to stop the [[broker]] putting the [[SPV]] into formal bankruptcy procedures ''once all its assets have been liquidated and distributed [[pari passu]] to creditors''.

Now, why would a [[broker]] want to put an empty [[SPV]] — one which has already handed over all its worldly goods — into liquidation? Search me. Why, on the other hand, would the directors of that empty [[SPV]], bereft as it is of worldly goods, be anxious for it ''not'' to go into liquidation? Because their livelihoods depend on it: being directors of a bankrupt company opens them to allegations or reckless trading, which may bar them from acting as directors in their jurisdiction. Since that’s their day job, it’s a bummer.  

But haven’t they been, like, reckless trading? No. Remember, we are in the [[parallel universe]] of [[SPV]]s. Unlike normal commercial undertakings, [[SPV]]s run on autopilot. They are designed to give exposure, exactly, to the pools of assets and liabilities they hold. That’s the deal. Everyone trades with [[SPV]]s on that understanding.  

The directors are really nominal figures: they outsource executive and trading decisions to an [[investment manager]]. Their main job is to ensure accounts are prepared and a return filed each year. They are not responsible for the trading strategy that drobve the [[espievie]] into the wall.<ref>The [[investment manager]] is. So should ''she'' be barred from managing assets? THIS IS NOT THE TIME OR THE PLACE TO DISCUSS.</ref>

So all an [[investment fund]]’s [[limited recourse]] clause really needs to say is:

:''Our recourse against the Fund will be limited to its assets, rights and claims. Once they have been finally realised and their net proceeds applied under the agreement, the Fund will owe us no further debt and we may not take any further steps against it to recover any further sum.''