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Limited recourse: Difference between revisions
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'''Limiting recourse to the fund’s 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]]. This is the same place you would be with a single-issue [[repackaging]] vehicle: the [[corporate veil]] does the work anyway. This provision just keeps the directors of the fund in paid employment. | '''Limiting recourse to the fund’s 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]]. This is the same place you would be with a single-issue [[repackaging]] vehicle: the [[corporate veil]] does the work anyway. This provision just keeps the directors of the fund in paid employment. | ||
==Limiting recourse to a pool managed by an [[agent]]== | |||
On the other hand, limiting recourse to a pool of assets ''within'' a single [[Legal entity|fund entity]] — say to those managed by a single [[investment manager]] (some funds subcontract out the management of their portfolios to multiple asset managers) — being a ''subset'' of the total number of assets owned by the fund — is a different story altogether. This, by sleepy market convention, has become a standard part of the furniture, but to the [[JC]] and his friends and relations, seems ''batshit insane''. | On the other hand, limiting recourse to a pool of assets ''within'' a single [[Legal entity|fund entity]] — say to those managed by a single [[investment manager]] (some funds subcontract out the management of their portfolios to multiple asset managers) — being a ''subset'' of the total number of assets owned by the fund — is a different story altogether. This, by sleepy market convention, has become a standard part of the furniture, but to the [[JC]] and his friends and relations, seems ''batshit insane''. | ||
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Thirdly, and most critically: a limitation to “a specified pool of assets under management” is, make no mistake, a limitation on the ''numeric value'' of your claim. You risk leaving money on the table. That is not what limited recourse is meant to do. This ought to be ''trading'' decision, not a ''credit'' decision. It is as if you have sold your counterparty a [[put option]], limiting its exposure under your contract. Ask yourself why your [[credit]] team, rather than [[trading]], are being asked to approve this. Ask yourself, too, whether the principal isn’t going to be inclined to keep a tight rein on the value of that pool, and tend to keep it shorter rather than longer. | Thirdly, and most critically: a limitation to “a specified pool of assets under management” is, make no mistake, a limitation on the ''numeric value'' of your claim. You risk leaving money on the table. That is not what limited recourse is meant to do. This ought to be ''trading'' decision, not a ''credit'' decision. It is as if you have sold your counterparty a [[put option]], limiting its exposure under your contract. Ask yourself why your [[credit]] team, rather than [[trading]], are being asked to approve this. Ask yourself, too, whether the principal isn’t going to be inclined to keep a tight rein on the value of that pool, and tend to keep it shorter rather than longer. | ||
==[[Limited recourse]] formulations== | |||
The following, rendered in the linguistic mush you can expect from [[Mediocre lawyer|securities lawyers]], are the sorts of things you can expect the [[limited recourse]] provision to say without material complaint: | The following, rendered in the linguistic mush you can expect from [[Mediocre lawyer|securities lawyers]], are the sorts of things you can expect the [[limited recourse]] provision to say without material complaint: | ||
*'''Recourse limited to segregated assets''': your [[Limited recourse|recourse]] against the [[SPV]] will be strictly limited to those assets that are ring-fenced for the particular deal you are trading against. This ring-fencing might take the form of: | *'''Recourse limited to segregated assets''': your [[Limited recourse|recourse]] against the [[SPV]] will be strictly limited to those assets that are ring-fenced for the particular deal you are trading against. This ring-fencing might take the form of: | ||