82,891
edits
Limited recourse: Difference between revisions
no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| (7 intermediate revisions by the same user not shown) | |||
| Line 1: | Line 1: | ||
{{a| | {{a|repack|{{image|Fidgety phillip|jpg|What happens if you do not concentrate on your debt extinction language}}}}Of a {{tag|contract}}, that a debtor’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. [[Security]] and [[limited recourse]] are fundamental structural aspects of contracts with [[special purpose vehicle]]s and [[investment fund]]s. | ||
}}Of a {{tag|contract}}, that a debtor’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. [[Security]] and [[limited recourse]] are fundamental structural aspects of contracts with [[special purpose vehicle]]s and [[investment fund]]s. | |||
===The basic idea=== | ===The basic idea=== | ||
| Line 13: | Line 11: | ||
Now, why would any [[creditor]] want to put an empty [[espievie]] — one which has already handed over all its worldly goods — into liquidation? What good would it do? Search me. Why, on the other hand, would the directors of that empty [[espievie]], bereft as it is of worldly goods, be anxious for it ''not'' to go into liquidation? ''Because their personal livelihoods depend on it'': being directors of a [[bankrupt]] company opens them to allegations of reckless trading, which may bar them from acting as directors to ''other'' countries. Since that’s their day job, that’d be a bummer. | Now, why would any [[creditor]] want to put an empty [[espievie]] — one which has already handed over all its worldly goods — into liquidation? What good would it do? Search me. Why, on the other hand, would the directors of that empty [[espievie]], bereft as it is of worldly goods, be anxious for it ''not'' to go into liquidation? ''Because their personal livelihoods depend on it'': being directors of a [[bankrupt]] company opens them to allegations of reckless trading, which may bar them from acting as directors to ''other'' countries. Since that’s their day job, that’d be a bummer. | ||
But if the [[espievie]]’s [[bankrupt]], doesn’t that mean they ''have'' been reckless? ''No''. Remember, we are in the [[parallel universe]] of [[SPV]]s. Unlike normal commercial undertakings, [[espievie]]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 that understanding. The directors are really nominal figures: they outsource trading decisions (if any — in a [[repackaging]], there most likely won’t be any) to an [[investment manager]]. The directors are really there to ensure accounts are prepared and a return filed each year. They are not responsible for the trading strategy that drove 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> | But if the [[espievie]]’s [[bankrupt]], doesn’t that mean they ''have'' been reckless? ''No''. Remember, we are in the [[parallel universe]] of [[SPV]]s. Unlike normal commercial undertakings, [[espievie]]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 that understanding. ''Those'' assets might blow up, but that’s hardly the [[espievie]]’s fault. How is it supposed to know? It is a harmless little [[Open-ended investment company|otter-like creature from Guernsey]]. The directors are really nominal figures, and are also rather like otters: they outsource trading decisions (if any — in a [[repackaging]], there most likely won’t be any) to an [[investment manager]]. The directors are really there to ensure accounts are prepared and a return filed each year, and build little dams out of twigs and rushes.<ref>''That is a beaver, not an otter''. Ed.</ref> They are not responsible for the trading strategy that drove 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: | So all an [[investment fund]]’s [[limited recourse]] clause really needs to say is: | ||
| Line 23: | Line 21: | ||
==Multi-issuance [[repackaging]] vehicles: secured, limited recourse== | ==Multi-issuance [[repackaging]] vehicles: secured, limited recourse== | ||
{{Repackaging limited recourse capsule}} | {{Repackaging limited recourse capsule}} | ||
{{limited value of security in repack}} | |||
===“[[Extinction]]” versus “[[no debt due]]”?=== | ===“[[Extinction]]” versus “[[no debt due]]”?=== | ||
{{extinction vs no debt due}} | {{extinction vs no debt due}} | ||
| Line 28: | Line 27: | ||
==[[Investment fund]]s== | ==[[Investment fund]]s== | ||
Where you are facing an [[investment fund]] held by equity investors it is slightly — but not very — different. Generally, there is no [[Security interest|security]], since there’s no question of [[ring-fencing]] separate pools of assets. (But [[investment manager]]s can get in the way and steal options, so be on your guard — see below). | Where you are facing an [[investment fund]] held by equity investors it is slightly — but not very — different. Generally, there is no [[Security interest|security]], since there’s no question of [[ring-fencing]] separate pools of assets. (But [[investment manager]]s can get in the way and steal options, so be on your guard — see below). | ||
'''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”, | '''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”, ''looks'' 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. But there’s a subtle cast on this. With no security, and no co-ordination of creditors that is typical of a structured finance deal, with security, a priority of creditors, covenants not to create any other indebtedness and so on, the ecosystem is very much mapped and controlled. In an investment fund, it isn’t. The creditors (competing brokers, prime brokers, swap counterparties, futures clearers and so on) have no idea what each is doing, and there are real benefits to them in the insolvency rules ensuring fair and equitable treatment of creditors in insolvency. The Archegos situation (which as far as I know didn’t involved limited recourse, by the way) illustrates this dynamic pretty well. | ||
==Limiting recourse to a pool managed by an [[agent]]== | ==Limiting recourse to a pool managed by an [[agent]]== | ||
| Line 69: | Line 68: | ||
*[[Bankruptcy remoteness]] | *[[Bankruptcy remoteness]] | ||
*[[Special purpose vehicle]] | *[[Special purpose vehicle]] | ||
*[[Voidable preference]] | |||
{{ref}} | {{ref}} | ||
{{Technical Tuesday|October 20}} | |||