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Limited recourse: Difference between revisions
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{{g}}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. | {{g}}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. They look significant but, in fact, aren’t. They are boilerplate. 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. In the immortal words of the East Enders: ''“Leave it Phil! Leave it! He's not worth it.”'' | |||
So all an [[investment fund]]’s limited recourse clause needs to say is: | ===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.'' | :''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.'' | ||
===[[ | ===Limited recourse in [[repackaging]]s and for [[SPV]]s with contractually [[segregated]] pools=== | ||
If the [[SPV]] has got segregated compartments in it (that is, it is issuing multiple series of securities, the limitation of a claim | If the [[SPV]] has got segregated compartments in it (that is, it is issuing multiple series of securities), the limitation of a claim — what we said above for the i[[nvestment fund]]s goes hand-in-hand with a [[security interest]] over the defined pool of assets. This is to secure, and limit, the broker’s claim to the specific pool with which it is trading, leaving all the other pools unmolested should one drive itself into the wall, but keeping all claimants of those other pools away from this one too. | ||
=== | ===[[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: | ||
**'''[[Security]] and limited recourse''': {{tag|security}} and {{tag|contract}} (in an old-style [[repackaging]] with a regular [[LLC]]) — there there is a subtle trade off between [[security]] over your assets (preferring your claim against all other comers) and limitation of that claim to those [[secured asset|secured assets]]; or | **'''[[Security]] and limited recourse''': {{tag|security}} and {{tag|contract}} (in an old-style [[repackaging]] with a regular [[LLC]]) — there there is a subtle trade off between [[security]] over your assets (preferring your claim against all other comers) and limitation of that claim to those [[secured asset|secured assets]]; or | ||
**'''Corporate structure''': by means of a specialist corporate structure providing for segregation of the corporate personality into little cells which may<ref>such a company and [[incorporated cell company]]</ref> or may not<ref>Such a company a [[segregated portfolio company</ref> have their own [[legal personality]] (if the [[SPV]] is a [[segregated portfolio company]] or an [[incorporated cell company]]); | **'''Corporate structure''': by means of a specialist corporate structure providing for segregation of the [[corporate personality]] into little cells which may<ref>such a company and [[incorporated cell company]]</ref> or may not<ref>Such a company a [[segregated portfolio company</ref> have their own [[legal personality]] (if the [[SPV]] is a [[segregated portfolio company]] or an [[incorporated cell company]]); | ||
*'''No set-off or netting between cells''': [[Netting]] and [[set-off]] will be limited to the specific [[cell]] you are facing: this means if your deal goes down, others issued from the same [[SPV]] can continue unaffected — boo — ''and vice versa'' — hooray. | *'''No set-off or netting between cells''': [[Netting]] and [[set-off]] will be limited to the specific [[cell]] you are facing: this means if your deal goes down, others issued from the same [[SPV]] can continue unaffected — boo — ''and vice versa'' — hooray. | ||
*'''Extinction (or non-existence) of outstanding debt''': Following total exhaustion of all assets after enforcement, appropriation, liquidation and distribution, and realisation of all claims subsequently arising form those assets, your outstanding unpaid debt will be “extinguished”. | *'''Extinction (or non-existence) of outstanding debt''': Following total exhaustion of all assets after enforcement, appropriation, liquidation and distribution, and realisation of all claims subsequently arising form those assets, your outstanding unpaid debt will be “extinguished”. | ||
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*'''A proceedings covenant''': You must solemnly promise never to set to put the [[SPV]] into [[insolvency]] proceedings. If you agree to all the foregoing, you should have concluded you have no literal right to do so, so this shouldn't tax your conscience too greatly. | *'''A proceedings covenant''': You must solemnly promise never to set to put the [[SPV]] into [[insolvency]] proceedings. If you agree to all the foregoing, you should have concluded you have no literal right to do so, so this shouldn't tax your conscience too greatly. | ||
{{sa}} | |||
*[[Bankruptcy remoteness]] | *[[Bankruptcy remoteness]] | ||
*[[Special purpose vehicle]] | *[[Special purpose vehicle]] | ||
{{ref}} | |||