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Payments waterfall: Difference between revisions
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{{a|repack|{{image|waterfall|png|A Counterparty “flipping” yesterday.}}}} The priority of payments waterfall in a [[repackaging]] is an important, but fundamentally dull, piece of engineering, only made interesting, somewhat, when rating agencies intervene sometimes to make life harder for dealers. The idea is to sort out all the agents and their mandatory running costs first, then “senior” creditors — typically the broker as swap counterparty, though this is where rating agencies can intervene — then getting to the Noteholders and if anything is left after that, to the Issuing SPV. | {{a|repack|{{image|waterfall|png|A Counterparty “flipping” yesterday.}}}}The priority of payments waterfall in a [[repackaging]] is an important, but fundamentally dull, piece of engineering, only made interesting, somewhat, when rating agencies intervene sometimes to make life harder for dealers. The idea is to sort out all the agents and their mandatory running costs first, then “senior” creditors — typically the broker as swap counterparty, though this is where rating agencies can intervene — then getting to the Noteholders and if anything is left after that, to the Issuing SPV. | ||
Given the wide range of assets and structures that repackaging SPVs can engage in, the trick it to make it as general as possible. Legal eagles like to nest in the overhangs of a payments waterfall — they can make a frightful mess — so it pays to keep it as simple as possible. | Given the wide range of assets and structures that repackaging SPVs can engage in, the trick it to make it as general as possible. Legal eagles like to nest in the overhangs of a payments waterfall — they can make a frightful mess — so it pays to keep it as simple as possible. | ||
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#'''Redemption Amount/ Early Redemption Amount''': this is the amount due to Noteholders under the Notes. | #'''Redemption Amount/ Early Redemption Amount''': this is the amount due to Noteholders under the Notes. | ||
#'''Residual amounts''': anything left — and for your common-or-garden repack there shouldn’t ''be'' anything left — goes to the issuer and is tossed into the pot and used for the Christmas party on Cayman Brac or something like that. | #'''Residual amounts''': anything left — and for your common-or-garden repack there shouldn’t ''be'' anything left — goes to the issuer and is tossed into the pot and used for the Christmas party on Cayman Brac or something like that. | ||
===Rating agencies and the flip clause=== | |||
It became ''a la mode'' in the dog days of the CDO market for rating agencies to require the priority as between the swap counterparty and the noteholders to be inverted upon a swap counterparty insolvency. Given that the ratings goal — the repayment of principal at maturity — would usually be predicated on the credit rating of the swap counterparty, this made little sense. And nor did it have any real effect on the payout of the notes: if your counterparty is bust, and it is owed money, then [[Q.E.D.]], the Noteholder’s total claim is limited the the liquidated value of thee bonds minus that payment; if the counterparty owes the SPV money, then no amount of reorganising its place in the security waterfall is going to make any difference since it has no claim against the SPV in the first place. | |||
But it made rating agency analysts feel good, and like they were making a difference, so CDO structurers tended to roll their eyes, but ultimately roll with it. | |||
{{sa}} | |||
*[[I’ll be gone; you’ll be gone]] | |||