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Payments waterfall: Difference between revisions
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#'''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. | 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. The theory was simple enough: if the swap counterparty has been careless enough to default on its obligations, even if forced to by the vicissitudes of [[insolvency]] — then it should forgo its privileged place in the security waterfall, and should slum it with, or below, the Noteholders. | ||
At first blush this made sense, and seemed ''just'', in a “living my own truth” kind of a way, but on second glace the analysis rather falls apart. Contractual arrangements are not meant to be punitive, judgmental or even evaluative: they are what they are, and you get what you bargained for regardless of the good or bad grace of your counterparty, as long as it is around and able to perform for you. | |||
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. | 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. | ||