Repackaging programme

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The Law and Lore of Repackaging
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Financial Weapons of Mass Destruction®

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Repack Programme

It’s exotic, it’s Caribbean, it’s transformative — but somehow just not that exciting any more.

Docs Propectus, agreements, supplements, swaps, global notes, side letters galore. Most exciting part: limited recourse. Yes: that exciting. 2
Amendability Bugger all, because of the trust structure. What? You think the Trustee’s going to take a view? 7
Collateral Fully funded. Note is fully collateralised. 4
Transferability In theory unlimited: cleared, dematerialised bearer notes. In practice? Forget about it. No-one wants your home-made espievie notes. 7
Leverage Not really. 3
Fright-o-meter CAYMAN ISLANDS DUDE! In reality, depends what you put in it, but mostly tame. 5


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Repackaging programme
/ˌriːˈpækɪʤɪŋ ˈprəʊɡræm/ (n.)
A secured medium term note programme created by a zombie queen ant repackaging vehicle, captive to the demands of a broker/dealer and used to sell securitised structured products, par asset swaps, credit-linked notes and all that good stuff.

GOAT repack programme

The second-best repackaging programme in the history of the universe was Goldman Sachs International’s “MaJoR” Multi-Jurisdiction Repackaging Programme[1] which, as its name suggests, was as cool as Jon and Ponch. You know, the ones from TV’s “CHiPs”.[2]

But time and tide encroached, and it fell into disuse, babbling away to its old friend and programmer, Duck Jeckson, as it went into middle-aged infirmity, about a yet greater repackaging platform, yet to be designed.

Duck Jeckson: Wait, second greatest? I thought you were the greatest?
MaJoR: [at this stage into its cups] You heard me.
Duck Jeckson: Who is greater? Surely not SPIRE?
MaJor: SPIRE? Pah! Trouble me not with such pocket discombubulator stuff. No, I speak of none but the repackaging programme that is to come after me. A FAST programme, one whose merest operational parameters I am not worthy to calculate, but yet I will provide them —
At this point the communication was broken

A quick word about limited recourse

Secured, limited recourse obligations are de rigueur for multi-issue repackaging SPVs. They save the cost of creating a whole new vehicle for each trade, and really only do by contract what establishing a brand new espievie each time would do through the exigencies of corporation law and the corporate veil. The point is to completely isolate each set of Noteholders from each other. This is a surprisingly narrow point, as we will see, so we should not get carried away for the formalities of security.

With secured, limited recourse obligations there is a quid pro quo: all creditors are known; they are yoked to the same ladder of priorities; they all have agreed to limit their claims to the liquidated value of the secured assets underlying the deal. In return, the espievie grants them a first-ranking security over those assets — mediated between them by the agreed priority structure — and this stopping any interloper happening by and getting its mitts on the espievie’s assets.

The key point to absorb here: this is not a material economic modification to the deal. The line it draws, it draws around all the assets underlying the deal: the underlying securities, cashflows deriving from them, the espievie’s rights against custodians and bankers holding them, and its rights against the swap counterparty — everything, tangible or otherwise, of financial value in the transaction is locked down and pledged to secured parties, and the intercreditor arrangements, too, are fully mapped out. This kind of limited recourse, in fact, doesn’t limit recourse: it maps practical recourse, exactly to the totality of assets that the issuer has available for the purpose: all it saves is the unnecessary process of bankrupting a shell company with nothing left in it in any case. Secured limited recourse is like a nomological machine; a model; it is a simplified account where everything works as it should do, there are no unforeseen contingencies, and all outcomes are planned.

We shouldn’t get too hung up about the whys and wherefores of the security structure of a repackaging as long as it is there, it covers all the rights and assets it is meant to cover, and all necessary perfections and execution formalities are observed. For in a repackaging, the security just sits there and will almost certainly never be exercised.

All that tedious business about automatically releasing it to make payments, powers to appointing receivers, calling and collecting in, the trustee’s rights and obligations under the Law of Property Act 1925 and so on — look it is all good stuff; let your trustee lawyer have his day — but as long as it is there, none of it really matters.

Why? Because — unless you have negligently buggered up your ring-fencing and your Trustee has let you: both of these are quite hard to do — the SPV cannot go insolvent. Any repack redemption will be triggered by an external event: a non-payment on an underlying asset or by a failing counterparty or agent. None relate to the solvency or ability to meet its debts of the Issuer itself.

That being the case, once it exists, the security package will never actually do anything: any diminution in value to of the secured assets — will happen regardless of how strong the security is. The security is a formal belt and brace there to fully isolate from each other the noteholders of different series, and even that only matters only when the SPV is bankrupt. Which is, never.

The limited purpose of the security package in a repackaging is widely misunderstood – all it does is defend against unexpected holes in the ring-fencing.

This is why it is de rigueur to accelerate, liquidate and distribute the proceeds of a repackaged note without enforcement of the security.

Over the years this secured, limited recourse technology has been refined and standardised, and now plays little part in the education of a modern-day structured finance lawyer, though, at his mother’s knee, he might once have been told fairy stories about what became of poor Fidgety Phillip when he carelessly put “extinction” rather than “no debt due” in a pricing supplement on his way home from school and burned to death.[3]

Limited recourse is a trickier proposition when you try it outside the laboratory in the real world. We discuss this in our voidable preference article.

See also


  1. Patent applied for!
  2. Youngsters: Let me Google that for you.
  3. Come to think of it he may have forgotten to file a Slavenburg.