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Payments waterfall: Difference between revisions
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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. | ||
===The Trustee Act and the Trustee’s primary responsibility. | |||
You may see something like this — it is likely to be articulated more florally than this, but this is the essence: | |||
{{Quote|Trustee’s primary responsibility is to the Noteholders and has no responsibility to any other Secured Parties and need not act on their directions.}} | |||
The Noteholders are the main debtors in the structure, of course, but they rank last in priority of payment. So, on first blush, you might ask, as the [[JC]] did, “why should the Trustee prioritise the interests of the security holders at the ''bottom'' of the waterfall?” Surely it should care more about the Swap Counterparty, and the parties further up? | |||
Well, it is counter-intuitive but the theory is whatever is good for the guy at the bottom of the heap is necessarily good for the guy at the top. The converse is not true. If the Trustee does all right by the guy on the bottom, then QED everyone else gets out fine too. The swap counterparty’s interest in preserving the value of the collateral lasts exactly as long as it takes to get itself paid: if the Trustee considered its interests over the Noteholders’, it might just flog the assets as quickly as possible, to hell with the price as long as it is more than swap MTM + $1, and be done with it. If you have to look after the buy at the bottom of the heap, you must act more carefully. Therefore, this prioritises ''value'' of the secured assets over ''speed of liquidation''. | |||
{{sa}} | {{sa}} | ||
*[[I’ll be gone; you’ll be gone]] | *[[I’ll be gone; you’ll be gone]] | ||