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Early redemption: Difference between revisions
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An asset failure will naturally do that, because the SPV won’t have assets to meet the swap payments, and the swap will terminate under its own steam. Likewise, a Swap Counterparty failure means the SPV has no one to pay its asset cashflows to, and no expectation of getting anything back if it did, so that is an obvious Early Redemption Event (and a cue to realise the market value of the Asset to fund the early redemption amount. | An asset failure will naturally do that, because the SPV won’t have assets to meet the swap payments, and the swap will terminate under its own steam. Likewise, a Swap Counterparty failure means the SPV has no one to pay its asset cashflows to, and no expectation of getting anything back if it did, so that is an obvious Early Redemption Event (and a cue to realise the market value of the Asset to fund the early redemption amount. | ||
====Vehicle failures==== | ====Vehicle failures==== | ||
{{drop|B|ut what about}} when Notes fail for reasons unrelated to the Asset or Swap Counterparty? As noted, this ''shouldn’t'' happen in the ordinary course: one builds a secured, limited recourse note vehicle precisely so it ''can’t'' fail — but laws and circumstances can change. Extra-judicial things can happen. Taxes can be imposed. These events will trigger unwind of the Note, which means the Swap must terminate. | |||
This creates a tension for the swap, especially where the Swap is [[out-of-the-money]] to the (innocent) Swap Counterparty, who might not ''want'' to terminate the swap and therefore book a [[mark-to-market]] loss. and as we know, a non-defaulting Party, when presented with an opportunity to designate an Early Termination Date, is not obliged to take it. This is less of a priority in our days of bilateral margining — but typically repackaging vehicles ''do not pay or receive margin''. | |||
In a repackaging, the counterparty must take it. | |||
What is the order of ceremonies under your hedging agreement if there is an unrelated early redemption event under the Notes? | What is the order of ceremonies under your hedging agreement if there is an unrelated early redemption event under the Notes? | ||