Limited recourse: Difference between revisions

But, as we shall see, sometimes [[asset manager]]s can be a malign influence, and try to further limit this.

In the world of multi-issuance [[repackaging]] [[SPV]]s, [[secured, limited recourse obligation|secured limited recourse]] obligations are ''de rigueur''. 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]] for each deal would do through the exigencies of corporation law and the [[corporate veil]].  That said, with [[Segregated portfolio company|segregated cell companies]], you can more or less do this, through the exigencies of the corporate veil, inside a single [[espievie]]. But I digress.

Over the years the 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.<ref>Come to think of it he may have forgotten to file a [[Slavenburg]].</ref>

Where you are facing an [[investment fund]] held by equity investors it is slightly — but not very — different. Generally, there is no security, since there’s no question of [[ring-fencing]] separate pools of assets. (But investment managers can get in the way and steal options, so be on your guard — see below).

'''Limiting recourse to the fund’s entire pool of assets''': A provision which says “once all the fund’s assets are gone, you can’t put it into bankruptcy”, is essentially harmless, seeing as once all the fund’s assets are gone there’s no ''point'' putting it into [[bankruptcy]]. This is the same place you would be with a single-issue [[repackaging]] vehicle: the [[corporate veil]] does the work anyway. This provision just keeps the directors of the fund in paid employment.

What the [[principal]] is doing here is ''broadly'' of a piece with segregated, ring-fenced [[repackaging]]. “Swap dudes: you are trading against, and limited in recourse to, this bucket of assets. Cut your cloth accordingly.” But not ''quite'': for one thing, poor swap counterparty has no security over the pool, and so gets no “quid” for its generously afforded “quo”. The swap counterparty may be limited to that pool of assets, but it has no priority over them as against other general creditors of the fund: should (heaven forfend) the fund blow up our intrepid swap dealer may find itself not only limited to the pool of assets, but even then only recovering cents in the dollar on them. Double whammy. You could fix that by having the fund represent that ''all'' other creditors are similarly limited to ''other'' pools of assets, but that is messy and unreliable. Security is much cleaner and neater, but you’ll never get it.

Secondly, a pool of assets [[for the time being]] allocated to an investment manager is ''kind of nebulous''. What the client giveth, the client can taketh away. If the client’s [[asset manager]] has gone rogue, that is ''exactly'' the time at which it will be anxiously raking its assets back. So the [[swap dealer]] facing that pool of assets — who has been faithfully handling and executing all orders competently and in good faith, of course — may find that nice big juicy bucket of assets to which it has limited its recourse, ''suddenly has a hole in it''.

===[[Limited recourse]] formulations===