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Limited recourse: Difference between revisions
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Investment funds and structured note issuance vehivles tend to be purpose-built single corporations with no other role in life. They issue shares or units to investors and with the proceeds, buy securities, make investments and enter swaps, loans and other transactions with their brokers. The brokers will generally be [[Capital structure|structurally senior]] to the fund’s investors (either as unsecured [[creditor]]s, where the investors are [[Shareholder|shareholders]], or as higher-ranking secured creditors, where the investors are also [[secured creditor|secured creditors]]). | Investment funds and structured note issuance vehivles tend to be purpose-built single corporations with no other role in life. They issue shares or units to investors and with the proceeds, buy securities, make investments and enter swaps, loans and other transactions with their brokers. The brokers will generally be [[Capital structure|structurally senior]] to the fund’s investors (either as unsecured [[creditor]]s, where the investors are [[Shareholder|shareholders]], or as higher-ranking secured creditors, where the investors are also [[secured creditor|secured creditors]]). | ||
So the main reason for limiting the [[broker]]’s recourse to the [[ | So the main reason for limiting the [[broker]]’s recourse to the [[espievie]]’s assets is not to prevent the broker being paid what it is owed. It is to stop the [[SPV]] going into formal bankruptcy procedures ''once all its assets have been liquidated and distributed [[pari passu]] to creditors''. At this point, there is nothing left to pay anyone, so launching a bankruptcy petition is kinda — ''academic''. | ||
Now, why would | Now, why would any [[creditor]] want to put an empty [[espievie]] — one which has already handed over all its worldly goods — into liquidation? What good would it do? Search me. | ||
But | Why, on the other hand, would the directors of that empty [[espievie]], bereft as it is of worldly goods, be anxious for it ''not'' to go into liquidation? Because their livelihoods depend on it: being directors of a bankrupt company opens them to allegations of reckless trading, which may bar them from acting as directors. Since that’s their day job, that’d be a bummer. | ||
But if the [[espievie]]’s bankrupt, doesn’t that mean they ''have'' been reckless? ''No''. Remember, we are in the [[parallel universe]] of [[SPV]]s. Unlike normal commercial undertakings, [[espievie]]s run on autopilot. They are designed to give exposure, exactly, to the pools of assets and liabilities they hold. That’s the deal. Everyone trades with that understanding. The directors are really nominal figures: they outsource trading decisions (if any — in a [[repackaging]], there most likely won’t be any) to an [[investment manager]]. The directors are really there to ensure accounts are prepared and a return filed each year. They are not responsible for the trading strategy that drove the [[espievie]] into the wall.<ref>The [[investment manager]] is. So should ''she'' be barred from managing assets? THIS IS NOT THE TIME OR THE PLACE TO DISCUSS.</ref> | |||
So all an [[investment fund]]’s [[limited recourse]] clause really needs to say is: | So all an [[investment fund]]’s [[limited recourse]] clause really needs to say is: | ||
:'' | :''creditors’ recourse against the Fund will be limited to its assets, rights and claims. Once they have been finally realised and their net proceeds applied to creditors, the Fund will owe no further debt and creditors may not take any further steps against it to recover any further sum.'' | ||
But, as we shall see, sometimes [[asset manager]]s can be a malign influence, and try to further limit this. | But, as we shall see, sometimes [[asset manager]]s can be a malign influence, and try to further limit this. | ||