Template:Limited value of security in repack

We shouldn’t get hung up about the whys and wherefores of the security structure of a repackaging as long as it is there, it covers everything 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 structuring, and your Trustee has let you, and both of these are quite hard to do — the SPV cannot go insolvent. Any repack unwind will be triggered by an external event: a defaulted underlying asset or 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.

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