Template:Repackaging limited recourse capsule

Secured, limited recourse obligations are de rigueur for multi-issue repackaging SPVs. 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 each time would do through the exigencies of corporation law and the corporate veil. The point is to completely isolate each set of Noteholders from each other. This is a surprisingly narrow point, as we will see, so we should not get carried away for the formalities of security.

With secured, limited recourse obligations there is a quid pro quo: all creditors are known; they are yoked to the same ladder of priorities; they all have agreed to limit their claims to the liquidated value of the secured assets underlying the deal. In return, the espievie grants them a first-ranking security over those assets — mediated between them by the agreed priority structure — and this stopping any interloper happening by and getting its mitts on the espievie’s assets.

The key point to absorb here: this is not a material economic modification to the deal. The line it draws, it draws around all the assets underlying the deal: the underlying securities, cashflows deriving from them, the espievie’s rights against custodians and bankers holding them, and its rights against the swap counterparty — everything, tangible or otherwise, of financial value in the transaction is locked down and pledged to secured parties, and the intercreditor arrangements, too, are fully mapped out. This kind of limited recourse, in fact, doesn’t limit recourse: it maps practical recourse, exactly to the totality of assets that the issuer has available for the purpose: all it saves is the unnecessary process of bankrupting a shell company with nothing left in it in any case. Secured limited recourse is like a nomological machine; a model; it is a simplified account where everything works as it should do, there are no unforeseen contingencies, and all outcomes are planned.

But one shouldn’t get hung up about the whys and wherefores of security. As long as it is there, and formalities over its creation observed, the security just sits there. All this business about releasing it to make payments, appointing receivers, the Law of Property Act 1925 and so on, is form rather than substance. Why? Because — unless you have badly buggered up your structuring, and it is in no-one’s interest to do that — the SPV will not itself ever go insolvent. The unwind event will always be triggered by a default from an underlying asset or a counterparty, not the Issuer itself. That being the case, the security doesn’t actually do anything: any diminution in value to the security package — the underlying assets and contractual rights — will happen anyway. The security is only there to isolate the Noteholders of different series from each other, and only then only if the SPV is bankrupt. Other than that it doesn’t do anything. This is why it is de rigueur to accelerate, liquidate and distribute the proceeds of a repackaged note without enforcement of the security.