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"Golden" shares - shares with a veto power over bankruptcy filings - are sometimes used as a backup measure for special purpose vehicles, but do they work?
For decades, financial engineers have been searching for a perfect solution to a vexing problem: Designing a bulletproof bankruptcy control mechanism.
For example, bankruptcy remote entities, or special purpose entities (SPVs), the legal entities at the heart of securitization structures, serve this purpose as long as the SPV provides sufficient certainty that it would not file for bankruptcy, and if it did (voluntarily or otherwise), that it would not be substantively consolidated with its parent entity and its affiliates.
The strength of the legal isolation of the SPV from its affiliates is one of the pillars of the rating system which assigns higher ratings to securities issued by SPVs than the rating that would have been assigned to the securities had they been issued by a non-SPV issuer.
As has been repeatedly noted, however, bankruptcy remote is not bankruptcy proof as a small percentage of SPVs have ended up in bankruptcy over the last few decades.
Asset Securitization Report recently published an article authored by Dechert partner Shmuel Vasser, analyzing the decision and the issues it raises.
Read "Fool's Gold? Circuit Court Taking Up Alternative Bankruptcy Proofing Mechanism."
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