Talk:Bankruptcy remote
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[edit] usage slightly reversed
While the definition in the article is technically correct, the much more common usage of the term "bankruptcy remote" is concerned with whether a particular subsidiary or affiliate will be consolidated with the rest of the corporate group of which it is a part. Specifically, I would re-write the sentence
"A company within a corporate group is said to be bankruptcy remote when the solvency of that company does not affect any other company in the group, particularly any holding company or subsidiary company of the bankruptcy remote vehicle."
to read as follows:
"A company within a corporate group is said to be bankruptcy remote when the solvency of parents, affiliates or other third parties does not affect the solvency of the bankruptcy-remote company."
To be even more precise, "a company within a corporate group is said to be bankruptcy remote when, under applicable federal bankruptcy and state laws, the assets and liabilities of such company will not be consolidated into the bankruptcy estate of any other company in the corporate group were such other company to file for bankruptcy (or be forced into bankruptcy by its creditors)."
The most common area where this issue comes up is in project or asset-backed financings. In this type of transaction, a sponsor company will create a special purpose company (the "SPC") for purposes of the financing, contribute assets to it, and then use the SPC's assets as the basis for borrowing by the SPC. Say, for example, that there's a very large bank that holds a number of automobile loans (for example) in its portfolio, along with loans of all other types, and this bank also conducts a wide range of other lending, borrowing and similar financial activities. Say that this bank wanted to liquidate its portfolio of automobile loans in a way that would maximize its value. One way to do this would be for the bank to set up an SPC, have the SPC sell bonds to investors and use the proceeds of the sale of bonds to purchase the auto loans from the bank. The bank would have cash, the SPC would own the auto loans, and the repayments of the auto loans by people who financed their car purchases would be paid to the SPC which would then use those payments to pay principal and interest on the bonds it issued. In this type of financing, the investors who purchased the SPC's bonds evaluate the creditworthiness of the bonds based solely on the quality of the automobile loans held by the SPC, *not* the creditworthiness of the bank that originated the loans and set up the SPC, so to those investors it is important that the creditworthiness of the SPC be isolated from the creditworthiness of the bank. One important factor in establishing this isolation is bankruptcy remoteness--whether, if the bank itself goes bankrupt, the SPC will be permitted to continue operate outside of the bankruptcy process and not have its assets and liabilities consolidated as part of the bank's assets and liabilities. Therefore bankruptcy remoteness of the SPC means that the investors in its bonds do not have to analyze the bank's entire portfolio in order to evaluate the investment in the SPC's bonds. MaxPig 20:24, 16 April 2007 (UTC)MaxPig—The preceding unsigned comment was added by MaxPig (talk • contribs) 20:15, 16 April 2007 (UTC).
