Ah so I didn't pass the parcel enough. My understanding of getting rid of the debt was along the line of:
PGW ---> ASB ---> Hapless Investor
whereas I should have written
PGW ---> ASB ---> 'Special Purpose Investment Vehicle' ---> Hapless Investor
This way both PGW and ASB get to preserve their reputations. If something goes wrong the hapless investor only has recourse to the new owner of the debt, the SPV - which promptly disappears into a black hole. What a way to do business!
Of course what I didn't mention in my original example was that when the PGW parcel of debt was rewrapped for on-selling, other debt packages were wrapped up with that PGW debt. These other debt pacakges might include some Allied Farmers debt, RDI debt, Elders debt etc. on the presumption that taking debt from different market players then wrapping it up is 'spreading the risk'. But of course if all of those 'different market players' are actually operating in the *same* underlying market, the hoped for 'spreading the risk' effect is just a fallacy. And no nod from the likes of Standard and Poors can change that.
OK so as well as PGW being out of the legal gun if they default on their loan, they are probably also benefitting by paying a lower interest rate.Quote:
but the concept is that the PGW assets that are being hocked off as a SUCKER bond as you call it have a rating much better than if it was PGW debt, so they get it placed at a lower rate, off their balance sheet with no recourse. PWG benefits partially from the lower rate, but also has the debtors off their books up front
The interesting take on this situation is this. If you were PGW and got into debt repayment problems, would you not pay back your on the balance sheet bank debt your bankers first?
That would mean the SPV bonds would not only be paying a lower interest rate than other equivalent debt. They would be higher risk for the end line investor than normal bank debt! It makes you wonder why 'hapless investors' would bother chasing these 'SUCKER' bonds in the first place!
SNOOPY