Bankruptcy-Remote Structuring

97 American Bankruptcy Law Journal 1 (2023), Forthcoming

Duke Law School Public Law & Legal Theory Series No. 2022-46

50 Pages Posted: 3 Aug 2022 Last revised: 24 Oct 2022

Date Written: August 1, 2022

Abstract

Bankruptcy-remote structuring, a legal strategy with potential public policy implications, is crucial both to a range of important financial transactions—including securitization, project finance, covered bonds, oil-and-gas and mineral production payments, and other forms of structured financing—and to the ring-fencing of utilities and other publicly essential firms. In finance, the goal is contractually to reallocate risk by structuring securities-issuing entities that, absent the bankruptcy risks inherent to operating businesses, can attract investments based on specified cash flows. In ring-fencing, the goal is contractually to structure firms to minimize bankruptcy risks, thereby assuring their continued business operations.

Parties engaging in bankruptcy-remote structuring usually seek to reallocate risk more optimally, including by reducing information asymmetry and assigning higher risk to yield-seeking investors, thereby enabling firms to diversify and lower their costs of capital. In reality, bankruptcy-remote structuring can sometimes create harmful externalities. Some blame bankruptcy-remote securitization transactions, for example, for triggering the 2007-08 global financial crisis by shifting risk from contracting parties to the public.

This Article undertakes a normative analysis of bankruptcy-remote structuring, examining the extent to which parties should have the right to reallocate bankruptcy risk. It is the first to do so both from the standpoint of public policy—examining how bankruptcy-law policy should limit freedom of contract; and also from the standpoint of cost-benefit analysis—examining how externalities should limit freedom of contract. The Article also examines how to reform bankruptcy-remote structuring to reduce its externalities.

Suggested Citation

Schwarcz, Steven L., Bankruptcy-Remote Structuring (August 1, 2022). 97 American Bankruptcy Law Journal 1 (2023), Forthcoming, Duke Law School Public Law & Legal Theory Series No. 2022-46, Available at SSRN: https://ssrn.com/abstract=4178280 or http://dx.doi.org/10.2139/ssrn.4178280

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)

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