TABLE OF CONTENTS Repackaging vehicles are special-purpose trusts or companies typically associated with banks and derivatives dealers. In the credit derivatives market, they are often counterparties in contracts that are subsequently securitized and sold off to investors. In this chapter, we will temporarily deviate from the stated goal of this book, which is to discuss specific types of credit derivatives, and take a closer look at this important aspect of many credit derivatives contracts. Repackaging vehicles are commonly backed by high-grade collateral and thus tend to be highly rated themselves in order to minimize investors concerns about counterparty credit risk. The main buyers of structured products issued by repackaging vehicles are insurance companies, asset managers, banks, and other institutional investors.
Repackaging vehicles are important issuers of credit-linked notes and play a central role in the synthetic CDO structure (Chapter 14). In this chapter we go over the basics of repackaging vehicles, also called special-purpose vehicles (SPVs), focusing on their applications to credit-linked notes, which were discussed in Chapter 12. [1]
Repackaging vehicles are trusts or companies sponsored by individual institutions, but their legal structure is such that they are bankruptcy-remote to the sponsoring entity, meaning that a default by the sponsoring entity does not result in a default by the repackaging vehicle. As a result, investors who buy, say, credit-linked notes issued by a repackaging vehicle are not directly subject to the credit risk associated with the sponsoring entity.
In the credit derivatives context, the purpose...
