Ring-Fencing and Other Bankruptcy-Remote Techniques

During the last years, Ring-Fencing regulations have been introduced by lawmakers to protect certain industry, or certain group of creditors. In a different sense, many large companies in the U.S. and around the world have used Ring-Fencing techniques to protect their subsidiaries' assets and to seek a higher rating. As opposed to "Regulatory" Ring-Fencing, "Consensual" Ring-Fencing transactions are unilaterally structured by parties in the absence of regulation. Both transactions seek isolation of assets and therefore limitation of liabilities. "Consensual" Ring-Fencing could be addressed as a technique that seeks to wall off the assets of a company usually by the formation of new subsidiaries. The basic idea of Ring-Fencing is to protect the assets in order to keep the subsidiaries in business in the event that the parent faces liquidation but also to obtain from rating agencies a better rating than the parent company. Ring-Fencing represents the steps taken to make a subsidiary bankruptcy-remote and to allow the subsidiaries to stand independent of the bankruptcy of the parent company as well. Ring-Fencing has been widely practiced in industries such as Utilities, Banking and Tobacco. In these businesses there are parent and subsidiaries that run either the same business or much diversified business. The common denominator in those cases is that some of the companies have a very high risk of exposure to liability. Therefore, Ring-Fencing is used to protect subsidiaries from the risks that other companies take. Moreover, ring-fenced structures have also been used by Multinational Companies in their overseas investments. In sum, Ring-fencing has been practiced for local and international transactions, all over the world. As a technique strongly related to other forms of structured finance, Ring-Fencing has different forms depending on the industry in which is used (Banking, Energy, Tax, Tobacco, etc) and the scale of these transactions (local or global markets). The recent bankruptcy proceedings that Energy Companies such as Pacific Gas & Electric, Edison and Enron have faced in the United States have led to some judicial scrutiny of Ring-Fencing Transactions. In some countries like Australia and New Zealand, Ring-Fencing has been regulated in areas such as Energy or Utilities. In this article I will address four issues with regard to Ring-Fencing transactions. First, I will explain what Ring-Fencing is, which are the different types of Ring-Fencing Structures and how have they been used in different industries. Second, I will focus on "Consensual" forms of Ring-Fencing transactions to analyze which the legal issues are or which legal risks may arise with regard to these transactions. Third, in connection to the previous topic, I will address the issue of whether Ring-Fencing is like Judgment Proofing or like Structured Finance. Finally, I will give an opinion as to whether Ring Fencing is legal and whether it should be regulated.