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97 Am. Bankr. L.J. 1 (2023)

handle is hein.journals/ambank97 and id is 1 raw text is: Bankruptcy-Remote Structuring: Reallocating Risk Through Law Steven L. Schwarcz* 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 in vestments 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 optimally reallocate risk, 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. For example, some blame bankruptcy-remote securitzation transactions for triggeringthe2007- 08 global financial crisis by shifting risk from contracting parties to the public. This Article undertakes a normative analysis of bankruptcy-remote structuring by examining the extent to which parties should have the right to reallocate bankruptcyrisk. Itis 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. *Stanley A. Star Distinguished Professor of Law & Business, Duke University School of Law; Senior Fellow, the Centre for International Governance Innovation (CIGI). The author thanks Stuart Benjamin, Jeremy C. Kress, Shitong Qiao, Jonathan Seymour, and participants in a faculty workshop at Duke Law School for valuable comments and Michelle Lou, Cameron (Cam) Irwin, Brendan Reichart, and especially Chorong Song for invaluable research assistance. The author also gratefully acknowledges the receipt of Fuller-Perdue Grant funding. 1

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