Lesson 22 of 25 · 7 min
Deadline pressure and the narrowing of choices
Every cure has a lead time, the cheapest cures have the longest, and delay removes them in order of price.
A cure window converts a financial problem into a scheduling problem, and the two have different solutions. The financial problem asks which route is cheapest. The scheduling problem asks which routes still fit, and it is the only one that gets answered after a certain point.
Take the $104,100 cash shortfall from the previous lesson and a 19-day cure window, which contains about 13 business days. Three routes close it. Transferring securities in kind from another account takes roughly 10 business days and requires $148,714 of market value. Raising cash by selling something unpledged takes about 5 business days once settlement and transfer are counted, and requires $104,100. Selling pledged shares takes no time at all and requires $104,100 ÷ 0.30 = $347,000, because the forced-sale multiple at a 70 percent threshold is 1 ÷ (1 − 0.70) = 3.333.
Each route therefore has slack: 13 − 10 = 3 business days for the transfer, 13 − 5 = 8 for the outside sale, and 13 for the pledged sale. Two deferrals of five and four calendar days consume about 6 business days. The transfer route, which had 3 days of slack, is gone. Three business days later the outside sale is gone too.
What remains is the route that costs $347,000 rather than $104,100. The nine calendar days of deferral cost $242,900, and the money was not spent on anything — it was spent on the closure of alternatives. The deferrals themselves were not decisions to sell; each one was a decision to decide later, which is the form a decision takes when every available option is unpleasant.
The ordering is the part worth keeping. Lead time and cost run in opposite directions, because the cheap routes draw on assets that sit outside the account and mobilising them takes days, while the expensive route draws on the assets already pledged and needs nothing but an order.
Key terms
- Cure period
- The time allowed to restore a position to the threshold after a breach. Measured in calendar days and spent in business days.
- Lead time
- How long a cure route takes from decision to completion, including settlement and transfer. A route with more lead time than remaining window does not exist.
- Slack
- The window remaining minus a route's lead time. When slack reaches zero the route closes, regardless of how cheap it was.
Worked example
What nine days of deferral cost
A $104,100 cash shortfall, a 19-day cure window containing 13 business days, 70% threshold.
- In-kind collateral transfer
- 10 business days, $148,714
- Cash from an unpledged sale
- 5 business days, $104,100
- Sale of pledged shares
- Same day, $347,000
- Business days consumed by two deferrals
- 6
- Routes still open
- Two of three
- Cost of the route that remains at the end
- $242,900 more
Slack 3 days.
Slack 8 days.
$104,100 ÷ 0.30. Slack 13 days.
Five calendar days, then four.
The transfer route closed on day 3 of slack.
$347,000 − $104,100.
Nothing was decided during those nine days and $242,900 was committed anyway. Deferral is not a neutral action inside a window.
Check yourself
A $104,100 shortfall can be cured by outside cash or by selling pledged shares at a 70 percent threshold. What does the pledged sale cost, and why does a delay push a borrower toward it?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.