ring fencing

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Ring Fencing

The practice of a company creating a legal entity separate from itself in order to protect certain assets. For example, ring fencing may protect assets from taxation, regulation, or allow the company to hide it from creditors. Ring fencing often makes use of offshore accounting. It is usually legal, but there are limitations, such as maximum amounts that may be protected.

ring fencing

The legal walling off of certain assets or liabilities within a corporation. For example, a firm may form a new subsidiary to protect, or ring-fence, specific assets from creditors.
Case Study California's electricity deregulation of the late 1990s resulted in the state's electric utilities hitting the financial wall by 2001. Unable by law to raise the rates it charged its customers, the utilities lost billions of dollars buying electricity at rising wholesale prices during an energy shortage in the western United States. To protect one part of the company, publicly traded PG&E, parent of Pacific Gas & Electric, in January 2001 ring-fenced its National Energy Group, which was then able to obtain its own credit rating and borrow money when the remainder of the company was shut out of the financial markets. In April 2001 Pacific Gas & Electric filed for bankruptcy while protected National Energy Group continued to borrow funds for trading power and purchasing turbines. The ring-fencing protected National Energy Group from Pacific Gas & Electric's creditors, which, in turn, allowed the company access to the capital markets. Critics claimed the financial maneuver was an abuse that unfairly shielded assets from creditors.
References in periodicals archive ?
It is due to deliver its report on the draft Bill by December 18 when it could make recommendations for changes to the legislation, which includes the ring-fence proposals.
In September, the former chairman of the US Federal Reserve Paul Volcker told reporters that plans to force banks in the UK to ring-fence would not work in the event of a bailout.
Mr Callum McCarthy, director-general of gas supply, said the proposed licence changes by Transco were designed to create a new regulatory ring-fence around Transco.
Ofgem said: "The policy to ring-fence Transco is to ensure that when a regulated company is owned by another firm funds are not sucked out to the extent it could not carry out its regulated duties.
Now the Financial Times has said that the float is unlikely to happen until 2013 at the earliest after this week's Vickers Report proposed that banks must ring-fence their retail arms from investment banking.
Even though Santander UK is a predominately a retail bank, between 5% and 10% of its assets would fall outside the definition of what can be included within a retail ring-fence, analysts have said.
Even though Santander UK is predominately a retail bank, between 5% and 10% of its assets would fall outside the definition of what can be included within a retail ring-fence, analysts have said.