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 ?
The ICB's assumption is that imposing losses on creditors will be easier with ring-fencing.
There are fears that swift implementation of ring-fencing amid renewed weakness in the global economy could pressure Britain's biggest banks to relocate abroad.
Moody's Investors Service said that the UK Chancellor's expression of support on Wednesday for the ring-fencing proposals contained in the interim report of the Independent Commission on Banking published in April increased the probability of a negative outcome for bondholders of the affected banks.
It is reported that the commission favours a ring-fencing of "operationally essential" parts of Britain's biggest banks.
ICB head John Vickers said Saturday that while the commission was unlikely to support "narrow" bank models over bigger and more diversified groups, it would nevertheless examine ring-fencing retail bank units from market trading operations.
Betbrokers punter Jan Midgeley, who deposited pounds 1,480 with the firm just 25 minutes before it crashed, said: "What is the point of ring-fencing money if this is the result?
Under the ring-fencing modifications customers will be protected from any risks that might be associated with the parent company.
Ring-fencing is clearly impractical when no knowledge of the reservoir populations exists, but other steps can be taken to acquire progressively more detailed information about the reservoir structure.
Under the terms of the approval of the 2007 merger, there are legally binding ring-fencing agreements and requirements in place to separate and protect Oncor.
HSBC Holdings (LSE: HSBA) is to make changes to its name in order to cope with ring-fencing norms in the UK.
Now a new review by PricewaterhouseCoopers, which looked at the effectiveness of ring-fencing the mental health budget, has concluded that the measure was successful.
Former Barclays chairman Sir David Walker had earlier said the arguments for ring-fencing had become redundant.