Cross-Collateralization

Cross-collateralization is a structure in which the assets in a pool secure the whole obligation, so a shortfall on one matter can be covered by proceeds from another. It lets a lender look at the pool rather than at each matter alone.

Pooling reduces the effect of any single failure, which is why portfolio finance is priced differently from single-matter funding. The benefit depends on diversification. If the matters share a judge, a legal theory, a defendant or a duration profile, they can fail together.

That makes correlation the central analysis. Pool-level pricing needs the concentration along each axis and an honest view of which matters move together, for example the matters inside one multidistrict litigation.

Cross-collateralization is not diversification by itself. A cross-collateralized pool of correlated matters has the same exposure as one large matter.