Since 2001, Portugal has had the benefit of a robust and flexible legal regime for securitisations, and for covered bonds since 2006. Portuguese banks were frequent issuers of asset- backed securities in the international markets in the pre-crisis period, and continued to use securitisation through the height of the crisis to obtain repo funding from the European Central Bank. Covered bond issuance, although slower to appear, rapidly became a funding tool used by most of the major Portuguese banks. While these banks were not able to access the public markets in the crisis years, the recent improvement in economic conditions in Portugal, and slowly returning confidence in the Portuguese financial sector, has led to increasing investor appetite for Portuguese bank debt. A number of negative factors continue to constrain the market for these securities, but 2015 saw the public placement of several asset-backed transactions and a renewed engagement with the covered bond market by Portuguese banks. This included the structuring of Portugal’s first conditional pass-through covered bond programme in the public markets.
SECURITISATION – THE LEGAL STRUCTURES
The Portuguese Securitisation Law (Decree-Law no. 453/99 of 5 November 1999, as amended) came into force in 2000. This was accompanied by the enactment in 2001 of the Securitisation Tax Law (Decree-Law no. 219/2001 of 4 August 2001, as amended). The Securitisation Law provides for the issue of asset-backed securities through two forms of Portuguese entities:
- credit securitisation funds (fundos de titularização de créditos) (“FTCs”); and
- credit securitisation companies (sociedades de titularização de créditos) (“STCs”).
The lag in the completion of the Securitisation Tax Law in 2000 prevented early issues through the STC structure, which required certain tax issues to be addressed by statute before the structure could be fully implemented. This led to the FTC structure becoming the preferred issuance model for the early transactions. In recent years, however, issuance has been exclusively on the basis of the STC structure.
FTCs are established as segregated portfolios of assets that are transferred to the FTC by the originator entity. The segregated fund is managed by a specialist fund manager under the terms of a fund regulation, which is required to be approved by the Portuguese securities regulator, the Comissao do Mercado de Valores Mobiliários (“CMVM”). A number of fund management companies operate in Portugal providing fund management services on a commercial basis. The FTCs are required to hold their assets with a custodian: a credit institution that meets certain capitalisation and other regulatory requirements. Although the custodian is required to act in accordance with the fund management company’s instructions, it also has certain obligations to ensure the fund’s compliance with the Securitisation Law.
An FTC issues “units”, which represent the undivided ownership interest in the assets held by the FTC. To facilitate placement with investors in the public markets a two-tier structure was developed, where the units issued by an FTC were held in their entirety by a special purpose company (usually incorporated in Ireland), which then issued tranched, secured asset-backed securities in the international markets.
STCs are Portuguese commercial companies (sociedades anominas) established under the supervision of the CMVM for the sole purpose of carrying on securitisation transactions. They are subject to certain capitalisation and other requirements. Several STCs have been established, offering their services on a commercial basis to originator entities. Each STC operates, in effect, as a multi-compartment vehicle, with each securitisation transaction constituting a segregated portfolio within the STC that is funded by the related note issue. Holders of notes issued by an STC with respect to one portfolio of assets do not have recourse to any other portfolio held by the STC.
Since 2007/8, securitisation transactions in Portugal have almost invariably adopted the STC model. This is due to an increased level of investor familiarity and comfort with the STC structure and the legal basis for securitisation issuance directly from on-shore Portuguese vehicles, and the CMVM’s encouragement of direct issuance into the markets by securitisation vehicles that fall under its regulatory oversight. Recent note issues by STCs have generally been listed on Euronext Lisbon, where the approval of the prospectus is also the responsibility of the CMVM. The CMVM is, therefore, able to exercise a high level of supervision over Portuguese securitisations.
The Securitisation Law provides for a number of helpful legal features, which include amendments to provisions of the Portuguese Civil Code and the Insolvency Code that would otherwise apply to the transaction and the parties. These helpful provisions include a simplified basis for assignments of receivables to a STC/FTC, provision for the isolation of the assigned receivables in the event of the insolvency of the servicer, and limitations on the exercise of set-off against the originator entity by an obligor under a receivable following an assignment of the receivable to a STC/FTC.
The Securitisation Tax Law provides a number of equally helpful derogations from the Portuguese tax regime. These include provision for the absence of withholding tax on collections relating to the receivables made by a servicer on behalf of the STC/FTC, and exemptions from stamp duty on the assignment of the receivables and the issue of the asset-backed securities.
THE UNIVERSE OF ASSETS
Portuguese securitisation has embraced a wide range of asset classes in the 15 years since the Securitisation Law came into force. A significant reduction in bank origination of mortgage and consumer loans has led, since 2011/12, to a fall-off in the number of transactions backed by such assets, although a loans. In 2015 the market welcomed the public placement by Banif of a €336 million note issue backed by residential mortgage loans in March (Atlantes Mortgage No. 3) followed in July by a €440 million note issue backed by SME loans (Atlantes SME No. 5). Another successful transaction in 2015 was a €500 million securitisation of electricity tariff deficit receivables for EDP – Energias de Portugal (Volta III). A number of Por tuguese banks are understood to be considering a return to the market with asset-backed transactions in 2016.
The Portuguese Covered Bonds Law (Decree-Law no. 59/2006 of 20 March 2006, as amended) provides for a statutory framework for the issuance of asset covered bonds. A number of supplementary regulations have been made by the Bank of Portugal providing for the segregation of the cover pool from the insolvency estate of the issuer, with the cover pool subject to a statutory special creditors’ privilege in favour of the covered bondholders. These regulations also set out valuation and LTV criteria, and the requirements for a cover pool monitor to monitor compliance with the financial and prudential requirements laid down in the Covered Bond Law. The appointment of a “common representative” (similar to an English law note trustee) to represent the interests of the covered bondholders is required.
While many of the leading Portuguese financial institutions have set up covered bond programmes, in recent years the opportunity for issuance under these programmes has been limited. A significant development in 2015 was the establishment by Novo Banco, S.A. of its €10 billion Conditional Pass-Through Covered Bond Programme. The “conditional pass-through” structure, pioneered by Dutch bank NIBC in 2013, and followed in mid-2015 by UniCredit, retains the bullet repayment of principal at maturity that is a feature of traditional covered bond structures, but in the event of certain conditions being met, such as the issuer’s insolvency, the conditional pass-through covered bonds will convert to an amortising principal repayment basis. This addresses the risk of maturity mismatch to which traditional covered bonds are exposed, with the resulting risk of default on the bullet repayment. Novo Banco has yet, at the time of writing, to undertake a public issue of conditional pass-through covered bonds under its programme. Such an issue in 2016 would be a significant landmark in the return of the Portuguese banks to another sector of the international capital markets.