Trends, developments and prospects
What is the general state of the securitisation market in your jurisdiction, including current trends, notable recent developments and future prospects?
Malta has grown rapidly in recent years as a strong jurisdiction for securitisation and structured finance, owing in particular to its comprehensive and flexible regulatory framework. This creates opportunities for a wide range of such transactions and structures which may benefit from Malta’s attractive fiscal regime while taking advantage of its dynamic business infrastructure and regulatory framework.
Following approval by the European Parliament and the EU Council, the following regulations were published in the Official Journal on December 28 2017:
- the Securitisation Regulation (EU Regulation 2017/2402) for securitisation transactions, which introduces the concept of simple, transparent and standardised securitisation; and
- the Capital Requirements Regulation amending Regulation (EU Regulation 2017/2401 amending EU Regulation 575/2013) on prudential requirements for credit institutions and investment firms (in relation to securitisation positions).
These regulations entered into force on January 17 2018 and are directly applicable across the European Union from January 1 2019, applying to securitisations, the securities of which are issued on or after that date.
This new legislative package was agreed on May 30 2017 following a final six months of negotiations between the Maltese Presidency of the Council of the European Union and the European Parliament. This agreement, which is a landmark legislative development aimed at facilitating the development of a securitisation market in Europe, was welcomed by the European Commission as an essential step towards a fully functioning capital markets union by the end of 2019.
What primary and secondary legislation applies to securitisation in your jurisdiction?
The Securitisation Act (Chapter 484 of the Laws of Malta) provides the legal framework for domestic and cross-border securitisation transactions which take place in and from within Malta.
The local securitisation framework also includes:
- the Securitisation Cell Companies Regulations (Subsidiary Legislation 386.16 of the Laws of Malta) which provide for the establishment of securitisation cell companies;
- the Reinsurance Special Purpose Vehicle Regulations (Subsidiary Legislation 403.19 of the Laws of Malta) which provide for the establishment of securitisation vehicles as reinsurance special purpose vehicles; and
- the Securitisation Transactions (Deductions) Rules (Subsidiary Legislation 123.128 of the Laws of Malta) which set out the tax regime relative to securitisation vehicles.
Which authorities regulate securitisation in your jurisdiction and what is the extent of their powers?
The regulatory authority responsible for the regulation of securitisation is the Malta Financial Services Authority (MFSA).
Importantly, a securitisation vehicle or a securitisation cell company need not obtain any licence, permit or authorisation from the MFSA unless it is established as a public securitisation vehicle (ie, a securitisation vehicle which issues or intends to issue financial instruments to the public on a continuous basis) or it is a securitisation vehicle established as a reinsurance special purpose vehicle. On the other hand, private securitisation vehicles are not required to be licensed by the MFSA, but must notify the MFSA (in the standard prescribed form) of their intention to enter into one or more securitisation transactions before commencing business.
Originators and assets
Which entities are typically the originators in securitisation transactions in your jurisdiction? Are there any restrictions on entities that can serve as originators?
Under Maltese law there are no restrictions on which entities can serve as originators, nor are originators required to be licensed in order to participate in a securitisation transaction. The main classes of originators are credit institutions and other lenders.
Which types of asset are typically securitised? Are there any restrictions on securitisable assets?
There is no limitation on what constitutes a securitisation asset. In terms of the Securitisation Act, a ‘securitisation asset’ may consist of any asset (whether existing or future, movable or immovable and tangible or intangible) and, if applicable, any risks. Assets which are typically securitised include residential mortgage receivables, commercial mortgage receivables and consumer loans.
What structures are typically used to securitise assets in your jurisdiction? Are there any restrictions on which structures may be used?
A Maltese securitisation vehicle may take the form of a public or private company (including an investment company), a commercial partnership or a trust created by a written instrument. The Securitisation Act also provides for securitisation vehicles taking the form of other legal structures as long as the Malta Financial Services Authority (MFSA) permits the use of such structure for securitisation transactions.
The Maltese Civil Code (Chapter 16 of the Laws of Malta) specifically allows for the use of foundations as vehicles for securitisation transactions, with the purpose foundation being the most suitable for use by special purpose vehicles.
However, the typical structure employed in the setting up of securitisation vehicles is the limited liability company.
Are foreign securitisation structures commonly used? What rules, restrictions and practical considerations apply to their use (if any)?
Although the Securitisation Act allows legal structures which are incorporated under the laws of a foreign jurisdiction to be established (provided that such jurisdiction is recognised by the MFSA), all securitisation vehicles established under the act to date have been set up in Malta.
The Securitisation Act provisions are the same for both local and foreign structures. Accordingly, if a foreign legal structure established in an MFSA-recognised jurisdiction is used, the same rules and restrictions applicable to local legal structures apply.
What formal and procedural requirements govern the establishment of securitisation structures?
The establishment of securitisation structures in Malta is governed by the Securitisation Act. A securitisation vehicle, as stated above, is typically established as a limited liability company.
No vehicle established under Maltese law can commence business as a securitisation vehicle in or from within Malta unless it has notified the MFSA that it intends to enter into securitisation transactions. Moreover, the Securitisation Act distinguishes between public and private securitisation vehicles:
- Public securitisation vehicles must be licensed by the MFSA before issuing any financial instruments to the public.
- Private securitisation vehicles are not subject to MFSA authorisation but must notify the MFSA of their intention to enter into a securitisation transaction before commencing business.
Notification must be made in the standard form as prescribed by the MFSA, which includes details of the securitisation vehicle and the securitisation transaction to be undertaken.
Securitisation cell companies The Securitisation Cell Companies Regulations provide the legal framework for the establishment of securitisation cell companies. The regulations allow for the launch of securitisation cell companies that carry on business as a securitisation vehicle in compliance with the Securitisation Act and those that carry on business as a reinsurance special purpose vehicle in compliance with the Reinsurance Special Purpose Vehicle Regulations.
Securitisation cell companies are structures that can create segregated cells, each constituting a separate patrimony of the securitisation cell company. They may be established as a limited liability company. A cell is established when the board of directors of the securitisation cell company resolves to establish a cell for the purpose of a securitisation transaction. No prior regulatory approval is required for the establishment of securitisation cells companies or cells within such companies, unless the company issues financial instruments to the public on a continuous basis or accepts insurance risks as part of an insurance-linked securitisation. A securitisation cell company is merely required to notify the MFSA that it intends to enter into one or more securitisation transactions in respect of a cell before that cell commences business.
Reinsurance special purpose vehicles The establishment of securitisation vehicles as reinsurance special purpose vehicles for the purpose of assuming insurance risk is governed by the Reinsurance Special Purpose Vehicle Regulations. Reinsurance special purpose vehicles are subject to the prior authorisation of the MFSA.
Transfer methods and procedures
How are assets transferred from the originator to the securitisation structure and what formal and procedural requirements must be met in order to perfect the transfer?
Title to securitisation assets may be transferred by any legally recognised form. Under the Securitisation Act, the originator and the securitisation vehicle are at liberty to select any method of transferring the securitisation assets, including by novation, sale, assignment and declaration of trust. Typically, a transfer of receivables is made by an assignment agreement.
The requirements which must be met for the transfer to take place depend on its governing law. The Civil Code (Chapter 16 of the Laws of Malta) is the primary legislation regulating the assignment of debts and other rights in general. However, its procedures are considered overly onerous for an assignment of rights regarding securitisation and therefore the Securitisation Act relaxes the legal formalities which would otherwise apply.
Generally, the assignment or sale of a debt is complete and the ownership is acquired ipso jure by the assignee once:
- the debt and price have been agreed; and
- the deed of assignment is made (except where a right is transferable by the delivery of the respective document of title).
The assignment is not valid unless made in writing. Moreover, the assignment of debts arising from a public deed is void unless made by a public deed. An assignment is not effective against third parties unless due notice has been given to the debtor by means of a judicial act.
Special rules apply for securitisation transactions. The Securitisation Act disapplies the general rules (as stated above) where a securitisation asset is assigned to a securitisation vehicle.
Assignment is complete and ownership of the assets is acquired ipso jure by the securitisation vehicle as soon as the assignment is confirmed in writing. The debtor must also be formally notified of the assignment in writing by any means or through a notice in a daily newspaper circulated wholly or mainly in the jurisdiction where the obligor or most of the obligors reside. Once third parties have been notified in accordance with the law, the assignment is complete.
Additionally, the Securitisation Act provides that such assignments are treated as final, absolute and binding on the originator, the securitisation vehicle and all third parties, notwithstanding any underlying contractual or statutory prohibition or restriction on the originator to assign the securitisation asset wholly or partly to any third party.
While it would be prudent to ensure that the requisite formalities under Maltese law are satisfied, in practice the assignment of receivables agreements is typically governed by the law of the jurisdiction in which the receivables are situated, which is typically not Malta.
Obligor notification and data protection
Must obligors be notified of the transfer of assets to the securitisation structure? If so, what rules and procedures apply? What data protection requirements apply regarding obligors’ personal data?
The assignee may not exercise his or her rights regarding third parties until due notice of the assignment has been given to the obligor in writing by any means (see above).
The Securitisation Act provides that any data or information transferred within the context of a securitisation is transferable without any restriction or limitation. Where obligations under the Data Protection Act (Chapter 440 of the Laws of Malta) and the General Data Protection Regulation (EU Regulation 2016/679) (GDPR) are concerned, any transfer of personal data is deemed to be necessary for the purpose of the legitimate interests pursued by the transferor and the transferee, except where such interests are overridden by their interests or fundamental rights and freedoms which require personal data protection. The obligor must be notified of:
- the legal basis for the processing of his or her personal data;
- the transfer of the personal data to a third country (if applicable); and
- other mandatory notice requirements as set out in Article 13 or 14 of the GDPR (as applicable) at the point of the data’s collection.
Moreover, any entity which is involved in the processing of the obligor’s personal data is required to comply with the security measures outlined in the Data Protection Act and the GDPR, as well as the general principles of personal data (eg, data minimisation, accountability and transparency).
Anti-money laundering provisions
What anti-money laundering provisions apply to asset transfers to securitisation structures?
Securitisation structures per se are not considered to be ‘subject persons’ under the applicable anti-money laundering laws and hence are not subject to the provisions of such laws. However, lawyers, accountants, tax advisers and other service providers for securitisation structures may need to comply with the applicable anti-money laundering framework depending on their respective roles in the transaction and whether this would constitute relevant activity.
Choice of law provisions
What rules and restrictions (if any) apply to the choice of law governing the asset transfer?
The Securitisation Act expressly allows the parties to a securitisation transaction to choose freely any law to govern contracts relating or ancillary to a securitisation transaction.
Available types of security
What types of security are available and commonly used for securitisation transactions in your jurisdiction? What formal and procedural requirements must be met in order to perfect the security?
In a typical security package tied to a securitisation, the securitisation vehicle grants a range of security interests over its assets and rights, including its rights under the receivables, bank accounts and various transaction documents, in favour of its secured creditors. The most common types of security that can be taken over the securitised assets are assignments and pledges.
In addition to any security granted to them, the Securitisation Act grants the holders of securities issued by a securitisation vehicle a special privilege over the securitisation assets. In the absence of fraud, such privilege ranks before all other claims at law over the securitisation vehicle’s assets (with the exception of other securitisation creditors which have been granted a prior ranking, with the holders’ consent). This privilege extends to the proceeds derived from the securitisation assets and to any other assets acquired with those proceeds.
As transaction security documents are almost always governed by the law of the underlying assets, this privilege intends to ensure that all valid security over securitisation assets is enforced and is the highest-ranking privilege of the investors under Maltese law, irrespective of the governing law of the security interests.
Perfection of the security depends on the particular security interest and must comply with the governing law of the security interest. While requirements vary between jurisdictions, perfection typically takes place by registering the security interest in a public register, or by notifying or obtaining an acknowledgement of the security interest from the debtor.
How are security interests enforced?
Security interests are generally granted to a security trustee to hold for the benefit of the investors and are enforceable only by the trustee on behalf of the investors in the event of a default. While the investors will not have the right to enforce their security interests directly, they can typically direct the security trustee to do so. The exact enforcement process and how it is triggered will depend on the terms of the particular security interest.
Issuance of securities
What rules, documentary requirements and procedures govern the public listing of asset-backed securities in your jurisdiction? How common is public listing? Are foreign exchanges preferred?
Under the Companies Act (Chapter 386 of the Laws of Malta) and the Listing Rules, a number of requirements must be satisfied before a company may apply for listing and trading on a local recognised exchange. The Listing Rules require that the securities of a listed company, whether debt or equity, must be freely transferable. In terms of the Companies Act, this is possible only through the medium of a public limited liability company. By virtue of its memorandum and articles of association, such a company must not:
- restrict the right to transfer its shares;
- limit the number of its members; or
- prohibit any invitation to the public to subscribe for shares in or debentures of the company.
Prospective issuers wishing to offer securities to the public via the Malta Stock Exchange’s official list must first notify the Listing Authority of their intention to submit an application for admissibility to listing. The application must then be submitted to the Listing Authority with supporting documentation, including:
- the prospectus and any supplements;
- evidence of payment of the application fee;
- audited accounts covering a minimum of three financial years preceding the application;
- the applicant’s memorandum and articles of association; and
- the appropriate corporate authorisations.
Once admitted to listing by the Listing Authority, the issuer must apply to the Malta Stock Exchange for admission to trading on a regulated market.
In addition to the main market, prospective issuers may list their asset-backed securities (the denomination per unit of which must be at least €100,000 or equivalent) on the European Wholesale Securities Market. The European Wholesale Securities Market relates to wholesale debt securities and is a joint venture between the Irish Stock Exchange and the Malta Stock Exchange, creating an additional EU-regulated market designed to meet international debt issuer requirements.
Further, the Institutional Financial Securities Market, the first fully Maltese regulated wholesale securities market launched in September 2017, adds to Malta’s capital markets offering, providing a new venue for the listing of asset-backed securities (the denomination per unit of which must be at least €100,000 or equivalent).
What rules, documentary requirements and procedures govern the private issuance of asset-backed securities in your jurisdiction? How common is private issuance?
Private issuances are predominantly regulated by the Companies Act and therefore do not fall within the remit of the Listing Authority.
The Companies Act contains an exhaustive list of offers that do not constitute an offer of securities to the public and are therefore exempt from having to publish a prospectus; such offers are deemed ‘private placings’.
Where private placings are used, issuers would typically enter into an agreement with the subscriber, setting out its terms and conditions. Private placing agreements would generally be accompanied by a form of offering memorandum, which ordinarily contains information similar to that in a prospectus.
Credit enhancement and rating
Credit enhancement methods
What credit enhancement methods are commonly used in your jurisdiction? Do any restrictions apply? Are there any special issues specific to your jurisdiction in relation to credit enhancement?
The most frequently used method of credit enhancement is the creation of ‘retained spread’, arising when the amounts due on the securities are less than the amounts that the securitisation vehicle receives in respect of the receivables. The residual income deduction under the securitisation tax rules is particularly helpful for retained spread, as excess spread can be retained as cash collateral without it being taxed on an annual basis.
Over-collateralisation, where excess collateral is used to enhance credit, has also been used as a risk-reduction technique to improve the credit profile of securitised products or transactions.
There are no specific issues that apply to these credit enhancement techniques in Malta.
Credit rating agencies
What factors do credit rating agencies consider when assessing asset-backed securities?
Each credit rating agency uses its own methodology to measure an issuer’s creditworthiness and the viability of its securities. The approach typically undertaken by credit rating agencies when assessing asset-backed securities begins with an in-depth analysis of the credit risk associated with the underlying assets in order to evaluate any potential risk to cash flow. Credit rating agencies analyse the legal integrity of the structure governing the asset-backed securities transaction and the security over – and procedures and mechanism for administering – the underlying assets and related cash flows. The agencies also assess the adequacy and creditworthiness of the relevant parties to the transaction, such as those providing credit enhancement and liquidity support, as well as those involved in payments to or from the securitisation vehicle.
Are the activities of credit rating agencies and their relationships with issuers subject to any regulations or restrictions?
The activity of credit rating of securities issued by Maltese securitisation vehicles is not subject to any regulations or restrictions.
What tax liabilities arise for originators in relation to securitisation transactions and how can these liabilities be mitigated?
Whether any tax liabilities will arise for the originator in relation to a securitisation transaction depends on the jurisdiction in which the originator is a tax resident and whether any assets are being transferred to the securitisation vehicle as part of the transaction. It is worth considering that applicable tax laws provide that the amount claimed as a deduction by the securitisation vehicle should give rise to an amount of deemed income at the level of the originator. This income should be considered to have arisen in Malta in the hands of the originator, unless the control and management of the originator’s business take place elsewhere.
What tax liabilities arise for securitisation structures and how can these liabilities be mitigated?
A securitisation vehicle is generally subject to income tax on its income and gains (after allowable deductions) arising in the year in which such income or gains are recognised for accounting purposes.
When determining the total chargeable income of a securitisation vehicle, as well as claiming any allowable expenses or outgoings in terms of the Income Tax Act (Chapter 123 of the Laws of Malta), the following deductions may also be claimed:
- any sum paid by the securitisation vehicle to the originator for the transfer of the securitisation asset or the transfer of any risks;
- premiums, interest or discounts connected to the financial instruments issued, or funds borrowed by the securitisation vehicle when financing the acquisition of the securitisation asset or the assumption of risks; and
- any expenditure incurred by the securitisation vehicle in respect of the day-to-day administration of the securitisation vehicle (or if the administration is delegated, the fees paid for the administration services), including expenditure relating to statutory requirements and its assets and risks (eg, the collection of any relevant claims).
The relevant rules stipulate that any item of expenditure or outgoings considered tax-deductible in terms of both the Securitisation Transactions (Deductions) Rules (SL 123.128) and the Income Tax Act may be deducted only once.
The rules also grant the securitisation vehicle the option of claiming, as a further deduction, an amount equal to any chargeable income remaining after deducting all allowable expenditure referred to above. This optional reduction effectively cancels out the chargeable income of a securitisation vehicle. In order for this option to be exercised, the commissioner for revenue must be satisfied that the originator has given its irrevocable written consent. If exercised, the amount of the optional deduction will be deemed to be chargeable income in the hands of the originator of the particular securitisation asset (see above).
What tax liabilities arise for investors in asset-backed securities and how can these liabilities be mitigated?
The taxation of investors will depend on the jurisdiction in which they are a tax resident. From a Maltese tax perspective, no withholding taxes apply to dividends, interest or other payments made to non-resident investors in a securitisation vehicle, and such payments are not subject to tax unless they are received by persons who are resident and/or domiciled in Malta.
True sale and recharacterisation
How is a ‘true sale’ determined in the event of the originator’s insolvency? In what circumstances will a bankruptcy court recharacterise an asset transfer as a secured loan?
The Securitisation Act provides that no insolvency proceedings regarding the originator may affect the securitisation assets transferred to the securitisation vehicle. It addresses the requirement of a true sale in securitisation transactions by providing that an assignment to a securitisation vehicle should be treated as final, absolute and binding on the originator, the securitisation vehicle and all third parties. Such an assignment is not subject to recharacterisation for any reason, nor is it subject to any claims of the creditors of an insolvent originator or otherwise.
Therefore, there should be no risk of the transfer of title being recharacterised, subject to the following exceptions:
- where there is fraud on the part of the securitisation vehicle; or
- where the assignment was entered into at a time at which the securitisation vehicle knew (or should have known) that an application for the dissolution and winding up of the originator due to insolvency was pending, or that the originator had taken formal steps to effect its dissolution and winding up due to insolvency.
How can commingling risk in the context of the originator’s insolvency be mitigated?
No insolvency proceedings taken in relation to the originator (including any dissolution and winding-up proceedings, any company recovery procedure, any company reconstruction and any proceedings affecting creditors’ rights) should have any effect on:
- the securitisation vehicle;
- any assets acquired or risks assumed by the vehicle;
- any other assets of the vehicle including any cash flows or other proceeds owing to the securitised vehicle; or
- any payments due by the underlying debtors in connection with the securitised assets.
How can securitisation structures be made bankruptcy remote?
The concept of ‘bankruptcy remoteness’ is fundamental to any securitisation structure. Securitisation vehicles established under the Securitisation Act are, by law, bankruptcy remote from the originator (see above). Further, bankruptcy remoteness can be achieved under the Securitisation Act through the following:
- Placing restrictions on the securitisation vehicle to prevent it from incurring liabilities outside those contemplated by the securitisation. The objects of such vehicle must be expressly limited to matters which are necessary to carry out any transactions intended or required in order to implement or participate in a securitisation transaction. Further, the Securitisation Act prohibits securitisation vehicles from carrying on any trade or business other than that relating or ancillary to the securitisation transaction.
- Prohibiting any person, save for securitisation creditors, from applying to court to demand the issuance or enforcement of any precautionary act against the securitisation vehicle, unless the court is satisfied that there has been fraud on the part of the vehicle.
- Allowing any securitisation creditor, or class thereof in the constitutive document of the securitisation vehicle, the power to demand or place the securitisation vehicle under any dissolution and consequential winding-up proceedings, company recovery procedure, company reconstruction or any proceedings affecting creditors’ rights generally.
- Allowing the securitisation vehicle to enter into any agreement through which its counterparties (including the securitisation creditors, shareholders and originators of the vehicle) accept to restrict or waive their right to commence dissolution and winding-up proceedings, company recovery procedures, company reconstruction or any proceedings affecting creditors’ rights generally.