Transactional issues

SPV forms

Which forms can special purpose vehicles take in a securitisation transaction?

Special purpose vehicles (SPVs) can take many forms, and determination as to the form of SPV to be used in a securitisation transaction is largely dependent on the desired tax treatment for the entity. The most common forms of SPV used are common law trusts, business statutory trusts, limited partnerships and limited liability companies. The SPV can either be owned by the originator or its subsidiary in the securitisation transaction. If the SPV is a pass-through trust, its beneficial ownership interest is owned directly by the investors. If the SPV is an orphan, its equity (typically nominal in amount) is owned by an entity or charitable foundation or organisation unrelated to the originator.

SPV formation process

What is involved in forming the different types of SPVs in your jurisdiction?

In the United States, the formation of an SPV is governed by the laws of the state in which it is formed. The requirements relating to SPV formation and the timing and costs involved largely depend on the state in which the SPV is formed. The costs of forming an SPV in the United States are typically less than $300. To form an SPV, one would typically file a certificate of formation, partnership or trust, as applicable, with the related jurisdiction’s division of corporations. Most jurisdictions can process formation documents and register the entity within 48 hours. The SPV may be required to have one or more independent directors whose vote will be required for the SPV to take certain key actions, including filing for bankruptcy of the SPV. The annual salary payable to an independent director is approximately $50,000 to $100,000.

Governing law

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

The purchase and sale agreement covering the assignment of the receivables to the SPV may and usually does stipulate the governing law applicable to the assignment (which is typically New York law). However, the governing law applicable to the perfection of the security interest created in the assigned receivables in favour of the security holders, or the assignment of the underlying security interest constituting part of the receivables package cannot be stipulated, and is usually governed by the statutory regime governing the perfection of security interest in the related assets, such as a jurisdiction’s uniform commercial code, motor vehicle titling statutes or statutes governing the transfer and encumbrance of real property.

Asset acquisition and transfer

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

In a securitisation that will not involve an SEC-registered public offering, generally there is no legal prohibition on an SPV acquiring new assets or transferring its assets after the initial issuance of its securities, except as described in the last paragraph below.

In a securitisation involving SEC-registered ‘asset-backed securities’, the securities must be backed by ‘a discrete pool of receivables or other financial assets’. The definition, however, specifically allows for the following features:

  • a master trust structure, whereby the securitisation may acquire additional assets in connection with future issuances of asset-backed securities;
  • a prefunding period of not more than one year, during which not more than 25 per cent of the proceeds of the offering may be used for future acquisition of additional pool assets; and
  • a revolving period of not more than three years, during which the transaction may use cash flows from the asset pool to acquire additional pool assets of the same general character as the original pool assets.

 

If a securitisation (whether or not it involves an SEC-registered public offering) is relying on Rule 3a-7 to be exempt from the registration requirements under the Investment Company Act of 1940, as amended, underlying assets may not be acquired or disposed of for the primary purpose of recognising market gains or decreasing market losses.

Registration

What are the registration requirements for a securitisation?

Under the Securities Act, for an issuer to conduct an initial public offering of asset-backed securities, it must first file a registration statement with the SEC (on Form SF-1 or SF-3) meeting the disclosure and other requirements contained in the Securities Act and related rules and regulations, including Regulation AB. To file a registration statement on Form SF-3 (for offerings on a continuous or delayed ‘shelf offering’ basis), the issuer and the securitisation transaction must meet certain eligibility requirements outlined in the form.

If the issuer’s offering qualifies as a private offering exempt from the registration requirements, it need not file a registration statement with the SEC.

Obligor notification

Must obligors be informed of the securitisation? How is notification effected?

There is no general requirement under the federal securities laws governing asset-backed securities to provide a notice of securitisation to the obligors of the securitised assets. However, notice may be required under the laws and regulations governing a particular type of asset. For example, in the case of residential mortgage loans, a notice of transfer of ownership as well as a notice of servicing transfer is required under Regulation Z (implementing the Truth in Lending Act of 1968, as amended). A notice is typically delivered by the originator or securitisation servicer in accordance with the terms of the underlying asset.

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

Confidential consumer information (including ‘non-public personal information’ within the meaning of Title V of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999) that can identify a consumer generally cannot be disclosed to third parties and can only be used for the purposes for which such information was provided. Identifying information is generally removed from all disclosure materials provided to investors, and entities possessing consumer information are generally obligated to safeguard such information from unauthorised access and disclosure.

Credit rating agencies

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

Rules exist under the Exchange Act that govern the relationship between nationally recognised statistical ratings organisations (NRSROs) and securitisation issuers. Rules governing this relationship primarily address issues of conflict of interest arising out of the fact that the credit ratings provided by NRSROs for asset-backed securities issued in a securitisation are paid for by the securitisation sponsor or issuer. For increased transparency, Rule 17g-5 under the Exchange Act requires the issuer to maintain a password-protected website that is accessible by non-hired NRSROs and to simultaneously post on such website all information that it provides to the hired NRSROs in connection with a ratings process.

The ratings methodology employed in connection with rating a transaction varies among credit rating agencies and the underlying assets backing the securities to be rated. Generally, the rating agencies will review:

  • the quality of the management and financial condition of the sponsoring entity;
  • origination and underwriting practices;
  • the quality of the transaction service providers;
  • collateral credit quality and the historical performance of the issuer or originator’s portfolio; and
  • the creditworthiness of credit enhancement providers, the transaction capital structure and credit enhancement.

 

They will also conduct a cash flow analysis and review the legal structure and opinions to be issued in making ratings determinations.

Directors’ and officers’ duties

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

Given that the SPV is a limited purpose entity, which is often formed for the sole purpose of serving as the issuer in relation to the securitisation, the chief duties of the directors and officers of the SPV are limited to administering the SPV in accordance with its organisational documents (including in compliance with their provisions intended to preserve bankruptcy-remoteness) and performing its obligations under the securitisation transaction documents (to the extent not delegated to a service provider in the securitisation, such as an administrator or a servicer). Credit rating agencies typically require the SPV to have one or more independent directors that are not affiliated with the owner of the SPV whose vote is required for the SPV to file for bankruptcy.

Risk exposure

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

Credit risk retention regulations (17 CFR Part 246), promulgated to implement the credit risk retention requirements under Section 15G of the Exchange Act, apply to registered, publicly offered asset-backed securities, as well as asset-backed securities offered privately pursuant to an exemption from registration under the Securities Act.

The sponsor of a securitisation must comply with the credit risk retention requirements by retaining:

  • an ‘eligible vertical interest’ in a percentage of not less than 5 per cent of the face amount of all ABS interests issued;
  • an ‘eligible horizontal interest’ equal to at least 5 per cent of the fair value of all ABS interests issued; or
  • a combination of the foregoing that aggregates to 5 per cent.

 

A sponsor of a securitisation may offset the amount of its risk retention requirements by:

  • the amount of the eligible interests retained by an originator;
  • in the case of a securitisation of commercial mortgage loans, by the amount of ‘eligible horizontal interest’ retained by a ‘third party purchaser’; or
  • establishing a cash reserve account in lieu of retaining all or any part of an ‘eligible horizontal interest’.

Law stated date

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31 December 2020