What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?
Most transactions in Japan involving the securitisation of receivables are done without granting any collateral to the investors. Such deals are based on the understanding that:
- the SPV is a single-purpose entity;
- the management of assets and cash flow of the SPV is structurally controlled;
- the SPV will not enter into any unrelated transactions with third parties; and
- the SPV will not incur any unrelated debt.
On the other hand, in the case of securitisation of real estate, if the investment method is an asset-backed loan, collateral is usually granted in favour of the lender to secure the payment of such loans. Mortgages and pledges of real estate beneficial interests are typical types of collateral granted.
Regarding other types of securities, a security interest over receivables may be created either by way of a pledge or a security assignment.
A security interest over bank accounts and trust beneficial interests may be typically created by way of a pledge, and a security interest over movable assets is typically created by way of a security assignment.
If any collateral is created in order to secure payments of bonds, the Secured Bonds Trust Act (Law No. 52, 1905) will apply and a trust company will need to be appointed to manage such collateral for the benefit of bond holders. However, because the requirements and restrictions under the Secured Bonds Trust Act are stringent, inflexible and cumbersome, a grant of a security interest for bonds is rarely seen in the market.
Alternatively, bonds issued by a TMK can be secured by a general lien pursuant to the Securitisation Act. In such a case, the appointment of a trust company is not required, although the rights and interests granted to the holders of a general lien are relatively weak.Perfection
How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?
The method for creating and perfecting a security interest depends on the type of security interest and the type of assets subject to the security interest.
To perfect a mortgage against third parties, the mortgage must be registered with the competent legal affairs bureau.
Pledge or security assignment of receivables
There are three ways to perfect a pledge or assignment, as explained in question 20:
- to send a written notice with a notarised date to the third-party debtor;
- to obtain a written consent with a notarised date from the third-party debtor; and
- to register the pledge or assignment with the competent legal affairs bureau pursuant to the Perfection Act.
Pledge over bank accounts
To perfect a pledge over a bank account, written consent with a notarised date is typically obtained from the bank at which the account is maintained.
Pledge over trust beneficial interests
To perfect a pledge over trust beneficial interests, a written consent with a notarised date is typically obtained from the trustee.Enforcement
How do investors enforce their security interest?
In general, enforcement of a security interest can be made through a judicial proceeding or private sale. The actual methods of enforcement may vary depending on the type of security and the arrangements specific to each transaction.Commingling risk
Is commingling risk relating to collections an issue in your jurisdiction?
In a Japanese securitisation deal, the originator is usually appointed by the SPV to serve as the servicer for continued collection and management of the receivables. Payments by obligors will continue to be made to the originator, and collections in respect of transferred receivables may be commingled with the originator’s other funds such as collections in respect of non-transferred receivables. If the originator or any successor servicer appointed or provided for under the servicing agreement is declared bankrupt or is subject to corporate reorganisation or civil rehabilitation proceedings while holding collections in respect of the SPV’s transferred receivables, it is likely that such collections would be treated as part of the originator’s bankruptcy estate or the originator’s estate subject to the corporate reorganisation or civil rehabilitation proceedings (or that of the relevant subsequent servicer), and not as funds owned by the SPV. In such a situation, it is likely that the SPV would not recover the full amount of such collections.
To mitigate such risk, one or more of the following tactics is usually used:
- reduction of the time period during which the originator or the subsequent servicer actually holds the SPV’s funds in its accounts;
- inclusion of a provision in the servicing agreement, providing the SPV with the right to terminate the appointment of the originator or the subsequent servicer in certain circumstances, including the petition for commencement of bankruptcy or corporate reorganisation proceedings in relation to the originator or subsequent servicer;
- establishment of an obligation requiring the originator to post a cash reserve or provide cash collateral;
- establishment of an obligation requiring the originator as servicer to pay to the SPV the scheduled collection amount prior to actual collection from obligors;
- use of separate accounts for the management of collected funds; and
- use of bank guarantees to secure the payment obligations of the originator or subsequent servicer.