In brief: securitisation transactions in USA

Transactional issues

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

There is no set organisational form for a special purpose vehicle (SPV). In the United States, SPVs are most frequently organised under the laws of the state of Delaware as statutory trusts or limited liability companies, or as real estate mortgage investment conduits when mortgage-backed securities are issued, but special purpose vehicles may also be limited partnerships, corporations or common law trusts. With respect to securitisations where certain tax considerations incentivise issuers to be organised outside the United States (in particular, collateralised loan obligations (CLOs), SPVs are often formed in the Cayman Islands, Jersey or Bermuda. The form selected for an SPV is dependent on a variety of factors including: (1) the type of assets to be securitised; (2) the preferred tax treatment for the vehicle; (3) the originators of the assets to be securitised; and (4) the anticipated characteristics of investors in the securities that will be issued.

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

The required organisational documents will vary depending on the form of entity, but in general the governing documents will consist of one document filed in the state in which the SPV is formed that establishes the existence of the SPV and a second, more fulsome document that governs the internal affairs of the entity. The formation documents for an SPV will not differ from those of an entity that is not being established as an SPV although additional provisions will need to be included in the document that governs the internal affairs of the entity.

The cost of filing an organisational document will vary depending on the jurisdiction, entity type and whether expedited service is required, but typically range between US$90 and US$500.

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

The purchase and sale agreement governing the assignment of receivables to the SPV will typically include a choice of law provision. US courts typically uphold choice of law provisions. US securitisations are typically documented by transaction documents governed by the laws of the state of New York. It is not, however, possible to stipulate the law that governs the perfection of a sale or a grant of security interest. This is dictated by the Uniform Commercial Code (the UCC) and laws applicable to the particular receivables (such as motor vehicle titling statutes where the receivables are related to titled vehicles). The UCC provides, in most cases, that the law of the jurisdiction in which a debtor or collateral, as applicable, is located governs perfection, the effect of perfection or non-perfection, and the priority of a security interest in collateral.

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

While Regulation AB defines asset-backed securities as securities serviced by collections on a discrete pool of assets, prefunding structures and revolving structures are generally permitted. With respect to public securitisations, Regulation AB provides that an offering involving prefunding must have a period of less than one year and a maximum prefunding amount of up to 25 per cent, but this limitation does not apply to private securitisations or securitisations to which Regulation AB does not apply. Outside of the limitations of Regulation AB, assets may be acquired or disposed of according to the terms of the transaction documents, including any provisions requiring security holder consent or confirmation that the ratings will not be negatively impacted. In particular, most CLOs will permit the acquisition of assets during an initial reinvestment period and the sale of assets throughout the life of the transaction, subject to satisfaction of conditions set forth in the transaction documents.

Considerations related to whether an acquisition or sale will undermine the treatment of the issuer as a separate entity or the transfer of the assets as a true sale, cause the issuer to be treated as an investment company under the Investment Company Act or undermine the tax treatment of the issuer must also be taken into account when determining the restrictions on post-closing sales or acquisitions of assets by an SPV.

What are the registration requirements for a securitisation?

Publicly offered securities are required to be registered with the Securities and Exchange Commission (SEC) through the filing of either Form SF-1 or Form SF-3. These forms specify which disclosure items are required to be included in the Prospectus to be filed with the SEC. Privately offered securities are not required to be registered.

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

Notification of obligors is not required to perfect a sale of, or security interest in, collateral under the UCC, although perfection of non-US collateral may be subject to other regulatory regimes with different requirements. Obligors with respect to the receivables are typically not provided with notice in connection with securitisations, except with respect to the servicing of a receivable where notice is required under applicable law. Depending on the type of collateral, notice may be required before certain remedies can be enforced against obligors by a transferee or secured party.

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

The SEC, under Subtitle A of Title V of the Gramm-Leach-Bliley Act, generally prohibits the disclosure of obligors’ non-public personal information to non-affiliated third parties. As such, participants in securitisations generally redact personally identifying information from reports to avoid violating privacy laws.

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

Regulation AB contains rules setting forth a number of requirements for Nationally Recognized Statistical Rating Organizations (NRSROs), including requirements related to disclosure of their credit rating performance, histories and methodologies and standards of training, experience and competence for their employees that participate in the credit rating determination decisions. Regulation AB II also requires issuers or underwriters of both public and private offerings of asset-backed securities rated by an NRSRO to furnish a Form ABS-15G attaching any due diligence report provided by a third-party provider at least five business days prior to the first sale of securities in the related offering. Any such third-party provider must also provide a written certification on Form ABS Due Diligence-15E to any NRSRO that produces a credit rating to which the services relate. 

To determine ratings on an issuance, NRSROs closely examine the issuer’s ability to pay interest and principal, with every major rating agency using its own scale of ratings. Factors considered by NRSROs include the (1) isolated assets’ credit characteristics; (2) creditworthiness and legal commitment of parties providing credit enhancement; (3) creditworthiness and legal commitment of parties providing liquidity support; (4) other parties involved in making and receiving payments from the issuer; (5) investors’ security interests granted in the securitised assets and those assets’ cash flows; and (6) transactional structure’s legal integrity.

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

The duties of directors and officers are governed by the organisational documents of the SPV and must consider only the interests of the SPV. While there will often be overlap between the directors and officers of an SPV and affiliated entities, including the originator or owner of the SPV, the governing documents of the SPV will typically contain limitations and requirements intended to ensure that it is operationally separate from affiliated entities. While no law requires independent directors or managers, it is standard in US securitisations to require at least one independent manager or director whose consent is required for enumerated material actions. Although not all SPVs have officers or directors, steps are nevertheless taken to ensure that there is an independent party with decision-making power for most SPV entity forms. With respect to trusts, the owner trustee is generally treated as the independent party, although it is also possible to appoint an independent trustee. Limited partnerships set up as SPVs are typically required to have a general partner that is also an SPV and has an independent director or manager.  

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

Although exemptions apply for the securitisation of certain types of assets, including qualified residential mortgages and open-market CLOs, credit risk retention is required for most securitisations, whether private or public. Regulation RR requires a ‘securitizer’ (defined as the sponsor or depositor of a securitisation) to retain not less than 5 per cent of the credit risk of a securitisation. This requirement can be satisfied, by the securitiser or a majority-owned affiliate thereof, through retention of an eligible vertical interest, an eligible horizontal residual interest or a combination thereof. An eligible horizontal cash reserve account may also be used in lieu of or in combination with an eligible horizontal residual interest. If the sponsor retains only an eligible horizontal residual interest, the amount of the interest must equal at least 5 per cent of the fair value of all ABS interests issued. Regulation RR also sets forth disclosure requirements with respect to this risk retention.