Isolation of assets and bankruptcy remoteness
Securitisation transactions typically require the underlying assets to be insulated from insolvency risks associated with the relevant seller and the SPV to which the underlying assets have been transferred. These risks will arise if the sale of assets can be challenged or set aside upon insolvency of the seller or if the SPV is declared insolvent, respectively.i Seller insolvency risks
In typical UK securitisation structures, the transfer of the underlying assets from the relevant seller to the SPV is structured so that it should not, upon insolvency of the seller, be re-characterised by a court as a secured loan (in relation to which security would be unenforceable due to lack of compliance with registration requirements); this corresponds to what parties in the market tend to call a 'true sale' (often resulting in the de-recognition of such assets from the balance sheet for the relevant seller for accounting purposes).
There is not a defined set of rules prescribing the requirements of a 'true sale'. However, market practice and case law have firmed up a set of key principles that can be distilled to a single requirement: the transfer of the risk of the beneficial title to the assets from the seller to the purchaser should put the purchaser in the position of owner of such assets. Unlike in other jurisdictions, English courts tend to place great emphasis on the intention of the parties, often allowing certain pockets of asset risk to be retained by the seller (for instance, in relation to repurchase obligations arising in relation to assets that breach certain 'eligibility' representations and warranties given on the date of transfer). The interpretation of 'true sale' principles is very fact specific and requires detailed analysis.ii SPV insolvency risks
Bankruptcy remoteness in UK securitisation is typically achieved through use of an SPV. In typical 'true sale' transaction structures, the beneficial title to underlying assets is assigned to a newly incorporated SPV structured as an 'orphan company'. To achieve this result, the share capital of the SPV is, directly or indirectly, held by a corporate entity unconnected to the transaction parties (usually a corporate services provider) on trust for discretionary purposes.
Additionally, transaction documentation usually contains a number of provisions limiting the risk of SPV insolvency and the risk of consolidation with the seller, such as (but not limited to):
- covenants restricting the future activities of the SPV to those contemplated in the transaction documents, including restrictions on ownership of assets or on having employees;
- covenants requiring the SPV to be owned by a party unconnected with the transaction and independently managed;
- representations and warranties to ensure the SPV has not previously been engaged in any activities or owned any assets; and
- limited recourse and non-petition provisions designed to prevent SPV creditors from filing insolvency petitions against the SPV.
In certain types of transactions, particularly whole business securitisation, the above principles may require some adjustment, although it is usual to have a certain degree of bankruptcy remoteness at issuer level. It should also be noted that securitisation of English underlying assets may be structured with an international element, which will require consideration of the laws and market practice of other jurisdictions.
If a transaction is rated, rating agencies tend to analyse isolation of assets and bankruptcy remoteness very closely, as an effective isolation of assets and bankruptcy remoteness may allow for the credit rating of the relevant notes issued (or loans, as applicable) to be higher than the seller's credit rating due to the dissociation of risk from the seller and the limited scope for any creditors to seek recourse against the issuer. Any cross-border elements or deviations from the standard structure or issuer covenant package may introduce considerable complexity and risk and will require detailed analysis.