What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?
All material assets of a securitisation special purpose vehicle (SPV) usually serve as collateral for its payment obligations. These assets include securitised receivables, bank accounts and rights under the transaction documents. The security is created by a (disclosed or undisclosed) right of pledge over the assets of the SPV.
Security rights are typically vested in favour of the security trustee for the benefit of the noteholders securing the obligations of the SPV under a parallel debt agreement. The noteholders cannot enforce their rights directly, but usually have the right to direct the security trustee to take certain enforcement actions.
A disclosed right of pledge is typically created over bank accounts and the rights under the transaction documents.Perfection
How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?
This requires a simple deed between the pledgor and the pledgee and notification of the right of pledge to the relevant counterparty. The securitised receivables are typically pledged by way of an undisclosed right of pledge, which requires a simple deed between the pledgor and the pledgee and registration thereof with the Dutch tax authorities or a deed in notarial form executed in front of a Dutch civil law notary.Enforcement
How do investors enforce their security interest?
The rights of pledge over the assets of a securitisation SPV (ie, receivables, bank accounts and rights under the transaction documents) can be enforced in case of a default by the SPV in its payment obligations. The security trustee will notify the relevant debtors in case of an undisclosed right of pledge or will terminate the SPV’s authority to collect payments in case of a disclosed right of pledge and will then be authorised to collect payments in respect of the receivables.
In case of a default by the SPV, the receivables can be sold or the collections can be used to satisfy the secured obligations.Commingling risk
Is commingling risk relating to collections an issue in your jurisdiction?
In most cases, receivables are assigned to the SPV using a so-called ‘undisclosed assignment’, which allows the debtors to validly discharge their debt by making payments to the originator. The originator then undertakes to forward the collections to the SPV. If the originator goes bankrupt before it has forwarded such amounts, they will remain in the insolvency estate of the originator.
The transaction documentation typically provides for assignment notification events, which allow the SPV (or the security trustee) to notify debtors of the relevant receivables. After notification, the debtors can no longer validly discharge their debt by paying the originator.
To prevent any collection amounts being trapped in the bankrupt estate of the originator, a collection foundation can be used. A collection foundation is established for the sole purpose of collecting payments and distributing these to the relevant beneficiaries (ie, the relevant SPV or the originator). As payments are made to the collection foundation instead of the originator, a bankruptcy of the originator will cause no commingling risk.
If a collection foundation structure cannot be used, an alternative option is to pledge the collection account held by the originator. However, this option:
- is not available if the originator is bound by negative pledge clauses in its other financing arrangements; and
- will have only limited effect if the originator becomes insolvent, as amounts paid into the account after insolvency will not be validly pledged.