corporate & commercial LAW
amendments introduced by law 5/2015 of 27 aPril on promoting corporate financing IN THE AREA OF securitiSation
Law 5/2015 of 27 April on promoting corporate financing (Ley 5/2015, de 27 de abril, de Fomento de la Financiación Empresarial) (“Law 5/2015”) was published in Spain’s Official State Gazette on 28 April 2015. Among other issues, this law consolidates into one piece of legislation what has, until now, been a dispersed legal framework on securitisation. It also modernises the law and makes it more flexible to align it with the laws of neighbouring jurisdictions. This law entered into force the day after it was published in Spain’s Official State Gazette.
The amendments brought about by the new law, some of which market participants have been requesting for some time, are expected to help reactivate the securitisation market after more than five years of apathy during the Spanish banking crisis and lack of confidence in these type of transactions by institutional investors.
Law 5/2015 has also introduced amendments in other areas, such as debt issuances, the financing of small and medium-sized enterprises, financial credit establishments and crowdfunding platforms. The most significant developments regarding debt issuances are summarised in a newsletter prepared today and that can be accessed by clicking here. In addition, the most significant changes in relation to the financial credit establishments’ regime and crowdfunding are also summarised in another of our newsletters, which is available here.
The most significant developments as regards securitisation introduced by Law 5/2015 are as follows:
1. Structural issues
1.1. Active management
Management companies that manage securitisation funds may “actively manage” the securitised portfolio of open-ended securitisation funds. This faculty, common in neighbouring jurisdictions, was not contemplated in Spanish regulations until now, limiting the role of securitisation fund management companies to mere “passive” managers of securitised credit rights (i.e., servicing the credit rights so that they can be monitored, collected and eventually enforced). Management companies will now also be able to “actively” manage securitised assets, which allows, for instance, for the sale of credit rights without the need to wait until their maturity, fostering an increase in the value of the portfolio.
The active management policy must be detailed in the deed of incorporation (and, in the case of securitisation funds for which a prospectus must be published, also in the prospectus), which will allow for changes in the assets to maximise profitability, guarantee the quality of the assets, manage risk appropriately and maintain the conditions established in the deed of incorporation of the securitisation fund.
Securitisation fund management companies that wish to implement active management policies in open-ended funds that they manage must comply with the additional requirements mentioned in section 4 below.
1.2. Creditors meeting
Another important novelty is the possibility of including a “creditors meeting” in the structure of a securitisation fund. A creditors meeting will be deemed entitled to pass the necessary resolutions to best defend the legitimate interests of the securitisation fund creditors.
The composition, faculties and rules governing the conduct of creditors meetings will be set out in the deed of incorporation. Any matters not provided for therein will be governed by the provisions applicable to syndicates of bondholders stipulated in the Spanish Companies Law (Ley de Sociedades de Capital).
The creditors meeting of securitisation funds may agree to restructuring securitisation transactions by amending the deed of incorporation of the securitisation fund without having the unanimous consent of all the creditors (or of a class of creditors), simply by respecting the procedure and the majority rule created for this purpose in the fund’s deed of incorporation.
Ultimately, the creditors meeting will be the mechanism through which bondholders and the remaining creditors of the securitisation fund can defend their interests on matters that must be discussed at the meeting. This provision had been called for by the market, since it approximates the legal framework applicable in other jurisdictions, in which an adequate majority of bondholders may call on the trustee or manager to adopt specific servicing and administration measures regarding the securitised portfolio, thus facilitating the swift adoption of those measures and a greater say for the investors themselves.
1.3. Unification of asset-backed securitisation funds and mortgage-backed securitisation funds and recognition of sub-funds
Lastly, the distinction between mortgage-backed securitisation funds (FTH, which assets could only be made up of mortgage credit certificates —participaciones hipotecarias—, i.e. those that are assigned credit rights arising from high-quality mortgage loans) and asset-backed securitisation funds (FTA, which assets could be made up of other credit rights) has been removed. The distinction, which made some sense at the start of the Spanish securitisation market, had been overcome in practice as investors and the rules themselves treated both types of entities as equivalents. Therefore unifying them will avoid any discrepancy.
In addition, the possibility of creating several sub-funds within a securitisation fund, each of whose assets and liabilities would be ring-fenced from the other sub-funds, has been expressly recognised and was already permitted in practice.
2. FUND ASSETS
2.1. Removal of transfer restrictions
The assignment in favour of a securitisation fund of credit rights recorded as assets of the originator no longer has to be in full, unconditional and for the entire remaining term until maturity. Furthermore, the originator can now grant guaranties to the securitisation fund and guarantee the success (garantizar el buen fin) of the transaction.
The removal of those restrictions permits more flexible securitisation structures, despite the impact that the guaranties given or risks assumed by the originator could have on whether or not the transaction qualifies as a true sale in order to be able to remove the securitised assets from the originator’s balance sheet for either accounting or capital adequacy purposes.
2.2. Possibility of completing the assets portfolio of the securitisation fund after its incorporation
Previously, assets or liabilities could not be integrated into closed-end securitisation funds once they had been set up (except to remedy hidden defects).
This restriction has been relaxed by the reform, which allows for a predetermined maximum volume of assets and liabilities to be reached within a four-month period (without the fund forfeiting its closed-end nature for such reason).
Therefore, ramp-up periods, common in structured finance transactions in other countries, will also probably become commonplace in Spanish securitisation transactions.
2.3. Servicing and administration of securitisation fund assets
The legally established presumption that the originator will retain the servicing and administration of the credit rights assigned to the securitisation fund (unless it was otherwise agreed) is eliminated.
2.4. Developments in synthetic securitisation
Law 5/2015 makes the rules applicable to synthetic securitisation more flexible. It allows for these type of transactions to be carried out not only through credit derivatives, but also through financial guarantees or bank guarantees granted in favour of the holders of credit rights. Furthermore, restrictions imposed on entities that can act as eligible counterparties of credit derivatives are removed.
2.5. Others novelties
The assets assigned to a securitisation fund will no longer need to be homogeneous. The requirement for homogenous assets, which was no longer applicable to securitisation funds exclusively targeted to institutional investors and whose bonds were not listed on a regulated market, created uncertainty in relation to its scope and was being interpreted in an ever more flexible way. As a result, its ultimate removal must be considered positive.
The law also expressly clarifies that securitisation funds may acquire assets directly through subscriptions in the primary market. This clarification is important because the previous regulations stated (as does the reform) that the assets included in the securitisation fund must first be recorded as assets of the originator (except future credit rights). This rule was traditionally interpreted as the securitisation fund being prohibited from subscribing an instrument directly from its issuer, which meant that an intermediate entity had to subscribe the asset only to then immediately assign it to the securitisation fund. This development will therefore simplify the set-up structure of certain securitisation funds (e.g. a structured covered bond transaction backed by a pool of covered bonds with several credit institutions as issuers).
Finally, the winding-up regime of securitisation funds is simplified, with the inclusion of new rules (e.g. the creditors meeting may agree the winding-up by a three-fourths majority) and the removal of other controversial or unclear rules (e.g. those referring to a “default indicating a serious and permanent imbalance with regard to any securities issued”, or the presence, in the management company’s view, of exceptional circumstances that prohibited or significantly frustrated the maintenance of the securitisation fund’s financial balance).
3. FUND LIABILITIES
3.1. Relaxing the rules on liability instruments
The new framework removes most restrictions on the financing of securitisation funds. As such, the requirement that financing through securities must generally exceed 50% of the fund liabilities no longer exists, and the requirement for fund securities to obtain a rating is also removed. In addition, any third party, not only a credit institution, may grant loans in favour of a securitisation fund.
Furthermore, the possibility that the securities issued by a securitisation fund may be listed in a multilateral trading facility (MTF) and not only on a regulated market is expressly recognised, although the possibility of securities not being listed on any market or facility is still allowed (private securitisation funds).
3.2. Granting of guarantees by securitisation funds
One of the other most important developments that Law 5/2015 has introduced is allowing securitisation funds to secure liabilities issued by third parties.
This development provides —especially to Spanish credit institutions— a catalogue of new alternatives for the structuring of asset-backed financing transactions, in addition to other instruments, already contemplated under the current legal framework, backed by mortgage loans, loans granted to public authorities or internationalisation-related loans. For instance, as in other jurisdictions, it will now be possible to carry out corporate issuances backed by a pool or specific portfolio of assets ring-fenced in a securitisation fund, structures which are likely to be favourably assessed by banking regulations on own resources.
4. securitiSation fund management companies
4.1. Rules applicable to management companies that carry out active management
Additional requirements have been established for securitisation fund management companies that choose to actively manage securitisation funds that they manage, in particular in relation to the remuneration rules of the management company and its employees. Thus, management companies that actively manage securitisation funds must calculate their remuneration through procedures that comply with the investment policy and risk management of each securitisation fund, and avoid the appearance of incentives towards a type of management that is contrary to the objectives set out in those policies. Besides, those same principles must be used as a basis for the management company’s remuneration policy for its senior executives and any other employees whose activity significantly influences its risk profile.
4.2. Strengthening of share capital and own resources
The minimum full paid-up share capital that a securitisation fund management company must have has increased from EUR 901,518.16 to 1 million. The management company must, as a minimum, also have the same amount in total own resources.
In addition, where assets of securitisation funds managed by a management company exceed EUR 250 million, the total own resources of the management company must be increased by 0.02% of the sum of the book value of such assets (the regulations applicable to banking asset funds already stipulate this same additional percentage, but as share capital, when the sum of the book value of the assets of the banking asset funds managed by a management company exceed that EUR 250 million threshold). Nonetheless, the sum of the own resources and this additional amount cannot exceed EUR 5 million.
4.3. Internationalisation of management companies
Law 5/2015 clarifies that, besides the management and administration of securitisation funds and banking asset funds legally entrusted to them, securitisation fund management companies can also be in charge of incorporating, managing and representing funds and special-purpose vehicles similar to securitisation funds set up abroad. Therefore, barriers to the international development of management companies are lifted, allowing them to compete on a level playing field.
4.4. Authorisation and registration of securitisation fund management companies by the Spanish National Securities Markets Commission
Finally, the Spanish National Securities Market Commission (CNMV) has been entrusted with the authorisation and registration of new securitisation fund management companies (a task previously undertaken by the Ministry of Economy and Competitiveness).