Securitisationstages and for Crucial Aspects of Doing Business
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GLOBAL PRACTICE GUIDE USA Definitive global law guides offering comparative analysis from top ranked lawyers LAW AND PRACTICE: p.2 Contributed by Shearman & Sterling LLP The ‘Law & Practice’ sections provide easily accessible information on navigating the legal system when conducting business in the jurisdic- tion. Leading lawyers explain local law and practice at key transactional Securitisationstages and for crucial aspects of doing business. TRENDS AND DEVELOPMENTS: p.37 Contributed by Morgan, Lewis & Bockius LLP The ‘Trends & Developments’ sections give an overview of current trends and developments in local legal markets. Leading lawyers ana- USA: Law & Practice lyse particular trends or provide a broader discussion of key develop- Shearman & Sterling LLP ments in the jurisdiction. chambers.com USA LAW AND PRACTICE Law and Practice Contributed by Shearman & Sterling LLP Contents 1. Structurally Embedded Laws of General 5. Documentation p.28 Application p.3 5.1 Bankruptcy-Remote Transfers p.28 1.1 Insolvency Laws p.3 5.2 Principal Warranties p.29 1.2 Special-Purpose Entities p.5 5.3 Principal Perfection Provisions p.29 1.3 Transfer of Financial Assets p.8 5.4 Principal Covenants p.29 1.4 Construction of Bankruptcy-Remote 5.5 Principal Servicing Provisions p.30 Transactions p.9 5.6 Principal Defaults p.30 2. Tax Laws and Issues p.10 5.7 Principal Indemnities p.30 2.1 Taxes and Tax Avoidance p.10 6. Enforcement p.30 2.2 Taxes on SPEs p.10 6.1 Effectiveness of Overall Enforcement 2.3 Taxes on Transfers Crossing Borders p.11 Regime p.30 2.4 Other Taxes p.11 7. Roles and Responsibilities of the Parties p.31 2.5 Obtaining Legal Opinions p.11 7.1 Issuers p.31 3. Accounting Rules and Issues p.11 7.2 Sponsors p.31 3.1 Legal Issues with Securitisation Accounting 7.3 Underwriters and Placement Agents p.31 Rules p.11 7.4 Servicers p.31 3.2 Dealing with Legal Issues p.12 7.5 Investors p.31 4. Laws and Regulations Specifically Relating to 7.6 Trustees p.31 Securitisation p.12 4.1 Specific Disclosure Laws or Regulations p.12 8. Synthetic Securitisations p.31 4.2 ‘Credit Risk Retention’ p.16 8.1 Synthetic Securitisation p.31 4.3 Periodic Reporting p.19 8.2 Engagement of Issuers/Originators p.32 4.4 Activities of Rating Agencies (RA) p.20 8.3 Regulation p.32 4.5 Treatment of Securitisation in Financial 8.4 Principal Laws and Regulations p.32 Entities p.20 8.5 Principal Structures p.32 4.6 Use of Derivatives p.22 8.6 Regulatory Capital Effect p.33 4.7 SPEs or Other Entities p.24 9. Specific Asset Types p.33 4.8 Activities Avoided by SPEs or Other 9.1 Common Financial Assets p.33 Securitisation Entities p.25 9.2 Common Structures p.33 4.9 Material Forms of Credit Enhancement p.26 4.10 Participation of Government Sponsored Entities p.26 4.11 Entities Investing in Securitisation p.27 2 LAW AND PRACTICE USA Shearman & Sterling LLP has been a central participant depth experience in all aspects of the public and private dis- in some of the largest, most complex structured finance tribution of structured finance securities. Highly regarded transactions. With lawyers in New York, Washington, DC, by major corporations and financial institutions, the firm London and Frankfurt, its structured finance group assists represents the entire range of global market participants, clients in developing, structuring and executing a broad including issuers, underwriters, investors, trustees, servic- range of complex financings involving securitisation and ers, credit-enhancement providers, lenders, rating agencies other sophisticated financing techniques. Lawers have in- and conduits. Authors Bjorn Bjerke is a partner in the finance Stuart Fleischmann , a partner in group and resident in the New York office. Shearman & Sterling’s capital markets He focuses his practice on representing Group, has worked on a wide range of issuers and other borrowers, lenders, securities and financing activities and has managers and investors in a broad range broad experience in public and private of financing and risk-allocation securities transactions, particularly those arrangements across a wide spectrum of asset classes and involving Latin American issuers and structured structures, including cash and synthetic securitisations, financings. He regularly represents underwriters of a wide other shared collateral and tiered lien structures using range of debt securities offerings and regularly is involved various forms of bankruptcy advantaged contracts, leasing in such novel transactions as toll road financings and arrangements and a variety of hybrid capital and securitisations involving credit cards, residential nonrecourse asset-based financings. In addition, he has mortgages, international oil payments, money transfers extensive experience representing investors, creditors and and electronic remittances, loan pools, auto and farm managers in complex restructurings, work-outs and equipment loans, leases and franchise revenues. acquisitions of distressed and non-performing assets. He is involved in all aspects of deal structuring, negotiation and documentation. 1. Structurally Embedded Laws of called ipso facto clauses) except for certain enumerated General Application rights and contract types. 1.1 Insolvency Laws Consequently, a key focus of securitisation transactions is to Upon the commencement of bankruptcy proceedings, credi- insulate the securitisation issuer (the issuer) from such bank- tors will, with some exceptions, be subject to the automat- ruptcy risks. If a seller’s sale of assets to the issuer is deemed ic stay on their ability to collect on, or otherwise enforce to be a loan from the issuer to the seller despite being in the against, the property of the bankruptcy estate, even if they form of a sale then the issuer will be subject to the automatic have been granted a security interest in such property. Lift- stay on its ability to collect on, or otherwise enforce against, ing the automatic stay can be time-consuming and costly, the transferred assets upon the seller becoming subject to and the impact on the creditors in the meantime could be bankruptcy proceedings. Consequently, one important material. In addition, the bankruptcy court has broad statu- aspect of insulating the issuer and its assets against the risks tory and equitable powers that could affect the creditors’ of the transferor’s bankruptcy is to ensure that the assets rights depending on the specific facts and circumstances of are transferred in a ‘true sale’, which is discussed in more the bankruptcy, including the power to: detail immediately below. Alternatively, it is also possible to structure a securitisation transaction using certain types of • release excess collateral, thereby reducing the amount of contracts that are afforded protections against the automatic collateral available to the secured creditor; stay and some of the other more troublesome bankruptcy • add additional super-priority debt, pari passu debt or powers, which is discussed in more detail under the heading junior debt secured by the collateral; “Protected Contracts” below. • substitute different collateral for the original collateral; and As part of insulating a securitisation transaction from poten- • reject executory contracts. tial bankruptcy risks, it is also important to protect against voluntary and involuntary bankruptcy filings of the issuer as A bankruptcy also renders unenforceable provisions that well as the issuer’s dissolution. These considerations are dis- trigger off a debtor’s bankruptcy or financial condition (so- cussed in 1.2 Special-Purpose Entities. Furthermore, even 3 USA LAW AND PRACTICE where the securitisation entity is otherwise solvent and is not transferor to receive (or for the transferee to account for) subject to any involuntary or voluntary bankruptcy petition, any surplus is also an important factor for concluding that there is a risk that a bankruptcy court applying the equitable the transaction is a secured loan rather than a true sale. doctrine of substantive consolidation could pull a securitisa- Securitisation transactions often do permit some degree of tion issuer into the bankruptcy of its sponsor, seller or their repurchases for purposes of maintaining compliance with affiliates in the absence of sufficient separateness between the appropriate diversification requirements of the secu- such entities and the issuer, which is discussed below under ritisation. However, in order to ensure compliance with the the heading “Substantive Consolidation.” true sale criteria, such repurchases tend to be limited both to a maximum percentage of the transferred assets as well True Sale v Secured Loan as a prohibition against reacquiring delinquent or defaulted If an asset has been transferred to an issuer in a true sale, assets. the asset will cease to belong to the seller and will not be part of the seller’s estate in the event of any subsequent Administration of, and control over, the underlying assets bankruptcy proceedings involving the seller. Documenting is another factor frequently cited by courts in resolving the the transfer as a sale is important, but not dispositive. The loan versus sale characterisation. For example, the fact that Uniform Commercial Code (UCC) expressly provides in a transferee has the authority to control the collection on the Section 9-202 that title to collateral is immaterial. It is pos- relevant assets and that the obligors have been notified of sible to have a true sale where the seller retains title, just as the transfer would support a true sale treatment. However, it is possible to have a loan even though the seller transfers in many instances it is current market practice for a seller title. When distinguishing between transfers constituting of loans or receivables to remain as servicer thereof and as true sales and transfers only conferring a security interest, such it is not dispositive if a loan obligor is not notified of courts have focused upon whether the transaction predomi- such sale.