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Recommendations on Implementation of Mortgage Backed Securitization Final Report

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Recommendations on Implementation of Mortgage Backed Securitization Final Report RECOMMENDATIONS ON IMPLEMENTATION OF MORTGAGE BACKED SECURITIZATION FINAL REPORT USAID GOVERNING FOR GROWTH (G4G) IN GEORGIA 28 September 2018 This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. RECOMMENDATIONS ON IMPLEMENTATION OF MORTGAGE BACKED SECURITIZATION FINAL REPORT USAID GOVERNING FOR GROWTH (G4G) IN GEORGIA CONTRACT NUMBER: AID-114-C-14-00007 DELOITTE CONSULTING LLP USAID | GEORGIA USAID CONTRACTING OFFICER’S REPRESENTATIVE: PHILLIP GREENE AUTHOR(S): BLC LAW FIRM CAPITAL MARKETS: 5820 LANGUAGE: ENGLISH 28 SEPTEMBER 2018 DISCLAIMER: This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA RECOMMENDATIONS ON IMPLEMENTATION OF MORTGAGE BACKED SECURITIZATION i DATA Reviewed by: Giorgi Amzashvili, Tamar Buadze Project Component: GoG Capacity Strengthening Component Practice Area: Capital Market Key Words: Mortgage, Assets, Securitization, Covered Bonds, SPV USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA RECOMMENDATIONS ON IMPLEMENTATION OF MORTGAGE BACKED SECURITIZATION ii ACRONYMS BLC BLC LLC, a Georgia based law firm qualified in the Georgian law CIT Corporate Income Tax G4G Governing for Growth in Georgia MBS Mortgage Backed Security MFO Micro-Finance Organization MNKS MNKS S.à r.l. as Luxembourg law firm NBG National Bank of Georgia SPV Special Purpose Vehicle TCG Tax Code of Georgia USAID United States Agency for International Development VAT Value Added Tax USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA RECOMMENDATIONS ON IMPLEMENTATION OF MORTGAGE BACKED SECURITIZATION iii CONTENTS 1. EXECUTIVE SUMMARY .............................................................................................................. 5 2. SECURITIZATION ........................................................................................................................ 6 2.1. SECURITIZATION IN A NUTSHELL ............................................................................................ 6 2.2. IDENTIFIED GAPS ....................................................................................................................... 8 A. LEGAL STRUCTURE OF SPV ..................................................................................................... 8 B. INSOLVENCY REMOTENESS ................................................................................................... 11 C. TRANSFER OF ASSETS ........................................................................................................... 13 D. TRADABILITY ............................................................................................................................ 14 E. TAXATION .................................................................................................................................. 16 2.3. RECOMMENDATIONS FOR IMPLEMENTATION OF SECURITIZATION MECHANISM ........ 18 A. LEGAL STRUCTURE OF AN SPV ............................................................................................ 18 B. INSOLVENCY REMOTENESS ................................................................................................... 21 C. TRANSFER OF ASSETS ........................................................................................................... 23 D. TRADABILITY ............................................................................................................................ 23 E. TAXATION .................................................................................................................................. 24 3. COVERED BONDS..................................................................................................................... 25 3.1. COVERED BONDS IN A NUTSHELL ........................................................................................ 25 3.2. GAP ANALYSIS ......................................................................................................................... 25 A. COVERED BOND ISSUER ........................................................................................................ 26 B. ASSETS ELIGIBLE FOR COVER POOL................................................................................... 26 C. BANKRUPTCY REGIME ............................................................................................................ 27 APPENDIX: 1 ........................................................................................................................................ 29 I. ANALYSIS OF PROPOSED LAW ON CIS ................................................................................ 29 USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA RECOMMENDATIONS ON IMPLEMENTATION OF MORTGAGE BACKED SECURITIZATION iv 1. EXECUTIVE SUMMARY In the foregoing Report, the Project Team (which implies BLC and international consultants, Mr. Femelat and Mr. Joseph of MNKS, the Luxembourgian Law Firm, specializing in structured finance) briefly describes the notion and mechanics of Mortgage Backed Security (MBS) and covered bonds as understood by Luxembourg law and identifies the key characters of the structure relevant for successful operation of these legal mechanisms in Georgia. It further detects shortfalls and/or gaps under the Georgian legislation, which may hinder successful implementation of MBS and/or covered bond system in Georgia and provides for recommendations on the legislative changes for enabling proper establishment and operation of MBS and/or covered bond system in Georgia. Furthermore, the discussion and analysis provided in this Report is limited to the MBS and covered bonds only and does not cover any other form of structured finance transactions. Term “securitization” whenever used in this Report and unless context otherwise requires shall refer to MBS. Although it does not fit int\o the securitization mechanism, the covered bond mechanisms, are also analyzed in parallel. Information provided in the Report regarding the laws of the Grand Duchy of Luxembourg (Luxembourg) and practice has been elaborated and verified by international consultants. Femelat and Joseph. This Report is limited to the matters directly addressed herein and shall not be deemed applicable to the explanations, clarifications or matters other than expressly contemplated herein. In rendering the following Report, the Project Team is opining on the matters herein referred to only insofar as they are governed by the laws of Georgia. Any reference to the laws of Luxembourg has been verified by international consultants. The Project Team expresses no opinion on the future changes that may be made to the respective legislative acts of Georgia or those of Luxembourg. In this Report, Luxembourg legal concepts are expressed in English terms and not in their original French terms. The concepts concerned may not be identical to the concepts described by the same English terms as they exist under the laws of other jurisdictions. Without prejudice to conclusions and assessments outlined in this Report, the Project Team would like to limit its statements by the considerations that the legal system of Georgia is relatively new and is undergoing rapid development. Besides ambiguity and lack of clarity of legislative norms, there is little official interpretation available, and there has been insufficient time for the laws to be thoroughly tested in practice, either at the administrative or judicial level. Accordingly, the assessments and conclusions reflect the Project Team’s best understanding of the laws currently in effect based on the legislation in force, on available official interpretation and on unofficial discussions of the issues with the relevant authorities and private sector. As regards to Luxembourg legal concepts, all explanations, description and interpretation are exclusively based upon, governed by and shall be construed in accordance with Luxembourg law effective on the date of this Report. Owing to the lack of available official interpretations and the lack of experience of the authorities and courts in interpreting the laws in Georgia, BLC can provide no assurance that the authorities, courts or tribunals in Georgia will take a position consistent with conclusions and assessments contained in this Report. 5 2. SECURITIZATION 2.1. SECURITIZATION IN A NUTSHELL In its most generic terms, securitization refers to financial structure of pooling assets funded by the issuance of securities. In general, a pool of cash-generating financial assets are transferred from the initial creator/owner of the assets (i.e. the Originator, as defined below) to a Special Purpose Vehicle (SPV) created for this occasion. The acquisition of such assets are financed by the SPV from the funds generated from issuance of securities. Principal and interest on such securities are payable from and backed by the proceeds from such assets. Acquisition of the portfolio of assets is usually made by a true sale (cession parfaite) but the SPV may also acquire an exposure to the underlying assets/risks using derivatives instruments
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