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The International Comparative Legal Guide to: Securitisation 2019 The International Comparative Legal Guide to: Securitisation

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The International Comparative Legal Guide to: Securitisation 2019 Beijing Houston Riyadh* Boston London San Diego Brussels Los Angeles San Francisco Century City Madrid Seoul Chicago Milan Shanghai Dubai Moscow Silicon Valley Düsseldorf Munich Singapore Frankfurt New York Tokyo Hamburg Orange County Washington, D.C. Hong Kong Paris

* In cooperation with the Law Office of Salman M. Al-Sudairi

Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in France, Hong Kong, Italy, Singapore, and the United Kingdom and as an affiliated partnership conducting the practice in Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. Latham & Watkins works in cooperation with the Law Office of Salman M. Al-Sudairi in the Kingdom of Saudi Arabia. © Copyright 2019 Latham & Watkins. All Rights Reserved.

ICLG to Securitisation 2019_cover_FA_Spine 14.5mm_red.indd 1 07/05/2019 14:02:07 PREFACE

On behalf of Latham & Watkins, I would like to thank Global Legal Group for their efforts in publishing the 12th edition of The International Comparative Legal Guide to: Securitisation. Maintaining an accurate and up-to-date guide regarding relevant practices and legislation in a variety of jurisdictions is critical, and the 2019 edition of this Guide accomplishes that objective by providing global businesses, in-house counsel, and international legal practitioners with ready access to important information regarding the legislative frameworks for securitisation in 26 individual jurisdictions. The invitation to participate in this publication was well received by the world’s leading law firms, thereby validating the continued growth and in securitisation around the world. We thank the authors for so generously sharing their knowledge and expertise, and for making this publication so valuable a contribution to our profession. The Guide’s first 11 editions established it as one of the most comprehensive guides in the practice of securitisation. On behalf of Latham & Watkins, I am delighted to serve as the Guide’s contributing editor and hope that you find this edition both useful and enlightening.

Sanjev Warna-kula-suriya Latham & Watkins LLP chapter 3 unlocking Value in Private equity transactions Sanjev warna-kula-suriya

latham & watkins llP christopher Sullivan

Introduction ■ refinancing all or any of that ; and ■ funding as part of an exit from an acquisition. Securitisation markets have been off to a cautious but steady start in Due to its structural integrity, securitisation customarily incurs 2019, despite lingering uncertainty over transparency requirements lower funding costs than leveraged or high-yield bonds. under the new EU Securitisation , retention in Japan, Securitisations generally result in highly liquid assets (for example, and political headwinds such as Brexit and the end of net asset customer payables that turn into cash within a few months) being purchases by the European . By the end of March ring-fenced from the other of the target group operating 2019, over €12 billion of new issuance priced in Europe, across a companies. Typically, the more homogenous and predictable the variety of asset classes. A number of transactions are in the pipeline, cash flows from the receivables, and the more impenetrable the even in the midst of regulatory uncertainty. One of the asset classes ring-fencing, the lower the cost of the financing. that has attracted increased attention in recent times is private Securitisation financing can help lower the average cost of debt in equity. an acquisition, therefore it permits private equity sponsors to bid We discuss below how securitisation can be a valuable tool as a more for target groups and can help private equity sponsors increase means of: returns on equity – potentially both. ■ financing or refinancing all or part of acquisitions of While securitisations can play an important role in each stage of companies by private equity houses; and financing, the complexity of structuring and documenting ■ realising value in, or providing leveraged exposure to, private securitisation transactions means that these transactions are more equity and illiquid assets. likely to be used at the permanent financing stage or thereafter, and not at the bridge financing phase when speed is essential. That being said, Latham lawyers have completed so-called “bridge” Acquisition Financing securitisation financings that later transformed into permanent

securitisation financings once certain longer-term conditions were Private equity backed acquisitions customarily involve an equity satisfied (and at which time the advance rates in the securitisations component and a debt component. Typically, the “true” equity increased and funding costs decreased). component of an acquisition will be provided by one or more Raising financing via the securitisation of trade receivables limited partnerships using funds raised and managed by private alongside leveraged loans and high-yield bonds in private equity equity sponsors for that purpose. In some cases, these limited acquisition transactions is now very widely used. Typically, the partnerships will incur debt financing against either the limited package of operating covenants for such securitisation transactions partners’ commitments, the limited partnership’s will be lighter than the covenants for leveraged loans and even high- investments, or both, using securitisation structures and techniques. yield bonds, and such transactions may or may not have financial In that manner, private equity sponsors can leverage their equity covenants given their focus on ring-fenced -term receivables. funding even before it is invested in acquisitions. It has, for example, become typical for an acquisition to be The debt component of a private equity acquisition will typically be completed using leveraged loans and/or high-yield bonds and then, provided in the form of leveraged loans (whether senior or at a later date, to use the proceeds of a trade receivables securitisation subordinated, first, or second lien), high-yield bonds, or some to fund a shareholder . combination. Of course, funding that acts like equity for purposes Securitisation financing can also be raised via so-called “whole- of the senior debt financing can also be provided in the form of debt business” securitisations, in which a special purpose vehicle is incurred at one or more parent companies and then downstreamed to established to lend, to the target group, funds raised via rated debt the acquisition vehicle, creating so-called structural subordination. securities secured over the assets of the target group. Financing will be incurred at various stages in an acquisition, including: The cash flows of the target group as a whole are applied to repay ■ initial bridge financing; the loans to the issuer and to repay the rated securities to investors. Operating and financial covenants for a whole-business ■ more permanent take-out financing; securitisation tend to be largely similar to those for leveraged loans. ■ incremental financing, which permits private equity sponsors Whole-business securitisations generally require target groups with to extract some value after a period of initial success with an stable cash flows and strong positions (including high acquisition; iclg to: SecuritiSation 2019 www.iclg.com 11 © Published and reproduced with kind permission by Global Legal Group Ltd, London latham & watkins llP unlocking Value in Private equity transactions

barriers to entry). Liquidity supporting the rated securities will be special purpose vehicles established to acquire such equity . essential, and there may be some sort of These vehicles, sometimes known as collateralised fund obligations depending on the target group involved. This enhanced structure or CFOs, acquire such equity interests with funds raised in the will likely enable the target group to achieve higher levels of capital markets (whether or not publicly rated) or through bank borrowing and longer maturities than what is available in the financing. leveraged or high-yield markets. The benefits such vehicles offer to private equity sponsors are Similarly, securitisation financing can be raised via so-called manifold, including the benefits described above (e.g., earning “Opco-Propco” structures, pursuant to which a target group is split management fees). For example, whilst the primary route to into a -owning part and an operating part. The property- realising value in investments will remain an M&A or capital owning part raises funds via rated debt securities secured over the markets transaction in relation to a single portfolio company, . With the proceeds of these securities, the property- sponsors may be able to use such vehicles to monetise all or part of owning companies then acquire the properties and them to the a portfolio investment earlier than the M&A or capital markets operating part of the group. Rent on the is then applied to might otherwise allow. If pricing for an IPO is not attractive, repay the securities to investors. Operating and financial covenants securitisation can be a beneficial (even if temporary) way to raise tend to be largely similar to those for the leveraged loans. Opco- funds at competitive pricing from investors who want a leveraged Propco securitisations generally require target groups to have stable exposure to the investment. cash flows and strong market positions (including high barriers to Such vehicles might permit a sponsor to dispose of part of a entry), as well as properties that can be sold should cash flows be portfolio investment without losing control over the remainder. insufficient to service the securities. Alternatively, such vehicles might permit a sponsor to dispose of Finally, debt financing for private equity acquisitions is often raised control of such a portfolio investment (and, depending on the facts, by securitising the leveraged loans that lenders in the acquisitions achieving off-balance sheet treatment of the target group) while originally provided. In fact, collateralised loan obligations (CLOs) retaining a minority investment and thus participating in future are now one of the biggest buyers of leveraged loans. With profits. Finally, a sponsor might be able to negotiate a right to increasing frequency, leveraged loans are being acquired by repurchase assets from the vehicle, and thus enhance the sponsor’s specialist funds established by private equity sponsors for the flexibility and the potential profitability of an alternative exit in purpose of acquiring and securitising leveraged loans and acquiring future. equity in CLO transactions. In order for such vehicles to appeal to and successfully perform for A traditional CLO transaction begins with a fund manager investors, however, they will need to apply a variety of establishing a warehouse facility, usually with an arranger, pursuant securitisation techniques. The cash flows from private equity to which leveraged loans are acquired from the investments are more unpredictable than from debt investments for (often, immediately after the loans have been made at the time of the several reasons, and their value is more volatile. The portfolio acquisition). Once a sufficient volume of loans has been acquired, should have an expected realisation profile that, to the greatest the arranger helps a special purpose vehicle to issue rated securities extent possible, smooths out the cash flows to be received by the to investors secured by the loan portfolio. The proceeds of the vehicle. Even then, a liquidity facility to pay interest in a timely securities are used to repay the warehouse financing and, often, to manner on the most senior of debt securities, as well as acquire more loans during a subsequent brief ramp-up period. The perhaps a funding reserve or other credit or liquidity enhancement, manager will then reinvest the proceeds of loan repayments and loan may well be needed. Over-collateralisation requirements for CFOs sales over a several-year reinvestment period, and thereafter the are greater than for normal CLOs. CLO will be repaid as the loans are repaid. The structure customarily involves the transfer of limited Specialist private equity sponsor vehicles are a more recent partnership (LP) interests by the private equity sponsor to a special phenomenon. Originally set up to hold retention tranches in CLO purpose vehicle. In most cases, the general partner of the LP will be transactions in order to meet the requirements of the EU (and, later, required to consent to such transfer, and to consent to the subsequent the U.S.) risk retention rules, these vehicles gradually became long- creation of over the LP interests in favour of the security term owners of leveraged loans and other non-securitised trustee for the securitisation. Additional points for due diligence are investments, in part due to the EU requirement that “originators” the provisions for “clawback” of distributions made to limited (one type of entity permitted under EU rules to hold 5% retention partners and indemnities given by LPs in the partnership agreement. interests) not be “solely” in the business of securitising assets. A These features, which do not exist in normal CLOs, are factored into number of private equity sponsors have established such vehicles the rating analysis for CFOs. The structure will include over- that not only provide an additional source of financing for their own collateralisation and interest cover tests similar to those used in acquisitions without using their own balance sheet or limited CLOs and, sometimes, additional leverage ratios that need to be partnership funding, but can also earn several layers of management satisfied to permit distributions to the equity holder. fees and even access the (leveraged) excess spreads that the underlying assets generate by holding some or all of the equity in the specialist vehicle. A New Regulatory Landscape

The EU Securitisation Regulation defines “securitisation” broadly Realising Value and refers to a transaction or scheme whereby the associated with an exposure or a pool of exposures is tranched and A private equity sponsor can use securitisation to realise the value of has certain characteristics, including that: (a) payments in the its investments in several ways. For example, the sponsor can, when transaction or scheme are dependent upon the performance of the selling a target group, encourage bidders to include one or more of exposure or of the pool of exposures; and (b) the subordination of the forms of securitisation financing described above to maximise tranches determines the distribution of losses during the ongoing the sale price. In addition, private equity sponsors can securitise life of the transaction or scheme. their investments in target groups by selling those investments to

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While there is typically a transfer of risk in a whole-business templates. The extent to which wider disclosure and transparency securitisation, the risk is based on the value of a group of operating requirements apply to originators and sponsors established outside companies, reflected by the residual cash flows of the business. the EU remains uncertain, even where the only EU nexus is Whole-business securitisations could be structured in such a way as European investors. to conclude that the transfer of operational equity type risk falls out At the same time, CFO structures may avoid some costs normally of scope of the EU Securitisation Regulation’s risk retention, due associated with securitisations. For example, hedging for FX diligence, and transparency requirements. exposure may be avoided because of the significant equity cushion Market participants (and arguably regulators) have historically used for over-collateralisation. CFOs also should be structured to accepted this approach. However, such an equity-focused approach fall outside of the new EU Securitisation Regulation risk retention, raises an equally important question – does the investment credit granting and disclosure requirements, as they are more akin to constitute an alternative (AIF) under the EU a leveraged acquisition. The risk being tranched in relation to Fund Managers Directive (AIFMD), or private equity funds that invest in leveraged buyouts is more equity equivalent in other jurisdictions? For example, while CFO in nature. The performance risk being taken by investors is structures may look like CLOs, the notes are backed by funds rather effectively equity price risk and dividend risk on equity, rather than than loan obligations. Falling within the AIFMD’s scope comes credit risk. This risk can be contrasted with classic securitisations with its own host of disclosure, authorisation, and conduct of such as residential securitisations and CLOs, in business requirements (among others). In any event, the analysis which case the risk shared by the different classes of notes would be will be fact-specific and individual transactions should be structured the credit risk in relation to those loans. carefully to ensure the best result, whether by way of a In light of these developments, well-established private equity- securitisation, CFO, fund, or other structure. related transaction structures may carry added appeal. Historically, Under the new EU Securitisation Regulation, originators, sponsors such structures fell outside of EU risk retention and reporting and issuers must comply with a direct obligation to make significant obligations because they are structured to extract the residual cash amounts of information and documentation relating to flows of an operating group of companies, rather than to repackage securitisations available to regulators, investors, and, upon request, the credit risk of debt obligations. potential investors. Such information includes underlying documentation, monthly or quarterly investor reports, data on the credit quality, cash flows and performance of the underlying assets, Conclusion any material non-public information that the originator, sponsor, or issuer must disclose under market abuse legislation and any other Securitisation provides multiple tools for private equity sponsors to “significant events” such as changes to the transaction’s structure, achieve higher bid prices, higher levels of acquisition financing, risk profile, or documentation. lower costs of funding, earlier monetisation of investments, and higher returns to investors. In light of recent developments, EU-regulated institutional investors already required much of this securitisation transactions can be a challenge to structure and information as part of their own due diligence requirements under complete relative to other forms of financing. However, they the previous rules. However, the new direct disclosure requirements potentially offer a unique set of benefits and therefore are worth come with administrative sanctions for non-compliance, even considering for private equity assets. though the Commission has not yet finalised the reporting

iclg to: SecuritiSation 2019 www.iclg.com 13 © Published and reproduced with kind permission by Global Legal Group Ltd, London latham & watkins llP unlocking Value in Private equity transactions

Sanjev Warna-kula-suriya Christopher Sullivan Latham & Watkins LLP Latham & Watkins LLP 99 Bishopsgate 99 Bishopsgate London EC2M 3XF London EC2M 3XF United Kingdom United Kingdom

Tel: +44 20 7710 3034 Tel: +44 20 7710 4524 Email: [email protected] Email: [email protected] URL: www.lw.com URL: www.lw.com

Sanjev Warna-kula-suriya is a partner in the London office of Latham Christopher Sullivan is the Knowledge Management Lawyer for the & Watkins and a member of the Finance Practice. He is also Co-Chair and Derivatives Practices in the London office of of the Global Structured Finance Practice. Mr. Warna-kula-suriya Latham & Watkins. Prior to joining Latham & Watkins, Mr. Sullivan advises private equity sponsors, funds, commercial and practised as a transactional lawyer at another international law firm investment banks, and corporates on a broad range of innovative and was seconded to the divisions of two large capital-raising, investment, and realisation transactions. international banks in London. Mr. Sullivan has extensive experience in structured finance and transactions, acting for Mr. Warna-kula-suriya advises clients across a wide range of asset underwriters, originators, investors, and service providers across a classes and structures, including public and private debt, equity-linked variety of transaction structures and asset classes, including whole and hybrid capital markets issues, securitisations, CMBS, cash and business securitisations, RMBS, CMBS, auto ABS, CLOs, covered synthetic CLOs, OTC and exchange-traded derivatives, and cross- bonds and ABCP conduits. border structured finance. He also has significant expertise in the sale and purchase of financial asset portfolios, distressed investments and restructurings, and the establishment of alternative lending platforms and direct lending. Mr. Warna-kula-suriya is a member of the Financial Markets Law Committee, a member of the Editorial Board of the Butterworths Journal of International Banking and and a Visiting Fellow of the Faculty of Laws, King’s College, University of London.

Latham & Watkins operates worldwide as a limited liability partnership organised under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in France, Italy, Singapore, and the United Kingdom and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in South Korea as a Foreign Legal Consultant Office. Latham & Watkins works in cooperation with the Law Office of Salman M. Al-Sudairi in the Kingdom of Saudi Arabia. © Copyright 2019 Latham & Watkins. All Rights Reserved. In connection with this document, you agree not to with Latham & Watkins any confidential information regarding this potential engagement unless and until an attorney/client relationship is established and agreed-upon in writing.

14 www.iclg.com iclg to: SecuritiSation 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London chapter 32 uSa lawrence Safran

latham & watkins llP Kevin t. Fingeret

Note 1.2 Consumer Protections. Do your jurisdiction’s laws: (a) To the extent specified therein, the answers to certain questions limit rates of interest on consumer credit, loans or generally describe the rules provided by the Uniform Commercial other kinds of receivables; (b) provide a statutory Code (“UCC”), a model statute enacted with some variations in right to interest on late payments; (c) permit each state, and the answers to certain other questions generally consumers to cancel receivables for a specified period of time; or (d) provide other noteworthy rights describe the rules provided by the U.S. Code. The U.S. to consumers with respect to receivables owing by is a signatory to, but has not yet ratified, the United Nations them? Convention on the Assignment of Receivables in International Trade (the “UNCITRAL Convention”). (a) Each state has different limitations on the permissible rate of It is anticipated that the U.S. may ratify the UNCITRAL Convention interest; however, U.S. federal law permits banks and some in the near future. Upon the effectiveness thereof, the UNCITRAL other depository institutions to use a uniform nationwide rate, Convention would override the UCC and change many of the determined by the law of the state where the principal office answers set forth herein. of the institution is located. (b) Not to our knowledge. The U.S. contains multiple jurisdictions with varying statutory laws, and judicial precedent, in general, where the laws of a (c) Certain jurisdictions provide consumers with a period of time particular U.S. jurisdiction are relevant, the following answers to cancel certain types of transactions after entering into a contract; in some cases, these rights only apply when the assume that the law of the state of New York applies. contract was entered into in a specified context (e.g., when a contract is entered into with a merchant other than at a 1 Receivables Contracts merchant’s regular place of business). (d) Consumers benefit from a number of protections. For example, restrictions on assignment of consumer loans are 1.1 Formalities. In order to create an enforceable debt generally enforceable. In addition, personally identifiable obligation of the obligor to the seller: (a) is it consumer information cannot be disclosed or used other than necessary that the sales of goods or services are in specified manners. evidenced by a formal receivables contract; (b) are Federal and state consumer protection laws and regulations regulate invoices alone sufficient; and (c) can a binding the relationships among members, credit card issuers and contract arise as a result of the behaviour of the parties? sellers of merchandise and services in transactions financed by the extension of credit under credit accounts. These laws and regulations include the Credit Card Accountability and Disclosure With respect to a contract for the sale for goods of $500 or more, Act, the Federal Truth-in-Lending Act and Fair Credit Billing Act, some writing is sufficient to indicate that a contract for sale has been and the provisions of the Federal Reserve Board’s Regulation Z made is required. A contract for services is generally required to be issued under each of them, the Equal Credit Opportunity Act and the in writing if, by its terms, it is not to be completed within one year. provisions of the Federal Reserve Board’s Regulation B issued However, with respect to contracts for sales of goods, a formal sales under it, the Fair Credit Reporting Act and the Fair contract is not required but rather a contract may be on the basis of Practices Act. These statutes and regulations require credit exchanged purchase orders, general terms, and invoices, or by a disclosures on credit card applications and solicitations, on an initial combination of writings which are themselves insufficient to disclosure statement required to be provided when a credit card establish a contract coupled with the conduct by both parties which account is first opened, and with each monthly billing statement. recognizes the existence of a contract. They also prohibit certain discriminatory practices in extending credit, impose certain limitations on the charges that may be imposed and regulate collection practices. In addition, these laws and regulations entitle card members to have payments and promptly applied on credit accounts and to require billing errors to be promptly resolved. The Credit Card Accountability and Disclosure Act and the provisions of the regulations that implemented it limit the ability of credit card issuers

380 www.iclg.com iclg to: SecuritiSation 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London the has issue, that to respect with which, state the of law local the by determined are contract in issue an to respect with parties the of on activedutyinthefuture. placed be military,may the more in and duty active on placed been have balances outstanding with holders account stay. some Currently, a the such of if denial by stayed prejudiced be be would may rights individual’s involved is an service which military in in proceeding individual court or action any discretion, judicial to subject addition, In percent. 6 at duty active to call the before duty in the military to cap the and fees on incurred active on individuals allows Act Relief Civil Servicemembers The Act willaffect consumerreceivables. Dodd-Frank the of implantation how clear yet not is It Protection. provides for the establishment of the Bureau of Consumer Financial and industry financial the to relating regulations numerous contains and 2010 in law federal became Act Dodd-Frank the addition, In card. credit the of use unauthorized from resulted that account card credit member’s the to charges card to respect a with $50 cases exceed not certain may liability in that provide also laws These or controlsiscontrolledbythecardissuerdirectlyindirectly. the seller of the goods or services is the same party as the card issuer, jurisdictional certain requirements. meet These jurisdictional requirements do not apply and where card credit the honouring person faith attempt These to obtain satisfactory resolution of the dispute from the met. are conditions good a make member card the that requirements include conditions certain if services, or merchandise arising out of transactions in which a credit card is used to purchase issuer is subject to all claims, other than tort claims, and all defences card Truth-in-LendingFederal credit the a under Act, example, For against hisorherobligationtopayamountsowingonaccount. in set-off of and, way by seller, or laws lender the against claims protection cases, certain consumer these of certain of violations and with different interest cycle, rates. A card balances billing member may outstanding be entitled to to assert each allocated be must for payments balances, how regulate calculated card is credit interest existing how on regulate rates interest the increase to latham &watkins llP iclg to: SecuritiSation 2019 Under the Restatement 2 prosecuted. is litigation the which in state the on depending differ the court is located, and thus answers to choice of law questions may which in state the of rules law of choice the apply generally Courts NoLawSpecified.Ifthesellerandobligordonot 2.1 to rules such extend states few a municipalities andotherlocalgovernmentalentities. and thereof or agencies or departments state the of obligations to apply that laws similar have states of minority A set-off. exercise to government federal the of right the and receivables of assignment an to apply will Act Federal Claims the of case Assignment a such In instrumentalities. or agencies its of one or government U.S. the is debtor the Yes,if GovernmentReceivables.Wherethereceivables 1.3 ChoiceofLaw–ReceivablesContracts 2 will determinethegoverninglawofcontract? what arethemainprinciplesinyourjurisdictionthat specify achoiceoflawintheirreceivablescontract, collection ofthosereceivables? requirements andlawsthatapplytothesaleor or agovernmentagency, aretheredifferent contract hasbeenenteredintowiththegovernment nd of Conflicts of Law, the rights and duties of theparties. business of place and incorporation of nationality,place of residence, place the domicile, the (e) and contract; the of matter the (b) subject the of (d) location performance; contracting; of place the of (c) contract; the place of negotiation the (a) include: an to applicable issue law the determining in account into taken be to the absence of an effective choice of law by the parties, the contacts In parties. the and transaction the to relationship significant most (which may be another U.S. state or a foreign jurisdiction) when (1) contract a to parties the by chosen jurisdiction a of law the apply to bec o a esnbe eainhp O cus, n h facts state lawcannotbemade. the on course, Of specified above, there is no reason that an effective choice of a U.S. relationship. reasonable a of absence the not in state U.S. other may the in litigated if state law of choice U.S. this respect another however, thresholds; dollar certain satisfies contract the if contacts any of absence the in even contract few A New as such states, parties. York,a govern to law their of choice the permit or transaction the with relationship reasonable a bear not does effectit given if be not may contract a govern to U.S. the governing law. The choice of the law of a particular state of the as law) federal than (rather state U.S. particular a of law the select to needs contract the and country multi-jurisdictional a is U.S. The Under the Restatement 2 Restatement the Under from the law that would be applied in the absence of the chosen law. differs law chosen the and law chosen the by addressed been previously has applied be to the is law (iv) chosen the and which for fraud; law of by matter procured or induced not was law chosen the (iii) jurisdiction); foreign a or state U.S. another be may (which an agreement of underlying the to absence parties the by the law of choice in effective apply would law whose jurisdiction other such of or state the of policy fundamental or public a or to, offensive contrary is nor contravene, or violate not does law chosen the (ii) dispute; in matter the with contacts significant most the has law chosen the thereby,and contemplated transaction the or agreement and reasonable a underlying has the with contacts law sufficient and relationship chosen substantial the (i) if: effect given be will law non-U.S. of choice a such Typically law. non-U.S. of choice a to effect give to whether determining in considerations different circumstances described above. However, each state has somewhat In general, the choice of law of the parties will be given effect in the . BaseCase.Ifthesellerand obligor areboth 2.2 . FreedomtoChooseForeignLawofNon-Resident 2.3 would notgiveeffecttotheirchoiceoflaw? receivables contract? there anyreasonwhyacourtinyourjurisdiction jurisdiction togovernthereceivablescontract,is seller andtheobligorchooselawofyour receivables takeplaceinyourjurisdiction,andthe giving risetothereceivablesandpaymentof resident inyourjurisdiction,andthetransactions between thesellerandobligorunder apply incommercialrelationshipssuchasthat mandatory principlesoflaw)thatwouldtypically recognition offoreignlaw(suchaspublicpolicyor choice offoreignlaw? Are thereanylimitationstothe will acourtinyourjurisdictiongiveeffecttothe the obligor/sellertogoverntheirreceivablescontract, the sellerandobligorchooseforeignlawof resident inyourjurisdictionbutthesellerisnot,and jurisdiction buttheobligorisnot,orif Seller orObligor. Ifthesellerisresidentinyour nd of Conflicts of Law,of Conflicts decline of may court a www.iclg.com uSa 381 uSa 382 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com response toquestion2.3above. the in referenced considerations same the to subject yes, Generally Example2: Assuming thatthefactsaresameas 3.3 response toquestion2.3above. the in referenced considerations same the to subject yes, Generally Example1:If(a)thesellerandobligorarelocated 3.2 instead, issubjecttomandatorychoiceoflawrules. but, parties the by selected be cannot perfection governing law the and Code Commercial Uniform the under perfected be to need will receivables the of sale the 3.4, question to response in below noted However,as receivables. the of sale the governing state the of law the as same the be to needs receivables the to rise giving contract the governing state the of law the that reason no Generally,is there BaseCase.Doesyourjurisdiction’s lawgenerally 3.1 determinations onacase-by-casebasis. exception policy a make fundamental own its reach will court each and state U.S. each since apply would to the possible when not is of It statement law.definitive chosen the of state the a than has state such (2) issue particular a of determination the and in interest greater materially apply, otherwise would which of law the state, the of policies fundamental the protect to necessary is it latham &watkins llP ChoiceofLaw–ReceivablesPurchase 3 be takenintoaccount? obligor’s countryorthepurchaser’s country(orboth) seller), ormusttheforeignlawrequirementsof (such ascreditorsorinsolvencyadministratorsofthe effective againstthesellerandotherthirdparties in yourjurisdictionrecognisethatsaleasbeing both arelocatedoutsideyourjurisdiction,willacourt Example 1,buteithertheobligororpurchaser seller andtheobligor)? (such ascreditorsorinsolvencyadministratorsofthe against theseller, theobligorandotherthirdparties jurisdiction recognisethatsaleasbeingeffective requirements ofyourjurisdiction,willacourtin agreement, and(e)thesalecomplieswith your jurisdictiontogovernthereceivablespurchase (d) thesellerandpurchaserchooselawof receivable toapurchaserlocatedinthirdcountry, the lawofyourjurisdiction,(c)sellersells in yourjurisdiction,(b)thereceivableisgovernedby your jurisdiction’s lawsorforeignlaws)? irrespective ofwhichlawgovernsthereceivables(i.e., themselves? Ifso,doesthatgeneralruleapply same lawasthegoverningreceivables require thesaleofreceivablestobegovernedby Agreement ess f fie qimn, eal uo ess ad ay retail many and leases, auto instalment salescontracts. retail equipment, office of leases include paper chattel of Examples interest. security possessory a the evidencing tangible paper” chattel paper is physically located original will govern perfection of “chattel the tangible of or note promissory the where jurisdiction the of law the receivable, possession or by note obtained promissory is perfection Where perfection byfiling)willbetheirstateofincorporation. governing their law the U.S., hence (and UCC the the of of purposes for state “location” any of laws the under organized are that companies liability limited and most some for are exceptions, there Although creditor. lien having judgment a for over condition priority a as non- property of personal notices on of liens filing possessory public of system a provides (d) located is and office; executive chief its whether the law of of the jurisdiction in which its chief location executive office the (c) country; foreign a of laws the under formed is general it whether or (b) partnership); partnership limited , (e.g. organization of is determined according to a number of factors, including: (a) the type location seller’s A receivables. in interest security possessory law of the seller’s “location” generally governs perfection of a non- perfection is obtained by the filing of UCC financing statements, the parties but rather is subject to mandatory choice of law rules. Where the by selected be not may perfection governing law the However, below. 4.3 question to this response the in detailed perfecting are interest security of methods The seller. the of trustee bankruptcy any and seller the of creditors other against enforceable be to order “security a as UCC in “perfected” be to need would interest security the such and interest” under classified is security for conditional receivables, transfer a as of or sale outright transfer the an as characterized any which is it However, whether to pursuant sold. transaction were the receivables to parties the between as occurred has sale “true” a whether of determination law foreign 2.3 above, a court in a U.S. jurisdiction will generally recognize the question to response the in discussed considerations the to Subject Generally, yes. . Example3:If(a)theseller islocatedinyour 3.4 . Example4:If(a)theobligorislocatedinyour 3.5 own salerequirements? requirements? without theneedtocomplywithyourjurisdiction’s creditors orinsolvencyadministratorsoftheseller) against thesellerandotherthirdparties(suchas your jurisdictionrecognisethatsaleasbeingeffective requirements oftheobligor’s country, willacourtin agreement, and(e)thesalecomplieswith country togovernthereceivablespurchase and thepurchaserchooselawofobligor’s to apurchaserlocatedinthirdcountry, (d)theseller the obligor’s country, (c)thesellersellsreceivable country, (b)thereceivableisgovernedbylawof jurisdiction buttheobligorislocatedinanother comply withyourjurisdiction’s ownsale administrators oftheobligor)without theneedto third parties(suchascreditors orinsolvency sale asbeingeffectiveagainst the obligorandother country, willacourtinyourjurisdictionrecognisethat complies withtherequirementsofseller’s receivables purchaseagreement,and(d)thesale choose thelawofseller’s country togovernthe the seller’s country, (c)thesellerand purchaser country, (b)thereceivableisgovernedbylawof jurisdiction butthesellerislocatedinanother iclg to: SecuritiSation 2019 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London ecie blw rgrls o wehr h tascin is transaction the required tomakethetransferenforceableagainstthirdparties. whether of be will perfection lending, secured a or sale true a as characterized regardless below, described is documents will terminology often use a combination of terms as Sale a precaution. As governing although transactions, 4.9. these to refer to used customarily question in below discussed factors of number a on depend will interest security a contract. as re-characterized enforceable is and or sale sale” “true a as binding respected be will the transfer the whether However, otherwise and receivable an accounts by the evidenced sell to power the has or owns seller the value, gives purchaser the if enforceable parties the between and valid is transfer The foregoing. the of proceeds and title right, seller’s the of interest in, to and all under the receivables and the of related assets, and all sales generally outright are as transactions structured in receivables of Sales to question3.4above. The answer to this question will generally be the same as the answer Example5:If(a)thesellerislocatedinyour 3.6 latham &watkins llP iclg to: SecuritiSation 2019 negotiable “chattel intangibles”, or “payment notes constitute that promissory or by instrument, evidenced Receivables PerfectionforPromissoryNotes, etc.Whatadditional 4.3 – “located” is determined asprovidedintheanswertoquestion3.4. seller the which in jurisdiction the of office filing being sold. The financing statement must be filed in the appropriate statement that identifies the seller, the purchaser and the receivables to answer the financing by UCC a of filing the by covered perfected is sale the 4.3, not question receivables of types of sales For PerfectionGenerally. Whatformalitiesarerequired 4.2 Sale MethodsGenerally. Inyourjurisdictionwhatare 4.1 AssetSales 4 third partycreditororinsolvencyadministratorofany seller, anyobligorlocatedinyourjurisdictionand (such ascreditorsorinsolvencyadministratorsofthe effective againstthesellerandotherthirdparties in yourjurisdictionrecognisethatsaleasbeing requirements ofthepurchaser’s country, willacourt agreement, and(e)thesalecomplieswith country togovernthereceivablespurchase the purchaserchooselawofpurchaser’s purchaser locatedinathirdcountry, (d)thesellerand jurisdiction, (c)thesellersellsreceivabletoa the receivableisgovernedbylawofyour jurisdiction (irrespectiveoftheobligor’s location),(b) else? such obligor)? consumer loansormarketable debt securities? to salesofpromissorynotes,mortgage loans, or differentrequirementsforsale andperfectionapply same receivablesfromtheseller? subsequent goodfaithpurchasersforvalueofthe the saleofreceivablestobeperfectedagainstany there anyadditionalorotherformalitiesrequiredfor generally forperfectingasaleofreceivables? Are is itcalledasale,transfer, assignmentorsomething to apurchaser?Whatisthecustomaryterminology– the customarymethodsforasellertosellreceivables or (ii) having a securities intermediary that maintains the securities the maintains that intermediary securities a having (ii) or account, securities securities own purchaser’s the of to credited and transferred case securities the the having in (i) either account, (c) securities a in and maintained seller, the of consent further regarding the without sold instructions being securities purchaser’sthe of redemption the or disposition follow will it that agree of the issuer into the name of the purchaser, or (ii) having the issuer records and books the on transferred securities the having (i) either securities, uncertificated of case the in (b) seller, the assignment by executed written a with together securities debt such of marketable taking possession securities, certificated over of case the “control” in (a) involve achieving securities to steps The securities. necessary the in interest property a other claiming or person interest other security any by attack from free be will ownership interest purchaser’s protected A “protected a securities. is the of claim, purchaser” adverse any of notice without the of securities, “control” obtains and value gives that purchaser A UCC. the of 9 Article under transaction” “secured a as than rather UCC, the by of governed 8 are Article securities debt marketable of Sales Marketable DebtSecurities have priorityoverapurchaserthatperfectsbyfiling. will party, another of rights the violates so doing that knowledge good in paper faith, in the ordinary chattel course of the purchaser’s the business, and without of paper) a chattel electronic interests, of case the security conflicting in of control (or possession takes and case value new gives that purchaser the In paper. chattel the of control a taking purchaser the filing by or statement by financing UCC either perfected be may paper chattel “electronic” of purchaser (or its agent) taking possession of the the chattel by paper. or statement Afinancing sale UCC a filing by either perfected be ( paper chattel interest. security traditional more a or sale a as A“tangible” of sale characterized whether of regardless perfected be must paper chattel of sale a intangibles, payment and notes promissory to contrast In Chattel Paper statement. of types other in interests general intangibles can be perfected only by filing a UCC financing security of perfection and UCC, the sale. A “payment intangible” is a type of “general intangible” under re-characterization of the sale as a rather than a true to customary of risk the is against protect to statement financing a it filing by perfect Again, perfected. automatically also are and intangibles” “payment as UCC the under classified are instruments Mortgage loans that are not evidenced by promissory notes or other Payment Intangibles the in rights by promissorynotes. superior obtain evidenced are to loans mortgage most U.S., the In notes. promissory possession takes who party another for possible be may it notes promissory of possession take to fails purchaser the if addition, In UCC re-characterization. a a such of file or notes promissory financing statement to ensure that the the buyer is perfected in the event of possession take either and, sale true a than accordingly, rather to protect against this risk, interest it is customary for a security buyer to a as characterized re- was sale the that event the in applicable be not would perfection automatic However, sale. the perfect to taken be to needs action perfected, and no UCC financing statement needs to be filed or other commercial and residential mortgage loans are evidenced by promissory notes) is (most automatically notes” “promissory of sale A Promissory Notes perfection different rules. have all securities”, “marketable or paper”,

i.e. , evidence by traditional, hard copy writing) may writing) copy hard traditional, by evidence ,

www.iclg.com uSa 383 uSa 384 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com or obligationonthe obligor. ObligorNotificationorConsent. Musttheselleror 4.4 account. securities a in maintained securities to applicable be may that rules law of choice has Convention such and 2017 1, April on U.S. the in Rights Certain to Respect of Securities held with an Intermediary became effective in Applicable Law the on Convention the Hague account, securities a in maintained securities to respect With some in or, itself cases, anotherpersononbehalfofthesecuredparty. party secured the by obtained be may Control seller. the of consent further the without sold being securities the of redemption or disposition regarding instructions purchaser’s the follow will it that agree credited are securities the which to account latham &watkins llP receivable against the obligor and the between the purchaser and the seller the purchaser cannot enforce the effectiveas is sale the although intangible”, “payment a as UCC the prohibition is evidenced by a “” a or is such classified under containing receivable a if that provides UCC the However, of recoupment, claim, defence, termination or remedy, is ineffective. or which provides that a sale may give rise to a , breach, right and receivable account certain other types of receivables which prohibits or restricts non-consumer its sale, a in provision a UCC, the rule depends upon the type of receivables involved. Generally, under whether the language of the receivables contract changes the general of question the to purchaser.answer the The and seller the between as effective be to receivable the of respect in rights sellers’ the of sale a for order in law common U.S. under required not generally is consent obligor consent, such requires expressly contract the Unless notification the requirement istoavoidtheobligorbeingrequiredpaytwice. of purpose The the receivables. of those obligors of the assignment to notice give to receivables of purchaser the of ability the limit not will obligor or seller Generally,a rights areavailabletoprotectedpurchasersofdebtsecurities. subject conduct, to a few exceptions seller’s under consumer protection laws. the Similar from arising defences of clear and free takes and obligor the against directly enforce may course due are in holder receivables the alternatively, If, evidenced by a “negotiable instrument”, a purchaser who becomes a purchaser. the the of without contract consent receivables the to amendment any prevents performance, by earned fully been has receivable the where cases those in and, receivable) the to rise gave that transaction the from arising recoupment of right the retains always obligor an (although assignment the of notice receives obligor the after accrues that and of of set-off or defence that advantage the obligor might have had against the the seller has assignment preventing such obligor from the exercising against the purchaser a right of obligor underlying the order to be in relieved of its payment obligation. In addition, notifying purchaser the pay obligor the must (ii) and obligor; the against directly obligation payment the enforce purchaser the can (i) sold: only that is UCC the under purchaser.rule However,the general and the rights in respect of the receivable to be effective as between the seller sellers’the of sale a for order in required not is notification Obligor once the obligor receives notice that the receivable has been has receivable the that notice receives obligor the once rights andotherobligordefences? giving notice–suchascuttingoffobligorset-off required toperfectasale,arethereanybenefits against theobligors?Whetherornotnoticeis receivables inorderforthesaletobeaneffective purchaser obtaintheobligors’ consenttothesaleof and/or creditorsoftheseller?Mustselleror order forthesaletobeeffectiveagainstobligors purchaser notifyobligorsofthesalereceivablesin sale does not impose any duty cover future receivables as long as those receivables are identifiable. can and receivables of set specific a to the limited be not need obligor of an to Anotice twice. pay to commencement required being obligor the avoid to is the before insolvency proceeding. The consummated purpose of the notification requirement fully was assignment the as long so receivables, those of assignment the of the obligors the to limit notice give to receivables of purchaser the of not ability should insolvency obligor or seller a and later than noted above, there are advantages in giving the notice sooner rather as though, notice, a such of delivery the for limit time no Generally, is there thereof. equivalent electronic the or writing signed a other than that the notice must be an “authenticated record”, “authenticated an be must notice the that than other notice of delivery for specified form specific no is There obligor. the on obligations certain imposing of extent the to only required is As noted in the response to question 4.4 above, notice to the obligor eeal, uh etitos il o b efcie o rvn the prevent to effective be not will restrictions such Generally, depending onthetypeofreceivable. part in or whole in as either assignment on However,restriction such override characterized. nonetheless will UCC so the 4.4, question to answer the be in discussed to unlikely is formulation restriction on the assignment of the seller’s rights, whereas the third contractual a as viewed be to likely are formulations two first The . NoticeMechanics.Ifnotice istobedelivered 4.5 . Restrictionson Assignment; LiabilitytoObligor. Ifany 4.7 Restrictionson Assignment –GeneralInterpretation. 4.6 considerations? on anyotherbasis? the restrictiondoesnotrefertorights)? receivables? Are thereanyotherlimitationsor can itapplytoanyandall(includingfuture) Does thenoticeapplyonlytospecificreceivablesor have commencedagainsttheobligororseller? can noticebedeliveredafterinsolvencyproceedings can anoticeofsalebedeliveredafterthesale,and limit beyondwhichnoticeisineffective–forexample, take orhowitmustbedelivered?Isthereanytime any requirementsregardingtheformnoticemust obligors, whetheratthetimeofsaleorlater, arethere liable totheobligorforbreach of contractortort, purchaser, willeitherthesellerorpurchaserbe the sellerneverthelesssellsreceivables tothe restrictions onsaleorassignment ofreceivablesand commercial entities)?Ifyourjurisdictionrecognises exceptions tothisrule(e.g.,forcontractsbetween generally enforceableinyourjurisdiction? Are there the receivablescontract,aresuchrestrictions assignment ofreceivablesor“seller’s rights”under receivables contractexplicitlyprohibitsan of therestrictionsinquestion4.6arebinding,orif the [seller]withoutconsentof[obligor]”(i.e., this Agreement maynotbetransferredorassignedby restriction says“Theobligationsofthe[seller]under or obligations)?Istheresultsameif [obligor]” (i.e.,therestrictiondoesnotrefertorights assigned bythe[seller]withoutconsentof says “This Agreement maynotbetransferredor the purchaser?Isresultsameifrestriction prohibiting atransferofreceivablesbythesellerto without theconsentof[obligor]”beinterpretedas this Agreement maybetransferredorassigned that “Noneofthe[seller’s] rightsorobligationsunder Will arestrictioninreceivablescontracttotheeffect iclg to: SecuritiSation 2019 uSa i.e. , in , © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London collateral. clearly of description adequate of an certain be can receivables) than excluded description identified (other a receivables obligors, all referencing identified collateral specifically more or one by owing receivables than other sold been have receivables all If identification shouldberequired. further no sold, been have receivables all If receivable). accounts a UCC, the Under security interest can be created in a broad category of sold. assets (such as been have that receivables objectively identifying for means a provide nonetheless must it but sold, be to No, the sale document need not specifically identify each receivable Identification.Mustthesaledocumentspecifically 4.8 be not will interest security such unenforceable againsttheunderlyingobligor. cases some in 4.4, question to answer the in noted as though, interest, security the of granting latham &watkins llP iclg to: SecuritiSation 2019 as non- place, or limited took is seller the sale to recourse that a is loan, that a to opposed finding to element key a Generally, re-characterize thetransactionaccordingly. a of to power equitable substance their invoke may evidence”, economic courts financing”, “disguised the convincing had and transaction “clear the by that however, showing a Upon loans. secured of attributes certain bear also may transactions the though even characterization that disturb to unwilling been generally courts have characterization, that with consistently acted and sales, as transactions characterized have parties sophisticated commercially the whether determine loan. secured a Where or sale a resembles closely more transaction to order in sale, a of indicative attributes those against loan secured a of indicative transaction a of attributes intent as only one attribute of a transaction, and have balanced those seeking the “true nature” of a transaction, have regarded the parties’ analysing courts, Other parties. the of intent the to weight presumptive authority given judicial result, a have courts Several consistent. always not is sales true as transfers As law. common made (and not as a secured loan), in most states it is determined by judge- sale” “true a as recognized be will transfer receivables a Whether RecharacterisationRisk.Ifthepartiesdescribetheir 4.9 characteristics? Alternatively, ifthesellersells the receivablesbeingsoldhavetoshareobjective invoice number, invoicedate,paymentetc.)?Do specific informationisrequired(e.g.,obligorname, identify eachofthereceivablestobesold?Ifso,what sufficient identificationofreceivables? (f) anyotherterm? a righttotheresidualprofitswithinpurchaser;or receivables; (d)arightofrepurchase/redemption;(e) interest raterisk;(c)controlofcollections treatment asanoutrightsale:(a)creditrisk;(b) retain anyofthefollowingwithoutjeopardising Among otherthings,towhatextentmaytheseller transfer frombeingtreatedasanoutrightsale? characteristics ofthetransactionmightprevent security? Ifrecharacterisationriskexists,what characterised byacourtasloanwith(orwithout) there ariskthatthetransactioncouldbe statement ofintentautomaticallyberespectedoris treated asanoutrightsale,willthisdescriptionand sale andexplicitlystatetheirintentionthatitbe transaction intherelevantdocumentsasanoutright all identification ofreceivables?Finally, ifthesellersells its receivablestothepurchaser, isthissufficient one ormorespecificallyidentifiedobligors,isthis ofitsreceivables other than receivablesowingby all of opy ih h taiinl uiil eurmns o a re sale true a described above. for requirements judicial traditional the with comply bankruptcy court will respect such laws, a most securitization transactions seek to whether to as uncertainty of because Nevertheless, but including, law, of provision other any Notwithstanding (a) Delaware Code Ann. tit6,§2703A providesinpart: a example, For to statutes. such in defined pursuant as transaction securitization made if only but receivables just not and kind any of property of sale the to apply states seven other the in statutes the receivables, to limited are statutes Louisiana and Texas the While The application of this chapter to the sale of accounts, chattel (e) Texas UCCprovides: the of 9-109(e) Section example, For sale. a of re-characterization Nine states have enacted statutes of broad applicability that preclude be respectedinbankruptcy. would laws such if unclear is however,it sale”; “true as constitutes transaction the that intent stated parties the effectto give to purport that laws have states of number Asmall sale. true a as transaction a right of repurchase may adversely affect the characterization of the a loan than a sale. Related to that, while not necessarily dispositive, of indicative more being as benefits retained such view may courts asset, the from profits in participate to right the as such ownership, of benefits material retains seller purported the if side, flip the On transactions asloans. re-characterizing cases in cited often a are return provide of to rate contracted recourse and receivables the of uncollectibility the existent. Recourse to the seller can take several forms. Recourse for 3 n h eet f bnrpc, eevrhp r other or receivership bankruptcy, a of event the in (3) creditors its transaction, securitization the in transferor a (2) transferred, be to purported rights or property,assets any (1) documents relatingtoasecuritizationtransaction: effective July 1, 2001, to the extent set forth in the transaction 9-623 of the title, “Right to redeem collateral,” which became collateral,” as said section existed prior to July 1, 2001, and § not limited to, § 9-506 of this title, “Debtor’s right to redeem other any or term oftheparties’ agreement. surplus, any to entitled is debtor the whether party the to whether the passed secured party has any recourse against the debtor, has of regardless assets, those equitable, of purchaser the as characterized and legal title, that and transaction secured a not is and sale a is transaction the that conclusive be shall assets such of sale a as transaction a or parties’the of misrepresentation, characterization intentional fraud of absence the in purposes, all For system. filing but to protect purchasers of those assets by providing a notice indebtedness secure to transaction a as sale that characterize re- to not is notes promissory or intangibles, paper,payment rights orestate. assets, property,transferor’s the of part be to deemed be by Delaware law, such property, assets and rights shall not governed is issue the extent the to property, transferor’s insolvency proceeding with respect to the transferor or the any transferor whole orinpart,bythetransferor;and in the transferred, be to of purported rights or assets property property, as re-characterize or redeem disaffirm, repudiate, recover, reclaim, reacquire, law, shall have no rights, legal or Delaware equitable, whatsoever to by governed is issue the extent the to bankruptcy person, similar a or possession in property, debtor debtor, receiver, transferor’s trustee, the to the respect or with transferor proceeding insolvency any in or, the transferor; be deemed to no longer be the property, assets or rights of shall transaction securitization the in part, in or whole in www.iclg.com uSa 385 uSa 386 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com obligor owestheassignee. the amount the to limited are assignee the against claims obligor’s claims to respect with accruing effective prior to the obligor’s be receipt of a notice only of assignment. The will set-off to of right right the the to However, subject contract. the under take set-off of rights the and always recoupment will party secured the No, Set-Off;LiabilitytoObligor. Assuming thata 4.13 supporting paymentofsuchreceivable. credit of letter any or security related the automatic receivable, the securing in result will 4.3 and attachment and perfection of a security interest in a security interest 4.2 4.1, the questions in to described formalities answers the with accordance in receivables Generally, attachment and perfection of a security interest or sale of RelatedSecurity. Mustanyadditionalformalitiesbe 4.12 “executory an contract” whichmayberejectedbytheseller’s bankruptcytrustee. constitute could agreement the perform, to duties continuing have purchaser the and seller the both If uncertain. be could seller the of bankruptcy the after arising receivables of sales of effectiveness The agreement. sale the by specified sufficiently are question in receivables the as long as yes, insolvency, to Prior FutureReceivables.Canthesellercommitinan 4.11 bankruptcy. interest in any receivables that are generated after the seller files for however, the bankruptcy code will generally cut-off the purchaser’s Yes, a seller can agree to continuous sales of receivables in the U.S.; ContinuousSalesofReceivables.Canthe selleragree 4.10 latham &watkins llP following theseller’s insolvency? obligor fordamagescausedbysuchtermination? either thesellerorpurchaserbeliableto terminated duetonoticeorsomeotheraction,will waive set-offbuttheobligor’s set-offrightsare At anyothertime?Ifareceivablescontractdoesnot rights terminateuponitsreceiptofnoticeasale? amounts itowestotheseller, dotheobligor’s set-off whereby theobligorwaivesitsrighttoset-offagainst receivables contractdoesnotcontainaprovision security? provide thepurchaserbenefitsofsuchrelated transferred, whatmethodsarecustomarilyadoptedto If notallrelatedsecuritycanbeenforceably transferred concurrentlywiththesaleofreceivables? fulfilled inorderfortherelatedsecuritytobe insolvency? receivables thatarisepriorto enforceable? Isthereadistinctionbetweenfuture future receivablesbestructuredtovalidand flow” securitisation)?Ifso,howmustthesaleof the receivablespurchaseagreement(e.g.,“future purchaser thatcomeintoexistenceafterthedateof enforceable mannertosellreceivablesthe continue totransferreceivablesthepurchaser they arise)?Would suchanagreementsurviveand receivables (i.e.,salesofasandwhen in anenforceablemannertocontinuoussalesof versus aftertheseller’s bankruptcy applicable on re- profit based considerations. cases such limited in therefore typically cited is and often extraction loans are as seller transactions the characterizing by recourse of other or associated forms profits residual otherwise receive to right benefits of Retention the therewith. and obligors underlying the of risk credit the purchaser,including a by acquired receivables the of benefit and risk economic the assume to purchaser the for intend finding that a sale took place, as opposed to a loan, is that the parties on However, as noted in our response based to question 4.9, a key element to price purchase deferred a collections oftherelatedassets. receive to otherwise right or purchaser, a the having in interests equity or purchaser the purchaser,by issued notes of classes junior of form the in including the from distributions receive to right the include extraction profit and regulatory capital treatment which and may be applied. considerations Typical forms timing of and agency rating the U.S. with connection used, being enhancement credit of type the securitized, and/or sold in used extraction profit typically vary based on the nature of the assets being of type The usin o preto. eeal, f h rlvn security relevant the if Generally, perfection. of questions to applicable being differentjurisdiction a of laws the in result may same the with seller and purchaser the of locations different although 4.3, and 4.2 comply to required seller,questions the to did answers as the formalities in provided as be would purchaser The also anavailablemethodofperfection. is “control” form, electronic in is paper chattel the If of perfection. method a as available also is original the of possession paper, chattel tangible and instruments For statement. financing UCC a security interest in a receivable is generally perfected by the filing of a of grant the 4.3, and 4.2 questions to answers the in described As that the“sale”isnotcharacterizedasatruesale. event the in interest security back-up a take to customary Yes,is it .4ProfitExtraction.Whatmethodsaretypicallyusedin 4.14 . PurchaserSecurity. Ifthepurchasergrantssecurity 5.3 SellerSecurity. Ifitiscustomarytotakeback-up 5.2 Back-upSecurity. Isitcustomaryinyourjurisdiction 5.1 SecurityIssues 5 purchaser? laws ofyourjurisdictionandthe relatedsecurity? such securityinteresttobeperfected? and havebeenperfected(seequestion4.9above)? your jurisdictiontoextractresidualprofitsfromthe interest inpurchasedreceivablesgovernedbythe your jurisdictiontograntandperfectasecurity what formalitiesmustthepurchasercomplywithin receivables) infavouroftheprovidersitsfunding, over allofitsassets(includingpurchased security underthelawsofyourjurisdiction,andfor granting asecurityinterestinreceivablesandrelated security, whataretheformalitiesforseller by acourt(forwhateverreason)nottohaveoccurred security, intheeventthatanoutrightsaleisdeemed ownership interestinthereceivablesandrelated to takea“back-up”securityinterestovertheseller’s iclg to: SecuritiSation 2019 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London hold the assets in trust for the purchaser will not be sufficient to sufficient avoid theperfectionandotherrequirementsofUCC. be not will purchaser the for trust in assets the the hold includes this above, discussed purchase of most receivables) then simply having the seller (as agree to UCC the under U.S. interest in recognized security a as generally classified is transaction the are if however, jurisdictions; forms various of trusts Yes, Please seetheanswertoquestion4.3. governing rules law of choice perfection. mandatory the override reasonable to a able bears is it be not will perfection parties the and rules law of choice mandatory to subject governing if law The respected transaction. the to be relationship will interest security the of creation the govern to law of choice parties’ the general, In Recognition.Ifthepurchasergrantsasecurity 5.4 such in interest security a have receivables. to funding purchaser’s such no statement, a of providers such the for order in required be will filing UCC filed additional appropriately has purchaser the and statement, financing assets” “all an of filing the permits agreement latham &watkins llP iclg to: SecuritiSation 2019 UCC, the under control of requirement the satisfied perfection bank account located in the U.S. as long as the form of security and a over taken security of grant law foreign a recognize should U.S. account holder upon the occurrence of certain events. A court in the the than the rather party secured the of directions the follow the will whereby bank that agree party agreement secured the and control obligor the bank, account depositary usually an being perfection by with accomplished agreement pledge security or a agreement through accomplished is U.S. this Typically in account deposit jurisdictions. a over taken be can state. by security Generally, vary will account escrow an of status legal specific the and account escrow an for required elements specific the although accounts, escrow recognize will U.S. Generally,the in jurisdictions Bank Accounts. Doesyourjurisdictionrecognise 5.7 Trusts. Doesyourjurisdictionrecognisetrusts?Ifnot, 5.6 Additional Formalities.Whatadditionalordifferent 5.5 perfected inyourjurisdictionormustadditionalsteps jurisdiction, willthesecuritybetreatedasvalidand perfected underthelawsofpurchaser’s jurisdiction, andthatsecurityinterestisvalid interest inreceivablesgovernedbythelawsofyour purchaser? securities? be takeninyourjurisdiction? located inyourjurisdiction? an Englishlawdebenture)takenoverabankaccount recognise aforeignlawgrantofsecurity(forexample, typical method?Would courtsinyourjurisdiction account locatedinyourjurisdiction?Ifso,whatisthe escrow accounts?Cansecuritybetakenoverabank seller’s insolvencyestate)untilturnedovertothe seller’s ownassets(sothattheyarenotpartofthe be deemedtoheldseparateandapartfromthe the sellerinrespectofsoldreceivablescanbeheldor is thereamechanismwherebycollectionsreceivedby mortgage loans,consumerloansormarketabledebt connected toinsurancepolicies,promissorynotes, requirements applytosecurityinterestsinor Yes, theownercould have suchaccess. grantor). the of insider an is party secured the if year (one filing the to prior security credited to the account after the bankruptcy filing or within 90 days the of grantor the interest would cut off by the secured party’s security interest filing as to funds bankruptcy account; any deposit however, the to credited thereafter funds all over have would control account deposit a over control with party secured A the seller’s insolvency proceeding) to take some action under the under action some take receivables. to proceeding) insolvency seller’s the the of of commencement the owner of (as required still was purchaser the (b) or the than rather Specifically, if either (a) the transaction was, in fact, a secured loan, party, secured a The answer would be different if the purchaser is deemed only to be party seekandreceivealiftingofthe stayfromthecourt. secured the unless proceeding bankruptcy the of duration the for sale as a loan rather than a true sale, the stay would remain in effect the characterizes court the If sale. true a than rather loan, secured a can allege during the insolvency proceeding that the sale in fact was official insolvency the However, perfected. was sale the whether rights purchaser’s determines official the insolvency that while affect receivables the regarding otherwise or stay to right the have bankruptcy trustee, creditors’ committee or bankruptcy court) would receivables. No insolvency official (such as a debtor-in-possession, purchased the over rights ownership exercising from purchaser the stay automatic the prohibit not would Code Bankruptcy the of 362 section by imposed Accordingly, estate. bankruptcy seller’s the the then proceeding, of property constitute not would sale a such in involved receivables insolvency seller’s the of commencement the to prior occurred that sale true a was receivables of sale the If . UseofCashBank Accounts. Ifsecurityoverabank 5.9 EnforcementoverBank Accounts. Ifsecurityovera 5.8 . Stayof Action. If,afterasaleofreceivablesthatis 6.1 questions insection2. the to answers the by addressed law,consideration of choice the to notwithstanding the law governing the instrument of control, subject InsolvencyLaws 6 enforcement withoutaffectingthesecurity? what arethey? receivables? have accesstothefundsinaccountprior account ispossible,cantheownerof in full,oraretherelimitations?Iflimitations, enforcement forwarduntilthesecuredpartyisrepaid all cashflowingintothebankaccountfrom enforces thatsecurity, doesthesecuredpartycontrol bank accountispossibleandthesecuredparty only beasecuredpartyratherthantheownerof the answerbedifferentifpurchaserisdeemedto until hedeterminesthatthesaleisperfected?Would the abilitytostaycollectionandenforcementactions that stayofaction?Doestheinsolvencyofficialhave “stay ofaction”)?Ifso,whatgenerallyisthelength ownership rightsoverthepurchasedreceivables(a from collecting,transferringorotherwiseexercising insolvency lawsautomaticallyprohibitthepurchaser insolvency proceeding,willyourjurisdiction’s otherwise perfected,thesellerbecomessubjecttoan www.iclg.com uSa 387 uSa 388 uSa xhne o te rnfr r biain and obligation, or transfer the for exchange © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com was obligation the or engaged was (ii) made thereof, result a as insolvent was became or incurred, transfer the when insolvent became or was debtor or the indebted, which to entity any defraud or delay hinder, to intent actual an with obligation an incurred or transfer a made (a) debtor the if transfer fraudulent a constitutes transaction a for days alleged preference the 90 is an affiliate of of the recipient debtor-transferor. the generally Under section 548, where year one is and parties unrelated “preferences” for period look-back the below, discussed as and, parties related between transactions for and parties unrelated between transactions for both years two is transfers fraudulent for period look-back The Code. Bankruptcy the of 548 section to pursuant transfer fraudulent a was transaction years before the commencement of the insolvency proceeding, if the with requisite standing can avoid a transaction that took place within party two other or trustee bankruptcy debtor-in-possession, The SuspectPeriod(Clawback).Underwhatfactsor 6.3 relief. request. The bankruptcy court has some leeway to fashion equitable would have discretion in determining whether or not to grant such a court bankruptcy the and transaction), the in infirmity an was there the that request there is a question about whether the transaction if was a true sale (particularly or if still order stay or injunction an could issue court bankruptcy conceivably official insolvency the However, purchased. receivables the to officialas rights its exercising from insolvency purchaser the the prohibit to then power the have sale, not does true normally a was transaction the If InsolvencyOfficial’s Powers.Ifthereisnostayof 6.2 the bankruptcy courtcoulddenythemotion. and motion, the to object could proceeding insolvency the in otherwise or collect exercise control to over the receivables. it However, any allow party in interest to stay automatic the for from court relief bankruptcy the with motion a file could purchaser The receivables. the over, the control exercise otherwise Accordingly,or of, obtain possession to purchaser the estate. by actions prohibit bankruptcy would stay automatic seller’s the of property entitled to collect the receivables, then the receivables would remain agreement sale latham &watkins llP other action)? of thesuspectperiod? transactions” forpurposesofdeterminingthelength by thesellertopurchaser“relatedparty contracts withthepurchaser, doesthatrendersales the performancebysellerofitsobligationsunder period? Ifaparentcompanyofthesellerguarantee’s purposes ofdeterminingthelengthsuspect seller tothepurchaser“relatedpartytransactions”for affiliate oftheseller, doesthatrendersalesbythe is majority-ownedorcontrolledbytheselleran transactions betweenrelatedparties?Ifthepurchaser transactions betweenunrelatedparties,and(b) or “preference”periodsinyourjurisdictionfor(a) proceedings? Whatarethelengthsof“suspect” commencement oftheseller’s insolvency “suspect” or“preference”periodbeforethe reverse transactionsthattookplaceduringa circumstances couldtheinsolvencyofficialrescindor receivables (bymeansofinjunction,stayorderor purchaser’s exerciseofitsownershiprightsoverthe insolvency officialhavethepowertoprohibit action, underwhatcircumstances,ifany, doesthe (b) received less than a reasonably equivalent value in value equivalent reasonably a than less received (b) vis-à-vis h sle bfr i ws contractually was it before seller the h dbo () was (i) debtor the lis n gaate b cnoiae ette ae irgre. disregarded. are entities consolidated by and claims owed by, and the assets held by, a Substantive single legal entity. Inter-company were liabilities the if as them treating and entities legal Code. multiple of Bankruptcy the of has the effect of consolidating the assets and liabilities 105(a) section under consolidation substantive order to power equitable the have Courts uies n tases n hc te rdtr provided creditors the which in transfers contemporaneous orsubsequentnewvaluetothedebtor. and of course ordinary business the in made transfers creditors, for to defences including available a defences are affirmative there claim, statutory preference of a number of elements the of all establish plaintiffthe if Even can preferential. being not as creditors secured ( “insider” an to made been have to deemed be may transfers such because avoidance, to subject be may proceeding insolvency the of to the commencement the before year subject one within vehicle purpose special before are a to made days proceeding transfers However, transfers. preferential insolvency as 90 avoidance the within of made commencement transfers only Generally, has closed). sale the after paid and deferred is that price purchase the of portion a is there (unless sales true to applicable not usually is preference purchase price of property paid at the time of sale), the concept of a that the payment be on account of requirement antecedent debt the (as opposed to Given the case. (liquidation) 7 chapter a in received have would it than more receive to creditor the enable that (d) and insolvent, was debtor the while (c) made, was transfer the before debtor the by owed debt antecedent an of a account on to (b) creditor, (a) made those are transfers Preferential Code. Bankruptcy the the with of 547 section to connection pursuant transfers, preferential as in transaction debtor-originator the by made transfers avoid can standing requisite debtor-in-possession, with party other or trustee the bankruptcy then originator, special the the to by vehicle loan secured purpose a be to deemed is transaction the If made. the under limitations of statute Uniform Fraudulent Transfer the Act is four years after under the transfer was state example, that For than under 548. longer section period is generally look-back statutes transfer the fraudulent though the Code, of 548 section Bankruptcy in contain forth set statutes those to These similar are that elements Act. Conveyance Fraudulent Uniform Fraudulent TransferUniform older the on based are others and Act, fraudulent state under transfer law. avoided Most state fraudulent transfer statutes are based on the be could transaction a example, For law. non-bankruptcy applicable under transaction a avoid can debtor-in- the Code, possession, bankruptcy Bankruptcy trustee or other party with requisite standing the of 544 section to Pursuant the transfereegavevaluetodebtorinexchangefortransfer. that extent the to only but it, to transferred debtor the property any a If matured. takes debts for value and in good faith would have such a lien on, or may retain, as pay transfer,fraudulent a as avoided is transaction that transferee a then to ability its beyond debts incur) would it that believed small (or incur unreasonably to intended (iii) an or capital, was debtor the with remaining property any which for transaction or business a in engage) to about was (or . SubstantiveConsolidation.Underwhatfactsor 6.4 i.e. , a related party). Courts typically recognize payments to fully- to payments recognize typically Courts party). related a , affect theconsolidationanalysis? the sellerorbyanaffiliateofseller, doesthat insolvency proceeding?Ifthepurchaserisownedby with thoseoftheselleroritsaffiliatesin consolidate theassetsandliabilitiesofpurchaser circumstances, ifany, couldtheinsolvencyofficial iclg to: SecuritiSation 2019 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London in control of the entities would almost certainly have to be involved. two unaffiliated companies to be consolidated, active fraud by those For consolidation. is substantive for requirements the satisfy it would analysis, consolidation substantive extremely unlikely that two companies that are not closely affiliated foregoing the Under the and originator special purposevehicleifapartyobjects. the of consolidation substantive order would court a that unlikely is it then proceeding, insolvency an in debtor a become to were originator the and case the is this If ownership. is vehicle purpose and business indebtedness, investments, its in special limited appropriately the are (d) originator and parties, the third and to disclosed vehicle purpose special the legal of separate existence the (c) originator, the of those from distinguished the assets and liabilities of the special purpose vehicle can be readily be (b) observed, are should formalities corporate (a) that ensure to vehicle monitored purpose special The vehicle. purpose special that of existence corporate separate the on rely parties transaction, securitization a of part as used is vehicle purpose special a When is consolidation substantive which not sought. for or respective entities the the whether of to creditors equitable on be determination would consolidation its court substantive a base that indicate should considerations primarily policy and law case creditors. Both of expectations pre-petition the protect to proceedings insolvency in need the on focused have courts These entities. legal equitable open-ended, multiple consolidate substantively to an whether determine to inquiry adopted have decisions court Recent the profitability of consolidation at a single physical location. corporate (7) thecomminglingofassetsandbusinessfunctions; of observance without assets (6) of transfer the ascertaining and segregating in (5) difficulty of degree the on guarantees inter-corporate(4) and parent various of existence between the ownership and interests (3) of unity the (2) the presence or absence of consolidated financial statements; (1) the they couldnotbedisentangled: whether that obscured of so are analysis entities legal their multiple between relationships guide to others) (among factors following the of consideration a on relied have courts past, the In principal when consolidation substantive parties consent. order to likely more are Courts creditors. benefit would consolidation substantive that entangled so were entities the of affairs the (b) or credit, extending in identity separate their on rely a not did as and unit entities economic single legal various the with dealt had creditors (a) which extraordinary remedy that typically is reserved for circumstances in an is consolidation substantive that stated have courts influential of number However,a consolidation. substantive order to whether determining in standard uniform a apply not do U.S. the in Courts subject ofaninsolvencyproceedingandtheothersarenot. the are some where entities related to respect with ordered be may entities that are all the subject of relatedan insolvency proceeding, and also to respect with ordered be may consolidation Substantive latham &watkins llP iclg to: SecuritiSation 2019 formalities; individual assetsandliabilities; loans; corporate entities; party fordamages. the non-debtor the by claim unsecured an to only debtor,rise by gives and breach court-authorized a as treated is contract executory valid a an of rejection demonstrates The reject. to decision debtor its for justification business the as long so contracts rejection. executory proposed a to object of rejection the approve will generally However,courts bankruptcy to opportunity an and have approval, court parties bankruptcy to subject is an contract reject executory to decision complete debtor’s A party. to other the party of the performance excuses either that breach of material a constitute failure would performance the that unperformed far so are non-debtor the and debtor the both of under obligations the which contract a as it described have courts Bankruptcy numerous the but in Code, defined not is contract” “executory term The the “reject” generated. would be would receivables party further no and that contract executory contract, the to party a involving under arise that receivables proceeding insolvency an in that risk are a is there contracts, executory securitized assets the if Third, the bankruptcyfilingandsubjecttoasecurityagreement). to prior acquired assets of profits or offspring products, proceeds, purpose vehicle before the bankruptcy filing (unless such special receivables are the the and originator the by into entered agreement proceeding insolvency security the originator’sfrom resulting lien a to subject be not would generally the of commencement the stay as to those receivables. In addition, receivables generated after automatic the triggering thus estate, bankruptcy originator’s the in included be to deemed be could proceeding insolvency originator’s the of commencement the after generated receivables the Second, was notatruesale,butrather, wasasecuredloan. securitization flow future the recourse that conclude such to court a of cause could existence The originator). the a from of form the take may (which originator the to back recourse is First, many future flow securitizations are structured such that there into come yet not have that existence. receivables of sales and occurred would create uncertainties as to sales of receivables that have not yet originator the of proceeding insolvency an of commencement The documents. loan underlying the in provisions boy” “bad applicable to pursuant guarantors certain and/or debtor the of assets the pursue to lenders recourse limited may be used to trigger springing recourse liability, notwithstanding which may allow insolvency due of finding a Such contracts. come debtor’s the in provisions they as debts its may find that a debtor is insolvent on the grounds that it cannot pay jurisdictions U.S. certain in courts some However, no. Generally, . EffectofInsolvencyonReceivables Sales.If 6.5 . EffectofLimitedRecourseProvisions.Ifadebtor’s 6.6 such proceedings? its debtsastheybecomedue? only comeintoexistenceafterthecommencementof such proceedings,or(b)onsalesofreceivablesthat would otherwiseoccurafterthecommencementof proceedings haveon(a)salesofreceivablesthat seller inyourjurisdiction,whateffectdothose insolvency proceedingsarecommencedagainstthe declared insolventonthegroundsthatitcannotpay question 7.4below),canthedebtorneverthelessbe contract containsalimitedrecourseprovision(see www.iclg.com uSa 389 uSa 390 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com for regime registration asset-backed securities. special a into falls securities of offering registered a of whether determine to definitions used are Similar securities asset-backed company. parent the by controlled not is the of none if that entity an by company,held are subsidiary finance the by issued securities parent the by controlled company a or a company include parent the by held subsidiary finance a by not issued security does and purposes; such for security asset-backed asset-backed of debt collateralized obligations; and a security of that obligation the SEC, by rule, determines obligation to be an debt debt collateralized a securities; collateralized a obligation; bond mortgage collateralized a collateralized obligation; debt a collateralized including: a obligation; asset, the from flow cash the allows on primarily depend that payments receive that to security the of holder receivable) unsecured or secured a or mortgage, a lease, a loan, a (including asset financial self-liquidating of type Dodd- Frank any by collateralized security other or fixed-income a as Act, the by in amended as defined Act, Exchange is the of security” 3(a)(79) Section “asset-backed an securitization, define specifically Act Exchange the or Act Securities the neither While party duediligenceasitrelatestoasset-backedsecurities. to third- of conclusions providers and findings the of service transparency the promote diligence due third-party and underwriters issuers, for requirements new adopt things, other among to, SEC the required which 8.6), question to answer the Retention in discussed Rules Risk U.S. the included (which securities asset-backed to related regulations several adopted Act”) “Dodd-Frank (the Act Protection Consumer and Reform WallStreet Frank Dodd the 8.7, other and Act”), Exchange federal securities “Securities laws. As noted in the answers to (the questions 8.6 and amended as 1934, amended (the “Securities Act”), the U.S. Securities the Exchange Act of to respect with as Securities 1933, U.S. of the Act of regulation and administration authority regulatory primary (the the Commission is Exchange “SEC”) a and Securities to the effect generally, More giving after and to securitization transaction. prior both interests retained disclosure requirements relating to the form, holder certain and fair value satisfy of to securitization a of sponsor the require the also rules retention, risk the credit regarding of requirements to risk the addition In establishing credit below. the described fully of more as portion assets securitized a retain to affiliate”) owned rules “majority- a (or final securitization a of “sponsor” adopted a requiring generally jointly Development Urban and Housing of Department U.S. the and System Reserve Federal the of Governors of Board the Commission, Exchange and Securities the Treasury, the of Department the of Currency the of Comptroller the Officeof the Agency, Finance Housing Federal the Corporation, Deposit Federal the 2014 below,October 8.6 in question to answer to To implement the seek credit risk retention requirements described in the that statutes have states facilitate securitizationsbybolsteringthetruesaleanalysis. nine 4.9, question to answer Although there is no federal statute on securitization, as noted in our SecuritisationLaw. Isthereaspecialsecuritisation 7.1 latham &watkins llP SpecialRules 7 of transactionconstitutesasecuritisation? jurisdiction? Doesyourjurisdictiondefinewhattype regulating securitisationtransactionsinyour basics? Istherearegulatoryauthorityresponsiblefor securitisation transactions?Ifso,whatarethe jurisdiction establishingalegalframeworkfor law (and/orspecialprovisionsinotherlaws)your f .. euiiain, uh s Ds ue niis oiie in domiciled entities offshore jurisdictionssuchastheCaymanIslands. use CDOs, as such securitizations, U.S. of New of Yorktypes laws Some the under common. created also are Trusts Delaware. of laws liability the under trusts limited statutory or corporations, companies as organized entities use U.S. the in securitizations domestic Most requirements. certain satisfy that entities purpose special for rules special providing by securitization facilitate that provisions some have laws securities and regulations company investment laws, tax federal U.S. Certain such. as Not question 2.3. public policy of the state in which the court convenes as set forth in the offend would provision that of enforcement the country,unless another of that limited-recourse is law governing a the where contract to a in effect provision give will generally Courts limited. recourse clause applies in a particular the case, then recourse may not be enforce will usual meaning. If Courts a court determines that a carve-out to the limited- parties. the agreement of the parties, giving of the contract language its normal and intent the determine and its carve-outs, courts will analyse their language in an attempt to case, a particular situation. In interpreting the limited-recourse provision each of facts the on whether any of the based carve-outs to the limited-recourse clause apply in determine, will courts These thereto. carve-outs any and clauses limited-recourse enforce will typically selected, validly York,YorkNew New is in if law Courts to question7.2above. The answer to this question will generally be the same as the answer . SecuritisationEntities.Doesyour jurisdictionhave 7.2 unregistered deals, asabaselineofwhatwouldbeconsideredtomaterial. of context the in even requirements disclosure such consider including to tend underwriters classes, and Issuers asset loans. auto specified and RMBS certain operating for data for loan-level of disclosures from significantly Regulation companies. The provision the include requirements AB differ that AB, Regulation as known securities, asset-backed of offering registered The SEC has also established a set of line-item disclosures for SEC- . Limited-RecourseClause.Will acourtinyour 7.4 LocationandformofSecuritisationEntities.Isit 7.3 shareholders? extinguished? usually beowned? specific requirementsastothestatusofdirectorsor legal attributesandbenefitsoftheentity;(c)any establishment andmanagementofsuchanentity;(b) does thelawprovideasto:(a)requirementsfor special purposeentitiesforsecuritisation?Ifso,what laws specificallyprovidingforestablishmentof any shortfallthedebtofrelevantdebtoris relevant debtor, andproviding thattotheextentof parties tothatagreementtheavailableassetsof the lawofanothercountry)limitingrecourse agreement (evenifthatagreement’s governinglawis jurisdiction giveeffecttoacontractualprovisioninan take inyourjurisdictionandhowwouldsuchentity forms thatthespecialpurposeentitywouldnormally securitisations inyourjurisdiction?Whatarethe special purposeentitiestypicallylocatedfor entity inyourjurisdiction?Ifoffshore,whereare are theadvantagestolocatingspecialpurpose jurisdiction oroffshore?Ifinyourjurisdiction,what typical toestablishthespecialpurposeentityinyour iclg to: SecuritiSation 2019 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London rvnig niis rm iig outr bnrpc petitions covenants bankruptcy voluntary However, probably areunenforceable. filing from be consideration. entities should preventing they adequate and by contracts, supported of construction the governing rules the with accordance in provisions these interpret will courts sue, to not covenants Like person. another or purchaser proceeding a against insolvency involuntary an commencing from parties Courts typically will also enforce contractual provisions prohibiting policy. not enforce covenants not to sue that violate applicable law or public sue that are negotiated in business transactions. However, they will to not covenants enforce to refuse rarely very Courts covenant. the should be supported by adequate consideration by the beneficiary of sue to not covenant a To enforceable, contracts. be of construction and law, state courts will interpret them by in accordance with the governed rules governing the are typically sue” to not “Covenants Non-PetitionClause.Will acourtinyourjurisdiction 7.5 provision doesnotapplyifthepropertyistobesold. and have their entire allowed claims treated as secured claims. This claims deficiency their waive to elect to creditors undersecured of classes permits also but claims, recourse to claims limited-recourse converts Code Bankruptcy the of section This law. applicable or a recourse claim, whether or not it is limited-recourse by agreement the however, Code, Bankruptcy general rule is that a secured claim the in a Chapter 11 case is treated as of 1111(b) section Under latham &watkins llP iclg to: SecuritiSation 2019 properly may constituteabreach offiduciaryduty. he/she so do to SPE the be when of interest best the in be would may proceedings it that concludes petition bankruptcy commence bankruptcy to voluntary a file director a of policy.failure public fact, against In as unenforceable to not entity securitization an by agreement an However, U.S. proceedings. bankruptcy voluntary commence to in SPE the of ability the found limit to order in often transactions are directors Independent IndependentDirector. Will acourtinyourjurisdiction 7.7 the to relationship any fundamentalpolicyoftheapplicableU.S.jurisdiction. substantial a has transaction, and the application of such foreign law chosen is not contrary to jurisdiction the of factors, but in general such choice of law is likely to be upheld if range wide a on depends law of choice foreign a apply would court and other payments among themselves by contract. Whether a U.S. collateral of proceeds allocate may parties sophisticated general, In Priority ofPayments“Waterfall”. Will acourtinyour 7.6 person; or(b)commencinganinsolvencyproceeding taking legalactionagainstthepurchaseroranother another country)prohibitingthepartiesfrom:(a) (even ifthatagreement’s governinglawistheof give effecttoacontractualprovisioninanagreement against thepurchaseroranotherperson? vote ofanindependentdirector? an insolvencyproceeding)withouttheaffirmative from takingspecifiedactions(includingcommencing organisational documentsprohibitingthedirectors another country)oraprovisioninparty’s (even ifthatagreement’s governinglawistheof give effecttoacontractualprovisioninanagreement parties inacertainorderspecifiedthecontract? the lawofanothercountry)distributingpaymentsto agreement (evenifthatagreement’s governinglawis jurisdiction giveeffecttoacontractualprovisioninan oain f h udryn olgr ad te rlvn tax relevant other and obligors underlying considerations. the of location jurisdictions include the Cayman Islands among others based on the the laws of Delaware. When a purchaser is located offshore, under typical trusts statutory or companies liability limited corporations, question 7.2, domestic purchasers typically use entities organized as transaction the in noted obligor(s). As on underlying the of location the and structure depends generally purchaser of location The nomto ws rvdd Ette psesn consumer possessing Entities from unauthorizedaccessanddisclosure. information such safeguard to obligated generally provided. are information was information such which for purposes the for used be only can and parties third Confidential consumer information cannot generally be disclosed to with requirements respect to collection and other enforcement activities in limited instances. and licensing certain meet to need servicer may a of addition, In type involved. the jurisdiction the upon and receivables depending company operating originator the by possessed licences same the require may servicer replacement or servicer a However, required. is licence servicing general No case ofconsumerreceivables. the and in especially state a within business do to qualify Collection and licence a receivable. of obtain to entity an require to likely more are type activities enforcement the upon depending to state state from rule this to exceptions be may there although U.S., to the in purchaser business do to a requirements qualification other subject or licensing not do generally purchases Receivables . Required Authorisations, etc. Assuming thatthe 8.1 LocationofPurchaser. Isittypicaltoestablishthe 7.8 . DataProtection.Doesyourjurisdictionhavelaws 8.3 Servicing.Doesthesellerrequireanylicences,etc.,in 8.2 RegulatoryIssues 8 your jurisdiction? to consumerobligorsoralsoenterprises? and collectsoldreceivables? your jurisdiction? purchaser doesbusinesswithmorethanonesellerin answer totheprecedingquestionchangeif financial institutioninyourjurisdiction?Doesthe any licenceoritsbeingsubjecttoregulationasa being requiredtoqualifydobusinessorobtain collection andenforcementofreceivablesresultinits jurisdiction, willitspurchaseandownershipor purchaser doesnootherbusinessinyour purchasers typicallylocatedforsecuritisationsin purchaser inyourjurisdiction?Ifoffshore,whereare jurisdiction, whataretheadvantagestolocating purchaser inyourjurisdictionoroffshore?If provided byobligors?Ifso,dotheselawsapplyonly restricting theuseordisseminationofdataabout servicer requireanylicences,etc.,inordertoenforce appear beforeacourt?Doesthird-partyreplacement following theirsaletothepurchaser, includingto order tocontinueenforceandcollectreceivables www.iclg.com uSa 391 uSa 392 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com to affiliate)required majority-owned is (or sponsor class. The such each of percent) 5 least at (and proportion same the constitutes that transaction securitization such of part as issued affiliate) entity issuing the majority-owned a in interests ABS of class each (or in interest an retain would typically sponsor the “eligible interest,” an involving vertical structures In zero). to ABS reduced such is of interest other amount any the (until or provision payments, contractual of governing priority the of operation allocation, loss through whether interest, ABS other the any to the in payable amounts reduction to any to payable prior interest amounts residual horizontal reduce eligible any then due, principal would or shortfall interest resulting contractual all pay to obligation its satisfy to funds insufficient has entity issuing the equity which on date or subordinated of allocation or date payment any classes On entity. issuing the in multiple securities or class single a in interest an retains typically affiliate) majority-owned a (or sponsor In structures involving an “eligible horizontal residual interest”, the to ABCP conduits, CMBS,andtenderoptionbonds. the sponsors of “open market CLOs”. Special provisions also apply federal court ruling has made the recent risk retention rules inapplicable to a And all. at retention risk hold to have not do mortgages qualified of entirely comprised pools RMBS of Sponsors interest. credit card master trusts, can satisfy risk retention by holding a seller classes. For example, sponsors of revolving pool structures, such as asset certain for the alternatives other of are there combination However, a foregoing. or residual interest” vertical horizontal “eligible “eligible an an interest”, retaining by satisfied typically are obligations retention risk Such the securitizations). certain in hold retention may buyer B-piece the CMBS, of case the in (and, affiliatemajority-owned a through or,cases, directly some either in securitization, the of risk credit the in interest percent 5 a least at the Rules”), Retention be Risk sponsor of a securitization transaction is may generally required (“U.S. to retain such time to as time 1934, from of amended Act Exchange Securities the of 15G Yes, pursuant to the credit risk retention rules adopted under Section RiskRetention.Doesyourjurisdictionhavelawsor 8.6 in order to prevent the transfer of cash to certain prohibited persons. implement due diligence procedures with respect to their customers to institutions financial require laws laundering anti-money Federal CurrencyRestrictions.Doesyour jurisdictionhave 8.5 laws, amongotherlaws. confidentiality and laws reporting laws, collection debt to subject be could purchaser a addition, In seller receivable. the of the holder the of to acts the for liable pass to considered are be liabilities these as receivable, the originating may purchaser A U.S. the Consumer protection laws exist at both the federal and state levels in ConsumerProtection.If theobligorsareconsumers, 8.4 latham &watkins llP required? requirements? structured tosatisfythoseriskretention securitisation transactionsinyourjurisdictionusually regulations relatingto“riskretention”?Howare outside thecountry? payments inyourjurisdiction’s currencytopersons currency forothercurrenciesorthemakingof laws restrictingtheexchangeofyourjurisdiction’s protection lawofyourjurisdiction?Briefly, whatis purchaser) berequiredtocomplywithanyconsumer will thepurchaser(includingabankactingas euiiain icue rls eaig o h rgsrto of registration affect the also to may the relating commodity a of operator an requiring rules companies; that investment rules to requirements include: regulatory securitizations as Other information VolckerRule. the of purposes for entity provide issuing the of characterization typically securitizations for documents offering the thus and be fund,” “covered may a considered that hold entity issuing or an involve acquire securitizations of U.S.-based to portion significant A entities” funds.” “covered “banking in interests ownership of ability the restricts which Volckerthe Rule, included Act Dodd-Frank the addition, In the than rather date. securities, the of offering the of pricing the be to in the related and offering. The time of first sale is generally considered findings the issuer or underwriter at least five business days prior to containing the first sale SEC the by obtained report diligence due the third-party any of conclusions with ABS-15G a furnish Form to (NRSRO) organization rating statistical recognized an issuer or underwriter of an ABS that is to be rated by a nationally require rules these things, other Among securities. asset-backed to the findings and conclusions of third-party due diligence as it relates party due diligence service providers to promote the transparency of third- and underwriters issuers, for requirements new adopt things, for other the among to, SEC the required Dodd-Frank Act securities the addition, In affect asset-backed in adversely regulatory capitalpurposes. investments otherwise of or attractiveness securities own asset-backed that institutions financial to charges may capital greater approaches, in result measures advanced and based ratings internal Basel recent more the implement to adopted been have that those final rules while others remain pending. Such regulations, including foregoing have been proposed, some of which have been adopted as the to relating Regulations economy. the to risks address that bills including firms, extensive services financial consider regulating laws to the to continues changes Congress legislatures. state in and Congress U.S. the in introduced being continually are services industry financial the regulating further legislation for Proposals requires also 8.6). question to answer the in discussed Rules Retention Risk U.S. Act the Dodd-Frank included (which securities The asset-backed to related regulations practices. and guidance services financial supervisory and regulations their to changes adopt periodically also the on focused industry services financial the regulating industry,agencies the and them of many regulations, new new of several hundreds required Dodd-Frank Act The created bodies. regulatory Act Dodd-Frank the 8.6, and 7.1 questions to answer the in discussed considerations same the to addition In . RegulatoryDevelopments.Have therebeenany 8.7 US investors(asdefinedundertheU.S.RiskRetentionRules). by held be may value by percent 10 than more not that so securities do not involve a US sponsor and that limit the initial issuance of the that securitizations for available be also may harbour safer foreign Aaffiliate). such (or sponsor the to recourse full is financing such Risk U.S. unless financing any the for collateral as risk credit retained the pledge of requirements the satisfy Retention Rules, and the sponsor (or its applicable affiliate) to may not intended is that interest economic retained the of portion the of hedging or transfer assignment, the prohibit Rules Retention Risk U.S. the addition, In Risk Retention Rules, which U.S. vary by type of the asset being securitized. under required as long so for interest retained such hold transactions inyourjurisdiction? are likelytohaveamaterialimpactonsecuritisation regulatory developmentsinyourjurisdictionwhich

iclg to: SecuritiSation 2019 uSa

© Published andreproduced withkindpermission byGlobalLegal GroupLtd,London gemn wt te .. oenn FTA a b sbet to subject be may FATCA governing U.S. intergovernmental the an with have agreement that jurisdictions in located Entities non-financial or institution financial foreign entity otherwise qualifies for an exemption from these rules. foreign the (iii) or owner, U.S. substantial each regarding information identifying furnishes either or owners” States United “substantial entity any have not does it certifies foreign non-financial the (ii) obligations, and reporting diligence certain undertakes institution financial foreign the (i) unless entity”, foreign “non-financial a or institution” financial “foreign FATCAa under to tax paid withholding if percent 30 a to subject be will generally payments interest source U.S. such 2014, 1, July after or on arise) to deemed are (or arise that receivables for addition, In exception. this meet to necessary form registered the in not “portfolio are receivables the most but withholding under to exception tax interest” withholding of federal country U.S. from purchaser’s exempt or seller’s the are convention interest source U.S. of payments certain addition, In residence. and tax income U.S. applicable the an between by rate) lower other (or percent 0 to reduced be can rate this but percent, 30 is generally tax non- a is persons purchaser withholding federal U.S. of the rate statutory The U.S. U.S. or the of resident seller are the if who tax withholding federal obligors U.S. to subject by are generally interest”) source purchaser “U.S. (hereinafter, the or the to days seller 183 of excess in maturities with receivables interest- bearing any on interest of Payments receivables. the in interest any retain not will seller the whereby purposes tax income federal U.S. for sale true a as respected be will purchaser the to seller the by receivables the of sale the that assumes summary following The financial for securities asset-backed in reporting purposes. investment an report must owner its or investor the which in affectmanner adversely the the Issuers as liabilities of that investor or owner, or could otherwise in investments parties’ third record and statements, financial their in issuer an ABS of assets the consolidate to generally owner its or investor an require circumstances certain under could and entities, has These changes, or any future changes, may Board affect the accounting for Standards Accounting adopted changes to the accounting standards for Financial structured products. the Furthermore, enter intocertaintypesofswaps. may impose margin or requirements on issuing entities that that rules and pools); commodity as treated be to swaps own that entities certain cause that (and entity registered a become to pool latham &watkins llP iclg to: SecuritiSation 2019 Withholding Taxes. Will anypartofpaymentson 9.1 Taxation 9 withholding taxes? the typicalmethodsforeliminatingorreducing interest? Ifwithholdingtaxesmightapply, whatare price willberecharacterisedinwholeorpartas receivable, isthereariskthatthedeferredpurchase the purchasepriceispayableuponcollectionof case ofasaletradereceivableswhereportion recharacterised inwholeorpartasinterest?Inthe a discount,isthereriskthatthediscountwillbe is located?Inthecaseofasaletradereceivablesat term tomaturity, orwherethesellerpurchaser of thereceivables,whethertheybearinterest,their jurisdiction? Doestheanswerdependonnature purchaser besubjecttowithholdingtaxesinyour receivables bytheobligorstoselleror or tofeesforcollectionagentservices. receivables of sales to apply will taxes similar or sales added, value no general, In services. or goods of sales on tax sales state of form some have U.S. the of states 50 the of Virtually all services. agent collection for fees on or receivables of sales on of services, or sales goods on taxes sales or taxes added value federal no are There that needtobeconsidered. taxes material have that states are Florida Tennesseehowever,and receivables, and these types of charges are unusual at the state level; of sales on taxes documentary or duties stamp federal no are There of method accrual the may electtomarktheirassetsmarket. use vehicles securitization some to cases, limited certain In required accounting. are taxpayers Most eitrd s y lcn sc rcials n rno tut whose trusts ownership interestareinregisteredform. grantor in receivables such placing by is registered as treated be to receivables such causing of method common one If receivables with maturities in excess of 183 days are unregistered, the absenceofanapplicableexemption. in not, is seller the and U.S. the of resident a is buyer the if interest such to apply may tax withholding federal U.S. so, If purposes. tax characterized as interest income to the seller for U.S. federal income re- be to price purchase the of portion a cause could receivable the of collection upon payable is price purchase the of portion a where receivable trade a of sale a facts, particular the on Depending tax. withholding federal U.S. to subject be not generally will U.S. the accrued on a receivable held by a purchaser that is a non-resident of discount Market purposes. tax the income to federal U.S. discount for purchaser market as treated be to discount the cause could on the particular facts, a purchase of a trade receivable at a discount Depending obligor. such by maintained U.S. the in branch a from arises interest such unless tax withholding federal U.S. to subject not are generally person U.S. a not is who obligor an by the purchaser or seller the to interest of Payments refunded. or credited be additional tax but rather an advance payment of tax which may later Backup withholding currently is imposed at a rate of 24 percent. It is not an withholding. backup from exempt is it that appropriate certification the with payer the provide not does purchaser the or seller the if withholding” “backup to subject be also may purchaser the or seller the to interest source U.S. of payments Furthermore, entirely. withholding such eliminate rely) to entitled are taxpayers after January such 1, 2019, proposed U.S. Treasury regulations of (on which dispositions FATCAor to from on subject withholding been have proceeds would receivables the While rules. different . Value Added Taxes. Doesyourjurisdictionimpose 9.4 StampDuty, etc.Doesyourjurisdictionimposestamp 9.3 SellerTax Accounting. Doesyourjurisdictionrequire 9.2 on feesforcollectionagentservices? of receivables? securitisation? sales ofgoodsorservices,onreceivables value addedtax,salestaxorothersimilartaxeson duty orothertransferdocumentarytaxesonsales purposes bythesellerorpurchaserincontextofa that aspecificaccountingpolicyisadoptedfortax www.iclg.com uSa 393 uSa 394 uSa © Published andreproduced withkindpermission byGlobalLegal GroupLtd,London www.iclg.com is purchaser non-resident the where country the and U.S. the tax return and, absent an applicable income tax convention between business in the U.S., it will be required to file a U.S. federal income If a non-resident purchaser is considered to be carrying on a trade or DoingBusiness. Assuming thatthepurchaser 9.6 or duties taxes, ifimposed,mayvary. stamp state federal of ability The taxing authorities no to collect any value added tax, stamp receivables. duty or other of are sales on there taxes documentary above, discussed As PurchaserLiability. Ifthesellerisrequiredtopay 9.5 latham &watkins llP collections? the obligors,makeitliabletotaxinyourjurisdiction? agent, oritsenforcementofthereceivablesagainst appointment ofthesellerasitsservicerandcollection would thepurchaser’s purchaseofthereceivables,its conducts nootherbusinessinyourjurisdiction, purchaser oragainstthesoldreceivables able tomakeclaimsfortheunpaidtaxagainst seller doesnotpay, thenwill thetaxingauthoritybe services thatgiverisetothereceivables)and sale ofreceivables(oronthegoodsor value-added tax,stampdutyorothertaxesuponthe assets. such in basis tax purchaser’s the and satisfied debt the of amount the between difference the generally is loss or gain of amount The loss. or gain taxable has generally purchaser a debt, such securing If a purchaser is relieved of limited recourse debt by using the assets . Taxable Income.Ifapurchaserlocatedinyour 9.7 in theU.S.(thusgivingrisetoECI). establishment permanent a through business or trade a on be carrying to considered be to purchaser the cause not does appointment purchaser,non-resident a for agent collection and such that order in servicer as U.S. the in resident seller a of appointment the to given be must attention Particular basis. case-by-case a on considered be or has a permanent establishment in the U.S., is a question of fact to U.S., the in business a on carrying is purchaser the not or Whether or trade a from business carriedonthroughapermanentestablishmentintheU.S. ECI its on tax income federal U.S. to subject be country with which the U.S. has an income tax convention will only a in resident purchaser Typically, a (ECI). U.S. the in business or trade a of on any carrying its with on connected effectively is that tax income income federal U.S. pay to required be will resident, that debtreliefliabletotaxinyourjurisdiction? limited recourseclause(seequestion7.4above),is jurisdiction receivesdebtreliefastheresultofa iclg to: SecuritiSation 2019 uSa latham & watkins llP uSa

Lawrence Safran Kevin T. Fingeret Latham & Watkins LLP Latham & Watkins LLP 885 Third Avenue 885 Third Avenue New York, NY 10022-4834 New York, NY 10022-4834 USA USA

Tel: +1 212 906 1711 Tel: +1 212 906 1237 Fax: +1 212 751 4864 Fax: +1 212 751 4864 Email: [email protected] Email: [email protected] URL: www.lw.com URL: www.lw.com uSa

Lawrence Safran leads the firm’s Uniform Commercial Code practice. Kevin Fingeret is a partner in the New York office of Latham & Watkins. This area includes a wide variety of commercial law issues. Special Mr. Fingeret is a member of the Finance department and formerly emphasis is placed on those issues arising under Article 9 (secured served as Global Co-Chair of the Structured Finance and Securitization transactions) and Article 8 (investment securities) of the Uniform Practice. Mr. Fingeret is also a member of the firm’s Commercial Code although the practice also includes Article 2 (sales Practice. of goods), Article 3 (negotiable instruments), Article 5 (letters of credit), Mr. Fingeret has extensive experience representing banks and other Article 6 (bulk sales) and Article 7 (documents of title). financial institutions, issuers, borrowers and sponsors in a wide variety Mr. Safran has advised clients on commercial law and personal of structured finance and securitization transactions and aircraft property transfer issues in connection with credit facilities, secured finance transactions. bond transactions, project financings, securitizations, Mr. Fingeret specializes in the securitization of esoteric and operating collateralized debt obligations, credit card and other receivables assets. His experience includes aircraft portfolio securitizations, financings and other structured financing arrangements. EETC aircraft financings and securitizations of rental car fleets, wireless cell towers (and related interests), broadcast towers, billboards, equipment leases and music royalties. Mr. Fingeret also has substantial experience with traditional ABS, such as auto loan and credit card securitizations and traditional aircraft finance, such as bank financings and sale-leaseback transactions involving aircraft, engines and spare parts. Mr. Fingeret also has over 21 years of experience representing issuers, underwriters and managers in CLO transactions.

Latham & Watkins is a global law firm of more than 2,600 lawyers located in the world’s major financial, business and regulatory centres dedicated to working with clients to help them achieve their business goals and to find innovative solutions to complex legal issues. For more information on Latham & Watkins, please visit the website at www.lw.com.

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