DISTINCTION BETWEEN SECURITISATION AND OTHER FORMS OF STRUCTURED FINANCE 2.10 CONCL

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CHAPTER 2 SECURITISATION: GENERAL FORM AND FUNCTION

INTRODUCTION

Certain definitions relating to securitisation were briefly explained in the introduction.1 This chapter investigates the process of securitisation. A thorough understanding of this process is crucial.
Securitisation is the pooling of a homogenous group of income-producing assets, the sale of these assets by the original holder (originator) to an insolvency-remote third party (a special purpose vehicle (SPV)) and the issue by the SPV of marketable securities (commercial paper or other debt instruments)2 to finance the purchase of the assets.3 The transferred assets provide the cash flow to service the obligations under the issued securities. The transferred assets, which in this discussion will be claims, are collected by a servicer at a fee. This function is often retained by the originator. The transferred assets further serve as security for the obligations of the SPV towards its investors. Usually a trustee holds this security on behalf of the investors. The transferred assets and the structure of the securitisation scheme are rated by a rating agency at a fee. Depending on the rating that is aimed for, the rating agency may recommend certain credit enhancements. These credit enhancements may be internal, that is, from the originator, or external from third parties. There may further be an underwriter for the issued securities. There will always be specialist opinions from accountants and lawyers. If the securities are offered to the public, there may be prospectus requirements and if the securities are to be traded on an exchange, the listing requirements of the particular exchange will apply. Securitisation is therefore an expensive and complicated undertaking.

ADVANTAGES OF SECURITISATION

It is possible in South African law for companies to raise loan capital directly in the form of debentures and to use their assets as security for the issued debentures.4 Alternatively, South African companies have the option to use securitisation. A company will prefer securitisation if the benefits of securitisation outweigh those of traditional loan financing.5 The most important advantages of securitisation are improved liquidity, a diversification of funding sources, the achievement of better interest rates, better risk management and certain accountancy-related advantages.However, from the outset it must be emphasised that these advantages are dependent on the success of the securitisation scheme, in terms of obtaining a good rating and guarding against the insolvency of the SPV. I also briefly discuss some non-rational reasons why some companies opt for securitisation.

Improved liquidity

Securitisation, by its nature, turns claims into cash.7 The cash can be used by the company for a variety of purposes, including research and development, new projects and to meet its normal supplier obligations.

Diversification of funding sources

Investors who may ordinarily be reluctant to invest in the originator may be willing to invest in the securities issued by the SPV, because of the higher credit rating that securities issued by the SPV will achieve.8 For instance, pension fund managers that might be willing to purchase the highly rated securities issued by the SPV, could be unwilling to purchase conventional debt securities of the originator.9 It may also be that previous financing arrangements between the originator and its creditors contained restrictions on further issues of long-term debt and that securitisation has become the only option.10 Diversification of funding sources may improve the originator‘s own credit rating, making it possible after securitisation to return to more traditional forms of financing.

TABLE OF CONTENTS
TABLE OF CONTENTS
SUMMARY
KEY TERMS
ACKNOWLEDGEMENTS
CHAPTER 1 INTRODUCTION
1.1 INTRODUCTION
1.2 METHODOLOGY
1.2.1 Comparative perspectives
1.2.2 Structuring of securitisation scheme
1.2.3 Regulatory considerations
1.2.4 True sale and insolvency-remoteness
1.2.5 Aspects that fall outside study
1.3 TERMINOLOGY
1.4 CONCLUDING REMARKS
PART I TRADITIONAL SECURITISATION: GENERAL FORM AND FUNCTION
CHAPTER 2 Securitisation: general form and function
2.1 INTRODUCTION
2.2 ADVANTAGES OF SECURITISATION
2.2.1 Improved liquidity
2.2.2 Diversification of funding sources
2.2.3 Better interest rates
2.2.4 Improved risk management
2.2.5 Accountancy-related advantages
2.2.6 Non-rational and illegal motivations
2.2.6.1 Trends
2.2.6.2 Judgment-proofing
2.2.6.3 Money laundering and fraud
2.3 SPECIAL PURPOSE VEHICLE (SPV)
2.3.1 Capitalisation
2.3.2 Corporate governance
2.3.3 Insulating SPV against insolvency
2.4 IDENTIFICATION AND TRANSFER OF APPROPRIATE ASSETS TO SPV
2.5 CREDIT ENHANCEMENT
2.6 RATING AGENCIES
2.6.1 Factors considered when rating securitisation
2.6.2 Regulation of rating agencies
2.6.3 Liability towards third parties
2.7 SERVICER
2.8 SECURITY IN FAVOUR OF TRUSTEE FOR DEBENTURE-HOLDERS
2.8.1 Form of security
2.8.2 Security structures
2.8.2.1 Security SPV
2.8.2.2 Legal form of trust for debenture-holders
2.8.2.2.1 Agency construction
2.8.2.2.2 Trust construction
2.8.2.2.2.1 Aspects of Companies Act 61 of 1973
ASPECTS OF TRADITIONAL SECURITISATION IN SOUTH AFRICAN LAW
2.8.2.2.2.2 Transfer of ownership
2.8.2.2.2.3 Trust for debenture-holders as bewind trust
2.8.2.2.2.4 Trust for debenture-holders as true trust
2.8.2.2.3 Trust for debenture-stockholders
2.8.3 Trustee for debenture-holders
2.9 DISTINCTION BETWEEN SECURITISATION AND OTHER FORMS OF STRUCTURED FINANCE
2.10 CONCLUSION
PART II COMPARATIVE PERSPECTIVES
CHAPTER 3 English Law
3.1 INTRODUCTION
3.2 LEGAL AND EQUITABLE CHARGES
3.2.1 Characteristic elements of floating charges
3.2.1.1 Charges over book debts
3.2.2 Implied terms of floating charge agreements
3.2.2.1 Business continuance
3.2.2.2 Business-dealing licence
3.2.2.3 Crystallisation terms
3.2.3 Crystallisation
3.2.4 Receivership
3.2.5 Advantages of floating charges
3.2.6 Disadvantages of floating charges
3.3 SECURITISATION: SPECIFIC CONSIDERATIONS
3.3.1 Regulatory considerations
3.3.1.1 Financial Services and Markets Act of 2000
3.3.1.2 Companies Act 1985
3.3.2 Transfer of rights and ‗true sale‘ requirement
3.3.2.1 Equitable assignment
3.3.2.2 Charge in favour of debenture trustee
3.3.2.3 Recharacterisation of sale as security
3.3.2.4 Non-assignment clauses
3.3.3 Bankruptcy-remoteness from originator
3.3.3.1 Transactions at an undervalue
3.3.3.2 Preferences
3.3.3.3 Transactions that defraud creditors
3.4 CONCLUSION
CHAPTER 4 American Law
4.1 INTRODUCTION
4.2 REVISED ARTICLE 9 OF UNIFORM COMMERCIAL CODE
4.3 SECURITISATION: SPECIFIC CONSIDERATIONS
4.4 CONCLUSION
PART III SOUTH AFRICAN LAW
CHAPTER 5 Debt Financing of Companies
5.1 COMPANY DEBT
5.2 DEBENTURES
5.3 PURPOSE OF SECURITY
5.4 SECURING DEBT IN SOUTH AFRICA
5.5 FORM OF SECURITY GRANTED TO SECURITY SPV
5.6 CONCLUSION
CHAPTER 6 Regulatory Considerations for Traditional Securitisations
6.1 INTRODUCTION
6.2 REGULATORY HISTORY OF SECURITISATION IN SOUTH AFRICA
6.3 BANKS ACT 94 OF 1990
6.4 NATIONAL CREDIT ACT 34 OF 2005
6.5 COMPANIES ACT 61 OF 1973
6.6 COMPANIES BILL 61 OF 2008
6.7 SECURITIES SERVICES ACT 36 OF 2004
6.8 COLLECTIVE INVESTMENT SCHEMES CONTROL ACT 45 OF 2002
6.9 DEBT COLLECTORS ACT 114 OF 1998
6.10 CONCLUSION
CHAPTER 7 Transfer of claims and „True Sale‟ Requirement
7.1 INTRODUCTION
7.2 AGREEMENTS BETWEEN ORIGINATOR AND SPV
7.3 RELATIONSHIP BETWEEN SPV AND SERVICER
7.4 SIMULATED TRANSACTIONS
7.5 CONCLUSION
CHAPTER 8 Insolvency Law Considerations in Securitisation
8.1 INTRODUCTION
8.2 IMPEACHABLE TRANSACTIONS IN TERMS OF INSOLVENCY ACT
8.3 TRANSFER OF BUSINESS BY TRADER
8.4 DISPOSITIONS VOIDABLE AT COMMON LAW: ACTIO PAULIANA
8.5 CONCLUSION
CHAPTER 9 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
9.1 STRUCTURE OF SECURITISATION SCHEME
9.2 REGULATORY CONSIDERATIONS FOR TRADITIONAL SECURITISATION
9.3 TRUE SALE REQUIREMENT AND INSOLVENCY-REMOTENESS
9.4 RECOMMENDATIONS
9.5 FINAL REMARKS
CHAPTER 10 Bibliography
10.1 BOOKS
10.2 ARTICLES
10.3 OTHER PUBLICATIONS
10.4 LIST OF CASES
10.5 LIST OF LEGISLATION
10.6 TABLE OF FIGURES
INDEX