Legal and Regulatory Securitisation Framework in Asia

A comparative study: Hong Kong, South Korea, Taiwan and China

Paul Kruger

8 November 2005

2

Introduction

– Many Asian corporates and financial institutions have adopted securitisation as part of the core funding strategy to tap into the domestic and the international capital markets.

– Economics is the main driver of the development of each securitisation market. The legal and regulatory environment dictates whether a transaction is feasible and influences the ultimate funding structure.

3

Introduction (cont’d)

Two models:

• General Law - Hong Kong

• Specific Enactment - South Korea, Taiwan and China

 Discussion:

• the typical securitisation structure used

• the regulatory requirements for securitisation transactions

• the legal and practical execution issues

4

South Korea

The enactment of the ABS Act in 1998 provided the foundation for the growth of the Korean securitisation market:– a Korean SPV may be established with minimum capital

of Won 10million – upon registration of the transfer of assets with FSC, the

transfer is perfected against third parties (but not the obligors) under the Korean law

– clearly stipulates the conditions which are required for a transfer to be deemed as true sale

Today, Korea is the largest securitisation market in non-Japan Asia.

5

ABS Act

However, the ABS Act did not address certain issues:

–Taxation issues: withholding tax, stamp duty and income tax

–Secured Bond Trust Act: the result is unsecured securities for the domestic market and double SPV structure for the international market

6

Standard double SPV StructureStatic Pool

Seller

Korean SPV

Offshore SPV

Investors

Swap Counterparty

Sale of Assets

Foreign Currency Bond + Security Pledge

Notes

KRW + Purchaser Junior Note

Swap

$

$

7

Standard double SPV Structure (cont’d)Revolving Pool

Seller

Trustee

Korean SPV

Offshore SPV

Swap Counterparty

Settlement of Assets

KRW Investor Certificate

Notes

KRW + Seller and Subordinated Certificates

Investors

Swap

Foreign Currency Bond

Onshore

Offshore

$

$

$

8

FSC Approval ProcessAll securitisation transactions executed under the ABS Act regime must comply with the registration requirements:

– Filing of Securitisation Plan with FSC.

– Registration of the transfer of securitised asset with the FSC

9

Application of ABS Act

If the securitisation transaction involves short term assets, each sale of assets during the revolving period must be registered with FSS.

The ABS Act only allows for the registration of one securitisation plan for one SPV:

– no use of master trust structure– higher transaction costs for repeat issuer

(less efficient funding tool)

10

Application of ABS Act (cont’d)

Structure: CMBS

Asset class: Keun mortgages, RMBS

– Required by law for the secured amount to be “fixed” prior to a transfer

– Under ABS Act, the secured amount is deemed fixed on the day immediately following the date on which notice is set

– Impractical timeline and higher cost of transaction - notification process in conjunction with registration process

11

Application of ABS Act (cont’d)

RMBS Filing and Keun Notification Timeline

(1) (2) (1A) (3) (4) (5)

Cut-off Date

Filing of Securitisation

Plan

Notices to Borrowers

Amendment Plan

Returned Notices and Final Pool

Count

Asset Transfer

Closing

14 - 18 days

10 Business days

12

Taiwan

Securitisation market in Taiwan developed after the enactment of the Financial Asset Securitisation Law (“FASL”) in June 2002

13

Taiwan (cont’d)

FASL

FASL is designed to set up the framework for financial assets securitisation by providing for:

– sale of specific types of financial assets by specified classes of originator to an SPT or SPC

– upon publication of the transfer notice, the transfer of assets is perfected against third parties and, if the Originator is the Servicer, the underlying debtors

14

Taiwan (cont’d)

– concessionary withholding tax for ABS, exempts business tax, stamp duty, deed tax and registration fee

– issue of either trust certificates or debt securities

15

FASL - Features of SPT and SPCSPT SPC

Nature ● Trustee must be established under Taiwan’s Trust Law

● Cannot be an affiliated enterprise of the Originator

● Established under Company Law this approval from MOF● Single shareholder company formed by financial institution not affiliated with the Originator● Lower minimum capitalisation under FASL (NT$100,000)

Ownership ● Trustee holds the legal ownership of assets● Some legal uncertainty with limited recourse provisions

● SPC holds the legal ownership of the assets issues securities “backed” by the assets purchased from the originator

Tax ● Trusts are treated as a “pass through” entities under Taiwanese law and will not be subject to any income, profits or registration taxes other than Gross Business Receipt Tax

● Tax position of a SPC is less clear● Tax neutrality may be difficult to achieve

Issuance ● Beneficiary Securities ● Asset Backed Securities

16

Cross Border Issuance

Seller

Onshore Trustee

Offshore

Investors

Swap Counterparty

Assets

Investor Certificate

Notes

NT$ Seller Certificate Subordinate Certificate

Swap

SwapNT$

$

17

Domestic Issuance

Seller

Onshore Trustee

Investors

Swap Counterparty

Assets

Investor Certificates

NT$, Seller Certificate Subordinate Certificate

Swap

NT$

18

Regulatory - What Approvals and which Authorities?

All securitisation transactions executed under FASL regime are required to comply with the approval requirements.Action Authority Timing & Other

IssuesDocuments

All securitisations under FASL

Approved from the appropriate sections of Bureau of Monetary Affairs (BOMA), MOF

● At least 4 weeks● At closing, opinions from CPA and legal counsel are required to be filed with BOMA

● Trust, servicing and offering documents in “finalised” form● Securitisation Plan● Originator’s and Trustee’s board resolution● True sale opinion from counsel● Fair value opinion from CPA● Rating letter

19

Regulatory - What Approvals and which Authorities? (cont’d)

Action Authority Timing & Other Issues

Documents

● Entry into a swap with a non-resident● Overseas issuance of Beneficiary Securities

Consent from Central Bank of China

● Approximately two weeks● Must be obtained before BOMA approval

● Hedging plan ● Confirmation under ISDA Master Agreement

Public Offering of Beneficiary Securities or Asset Backed Securities

Registration with the Securities and Future CommissionTaiwan

Stock Exchange or OTC Securities Exchange

● 12th business day from the date of submission (SFC)● 10th - 11th business days (TSE or OTCSE)● An underwriter (not affiliated with the Originator) must be mandated● Must first obtain BOMA approval

● Application form● Securitisation Plan ● Other documents supporting BOMA application● “Credit enhancement” contract

20

Regulatory - What Approvals and which Authorities? (cont’d)

Action Authority Timing & Other Issues

Documents

Clarifications on Tax Issues

Ruling from Department of Taxation of MOF

● No legislative timeframe

● Ruling application prepared by CPA

21

Tax:

– payment of expenses as part of investor yield - 6% or 20%?

– stamp duty on servicing agreements and registration fees with respect to transfer of mortgages

– gains on swap

Limitation of FASL

22

Limitation of FASL (cont’d)

Mortgages:

– after transfer date, each mortgage is required to be registered at the relevant land registry (no bulk registration process)

– uncertain time frame for enforcement of mortgages

23

Limitation of FASL (cont’d)

Trustee Liability:

– Servicer of last resort

– the preference for the trust structure means that the Trustee is responsible for the content of the Information Memorandum.

– Trustee becomes owner of real property and liable for any damages caused by defects in the real property

24

Limitation of FASL (cont’d)

Restricted scope:

– does not set out requirements for “true sale”

– originators: FASL may only be used by financial institutions (i.e. corporations need special approval from Ministry of Finance)

– asset class: chattel secured loans, loans secured by real estates, monetary rights (such as credit card receivables)

25

China

Earlier this year, the PBOC and CBRC jointly issued the Administration Measures for Securitisation of Credit Assets on a Pilot Basis (the “Measures”).

Main barriers for entering into a securitisation prior to the issuance of the Measures:– Lack of issuing vehicle under Chinese law– Marketability of trust certificates– Bankruptcy remoteness

26

The Measures

The Measures provide the legal framework for the execution of a securitisation transaction:

– trustee as the issuing vehicle– the issuance of asset backed securities (and

not trust securities) with limited recourse to trust assets

– perfection requirements

27

Proposed structure

Seller

Onshore Trustee

Investors$

$

Credit Assets

Asset Backed Securities

Loan Servicer

Fund Custodian

Registrar and Custodian

28

Limitation of the Measures

– originators: only financial institutions regulated by CBRC

– derivatives: no hedging for the securitisation transaction

– registration: does not provide for registration of real estate

– tax: does not address tax issues – Improved but limited investor base

29

Limitation of the Measures (cont’d)

Approval Process:

– Filing documents: rating reports, legal opinions, accounting opinions, information memorandum, application report, articles of originator and draft agreements

– Within 5 business days, PBOC confirms whether the application will be processed

– If application is accepted, PBOC is required to confirm in writing whether the application is accepted or rejected within 20 business days.

30

Hong Kong

Securitisation has been employed as a funding technique in Hong Kong for more than 15 years.

There is no specific legislation enacted to promote the development of securitisation market.

The establishment of the Hong Kong Mortgage Corporation in 1997 enhances the liquidity of residential mortgages.

In 2004, the Hong Kong Government securitised the future toll income to be received from tunnels and bridges.

31

Typical securitisation structureStatic Pool

Originator

Offshore SPV

Investors

Swap Counterparty

Assets$

$ NT$

32

Typical securitisation structure (cont’d)Revolving Pool

Originator

Trustee

OffshoreSPV

Investors

Swap Counterparty

Assets

Investor Certificate

Notes

Seller Certificate

$

$

33

Legal system based on English law with a developed body of case law.

Sale: legal and equitable assignment. Notice to underlying obligor is required to perfect the assignment.

“True Sale” and recharacterisation risk - the starting point is to have clear sale language to express the intention of the parties.

Insolvency and “claw-back” risk- unfair preference and fraudulent disposition

Tax:– Tax ruling available– Stamp Duty– Withholding tax

The Legal Framework

34

Conclusion

Specific legislation for securitisation

– Advantage - provides the legal framework for the transfer and perfection of assets

– Disadvantage - inflexibility may limit market development

Future developments

Questions

35

A05577033