12th Edition

Securitisation 2019

A&L Goodbody

Allen & Overy LLP

Association for Financial Markets in Europe

Basila Abogados, S.C.

Brodies LLP

Cuatrecasas

Elias Neocleous & Co LLC

Freshfields Bruckhaus Deringer LLP

GSK Stockmann

Kieti Advocates LLP

King & Wood Mallesons

Latham & Watkins LLP

LECAP

Levy & Salomão Advogados

Macfarlanes LLP

Maples Group

The International Comparative Legal Guide to:

McMillan LLP

Nishimura & Asahi

Oon & Bazul LLP

Orrick, Herrington & Sutcliffe (Europe) LLP

Roschier Advokatbyrå AB

Schulte Roth & Zabel LLP

Shearman & Sterling LLP

Sidley Austin LLP

Structured Finance Industry Group

Vieira de Almeida

Wadia Ghandy & Co.

Walder Wyss Ltd.

Waselius & Wist

A practical cross-border insight into securitisation work

Published by Global Legal Group, with contributions from:

WWW.ICLG.COM

The International Comparative Legal Guide to: Securitisation 2019

Editorial Chapters:

Country Question and Answer Chapters:

1 SFIG LIBOR Green Paper – Sairah Burki & Jennifer Wolfe, Structured Finance Industry Group 1

2 A New Era for Securitisation? – Anna Bak, Association for Financial Markets in Europe 8

7 Australia King & Wood Mallesons: Anne-Marie Neagle & Ian Edmonds-Wilson 30

8 Brazil Levy & Salomão Advogados: Ana Cecília Manente &

Fernando de Azevedo Peraçoli 44

9 Canada McMillan LLP: Don Waters & Michael Burns 57

10 Cayman Islands Maples Group: Scott Macdonald & James Reeve 70

11 China King & Wood Mallesons: Zhou Jie & Eddie Hu 80

12 Cyprus Elias Neocleous & Co LLC: Achilleas Malliotis 94

13 England & Wales Sidley Austin LLP: Rupert Wall & Jason Blick 104

14 Finland Waselius & Wist: Tarja Wist & Ann-Marie Eklund 123

15 France Orrick, Herrington & Sutcliffe (Europe) LLP: Hervé Touraine &

Olivier Bernard 134

16 Germany Allen & Overy LLP: Dr. Stefan Henkelmann & Martin Scharnke 149

17 Hong Kong King & Wood Mallesons: Paul McBride & Brian Sung 166

18 India Wadia Ghandy & Co.: Shabnum Kajiji & Nihas Basheer 181

19 Ireland A&L Goodbody: Peter Walker & Sinéad O’Connor 193

20 Japan Nishimura & Asahi: Hajime Ueno & Taichi Fukaya 208

21 Kenya Kieti Advocates LLP: Sammy Ndolo 225

22 Luxembourg GSK Stockmann: Andreas Heinzmann & Hawa Mahamoud 236

23 Mexico Basila Abogados, S.C.: Mauricio Basila & Karime Jassen Avellaneda 252

24 Netherlands Freshfields Bruckhaus Deringer LLP: Mandeep Lotay & Ivo van Dijk 261

25 Portugal Vieira de Almeida: Paula Gomes Freire & Benedita Aires 278

26 Russia LECAP: Michael Malinovskiy & Anna Gorelova 295

27 Scotland Brodies LLP: Bruce Stephen & Marion MacInnes 307

28 Singapore Oon & Bazul LLP: Ting Chi-Yen & Poon Chow Yue 319

29 Spain Cuatrecasas: Héctor Bros & Elisenda Baldrís 334

30 Sweden Roschier Advokatbyrå AB: Johan Häger & Dan Hanqvist 355

31 Switzerland Walder Wyss Ltd.: Lukas Wyss & Maurus Winzap 367

32 USA Latham & Watkins LLP: Lawrence Safran & Kevin T. Fingeret 380

Contributing Editor

Sanjev Warna-kula-suriya,

Latham & Watkins LLP

Publisher

Rory Smith

Sales Director

Florjan Osmani

Account Director

Oliver Smith

Senior Editors

Caroline Collingwood

Rachel Williams

Sub Editor

Jenna Feasey

Group Consulting Editor

Alan Falach

Published by

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ISBN 978-1-912509-74-4

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Disclaimer

This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

General Chapters:

3 Unlocking Value in Private Equity Transactions – Sanjev Warna-kula-suriya & Christopher Sullivan,

Latham & Watkins LLP 11

4 CLOs in the Current Regulatory Environment – Craig Stein & Phillip J. Azzollini,

Schulte Roth & Zabel LLP 15

5 Securitization as an Integral Part of a Corporate Capital Structure – Bjorn Bjerke,

Shearman & Sterling LLP 20

6 Credit Fund Warehouse Origination Facilities – Richard Fletcher & Ryan Moore, Macfarlanes LLP 25

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 interest 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

1

chapter 1

Structured Finance industry group (with the assistance of Steve Kudenholdt and Kyle matula of Dentons uS llP)

Sairah Burki

Jennifer wolfe

SFig liBor green Paper

Introduction

SFIG Engagement

SFIG’s LIBOR Task Force was formed to identify potential

membership actions that could be taken in response to the

anticipated phase-out of LIBOR. Given that the impact of this

change will be felt across the securitization industry, a Steering

Committee representing key sectors of the industry helps guide the

Task Force. The Task Force is developing an industry-

recommended best practice to help ensure an as-seamless-as-

possible transition away from the LIBOR benchmark to successor

benchmarks.

In addition to the work SFIG membership is undertaking within the

LIBOR Task Force, SFIG is also involved in the Alternative

Reference Rates Committee (“ARRC”) that was convened by the

Board of Governors of the Federal Reserve System and the Federal

Reserve Bank of New York (“NY Fed”). SFIG is a co-chair with

CRE Finance Council of the ARRC’s Securitizations Working

Group (“SWG”), and in that capacity has been working with the

SWG and across ARRC working groups to align, where possible,

the recommendations of the SWG with those of other industry

participants.

It is important to note that the SWG published its own consultation

for public comment on December 7, 2018. That consultation was

informed by the collective views of members of the ARRC as well

as the SWG, and as such may differ from the recommendations that

SFIG membership will develop under the leadership of the LIBOR

Task Force. For this reason, SFIG is publishing this First Edition

Green Paper which sets forth SFIG members’ initial views on how

structured finance market participants may navigate this significant

transition, including recommended trigger events, a fallback

benchmark rate waterfall, and calculation methodologies for

replacement reference rates.

Premise and Goal

The LIBOR Task Force seeks to establish industry consensus and

provide recommendations around one or multiple accepted

approaches.

It is important to stress that a “one-size-fits-all” set of

recommendations may not be appropriate for many reasons.

Structural frameworks may vary, reflecting different market practices

that arise from individual goals, strategies, and structures of different

types of institutions and asset classes. The recommendations set

forth in this First Edition Green Paper will continue to evolve with

the industry and the changing market environment.

Please see original document at SFIG LIBOR Greenpaper for

important language around Project Governance, Methodology,

Work Product, Limitation of Scope, and Disclaimers.

New Securitization Transactions (Non-

Legacy): Recommended Best Practices for

LIBOR Replacement & Fallbacks

Scope and Overview

This First Edition Green Paper presents a set of industry-proposed

recommendations for how to transition LIBOR-based securities to a

replacement benchmark when the securities are issued under new

securitization transactions, setting forth: (i) the effects of a

benchmark discontinuance event; and (ii) the definitions of the

various potential benchmark discontinuance events. These industry-

proposed recommendations are designed for new securitization

transactions only and are not intended as guidance for transitions

from the LIBOR benchmark in connection with legacy or otherwise

previously existing securitizations.

Please see original document at SFIG LIBOR Greenpaper for

important information on scope and overview, including a

discussion on the merits and drawbacks of different SOFR

calculation methodologies.

Draft LIBOR Fallback Language for US Securitization

Transactions

Note: Please read this document’s endnotes carefully as they include

significant discussion points, disclaimers, considerations, etc.

Effect of Benchmark Discontinuance Event1

If a Benchmark Discontinuance Event with respect to the

Benchmark occurs, then with respect to each Determination Date on

or after the Benchmark Discontinuance Event Date with respect

thereto, all references to the Benchmark shall be replaced with the

Replacement Rate; where the Replacement Rate equals:2, 3

(1) the sum of: (a) the Replacement Base Rate, which shall equal

the Relevant Tenor SOFR rate (or, if there is no Relevant

Tenor SOFR Rate, such rate for the Interpolated Term Period,

if available) that shall have been selected, endorsed or

recommended as the replacement for Relevant Tenor

iclg to: SecuritiSation 2019 www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London

Benchmark by the Relevant Governmental Sponsor, as of

Determination Time on the Determination Date4 for such

interest reset date; and (b) a Replacement Floating-Rate

Spread, if any; provided that

(2) if a Replacement Base Rate cannot be determined in

accordance with clause (1), then the Replacement Rate shall

be the sum of: [OPTION 1:(a) the Replacement Base Rate

which shall equal Compounded SOFR5] [OPTION 2: (a) the

Replacement Base Rate which shall equal Average SOFR] as

of Determination Time on the Determination Date for such

interest reset date; and (b) a Replacement Floating-Rate

Spread, if any; provided, further, that6

(3) [if a Replacement Base Rate cannot be determined in

accordance with clause (1) or (2) above, then the

Replacement Rate shall be the sum of: (a) the Replacement

Base Rate which shall equal SOFR, as of Determination Time

on the Determination Date for such interest reset date; and (b)

a Replacement Floating-Rate Spread, if any; provided,

further, that]7, 8

(4) if a Replacement Base Rate cannot be determined in

accordance with clause (1), (2), or (3) above, then the

Replacement Rate shall be the sum of: (a) the Replacement

Base Rate which shall equal such other alternate, substitute or

successor rate as shall have been selected, endorsed or

recommended by the Relevant Governmental Sponsor as the

replacement for the Benchmark; and (b) the applicable

Replacement Floating-Rate Spread, if any, with respect

thereto; provided, further, that

(5) if a Replacement Base Rate cannot be determined in

accordance with clause (1), (2), (3) or (4) above, then the

Replacement Rate shall be the rate that shall have been

selected, endorsed or recommended by ISDA as the sum of

(a) (i) the replacement for Relevant Tenor Benchmark, or (a)

(ii) alternatively, the replacement for the Benchmark, in each

case as of Determination Time on the Determination Date for

such interest reset date (“ISDA Replacement Base Rate”),

and (b) a Replacement Floating-Rate Spread, if any, with

respect thereto; provided, further, that

(6) if a Replacement Base Rate is determined pursuant to clause

(5), then [within X days after][following] the determination

of such Replacement Rate, the sponsor may propose an

amendment9 to replace such Replacement Rate with a

replacement rate (which, for the avoidance of doubt, may be

comprised of a replacement base rate and a replacement

floating-rate spread) (the “Substitute Replacement Rate”).

Such Substitute Replacement Rate shall become the

Replacement Rate upon the execution of such amendment

[SEE THREE ALTERNATIVE OPTIONS BELOW

REGARDING NOTEHOLDER CONSENT].10 For the

avoidance of doubt, prior to any Substitute Replacement Rate

becoming effective as described in the preceding sentence,

[FOR USE WITH OPTION 1 DESCRIBED BELOW:

including, prior to the receipt of the consent of the requisite

noteholders or in the event that the requisite noteholders have

voted to reject such proposed amendment][FOR USE WITH

OPTION 2 DESCRIBED BELOW: including, if a [majority]

of noteholders have objected to the terms of such

amendment], the Replacement Rate shall continue to be the

rate determined pursuant to the immediately preceding clause

(5).

OPTION 1 – CONSENT OF HOLDERS: on the Determination Date

following the date on which a [majority of noteholders][a majority

of noteholders that have responded to such consent solicitation]

have provided their consent to such amendment [provided, that the

requisite noteholder quorum has been satisfied with respect to such

consent solicitation].

OPTION 2 – HOLDER OBJECTION RIGHTS: on the Determination

Date following the date that is X days after notice of the proposed

Substitute Replacement Rate has been provided to noteholders

unless a [majority] of noteholders have objected to such amendment

prior to such date.

OPTION 3 – NO HOLDER CONSENT/OBJECTION RIGHTS: on

the Determination Date following the date that is X days after notice

of the proposed Substitute Replacement Rate has been provided to

noteholders. For the avoidance of doubt, no consent from any

noteholder is required to execute such amendment to effect the

selection of a Substitute Replacement Rate.11

For the avoidance of doubt and subject to the immediately

succeeding paragraph, if, following the occurrence of a Benchmark

Discontinuance Event, a Replacement Rate is selected by

application of any of clauses (1) through (6) above, then all

references to the Benchmark shall be replaced with the Replacement

Rate for each Determination Date on and after the date of such

selection.

If a Replacement Rate is selected pursuant to clause (2) or (3) above,

then on the first day of each calendar quarter following such

selection, if reapplication of clause (1) on such date would result in

the selection of a Replacement Rate, then such Replacement Rate

shall become the Benchmark on each Determination Date on or after

such date. If the reapplication of clause (1) as described in the

preceding sentence would not result in the selection of a

Replacement Rate, then the Benchmark shall remain the

Replacement Rate as previously determined pursuant to clause (2)

or (3) above.

If, following the occurrence of a Benchmark Discontinuance Event,

no Replacement Rate is able to be determined by application of

clauses (1) through (6) above, the Benchmark shall remain the

Benchmark as determined on the last interest reset date; provided,

that in the event no Replacement Rate is able to be determined on

any Determination Date, clauses (1) through (6) shall be applied on

the successive Determination Date.

For the avoidance of doubt, if a subsequent Benchmark

Discontinuance Event occurs with respect to any Replacement Rate

that has become the Benchmark pursuant to the terms hereof, the

terms of this section shall be reapplied upon such subsequent

Benchmark Discontinuance Event.

Defined Terms

“Asset Replacement Percentage” means, on any date of calculation,

a percentage where the numerator is the outstanding principal

balance of the assets included in the securitization that were indexed

to [the Relevant Tenor Benchmark][any tenor of the Benchmark]

but that are indexed to a reference rate other than the [Relevant

Tenor Benchmark][any tenor of the Benchmark]12 as of such

calculation date and the denominator is the outstanding principal

balance of the assets, as of such calculation date, that are or were

previously indexed to [the Relevant Tenor Benchmark][any tenor of

the Benchmark].13

“Average SOFR” means, as of any Determination Date, the average

of daily SOFR for each day in the [X] month period ending on the

day prior to such Determination Date; provided, that if SOFR is not

published on any day during such period, for the purposes of this

definition, SOFR for such day shall be deemed to be SOFR as

published on the most recent day preceding such date.14

“Benchmark” means, initially, LIBOR; provided that if a

Benchmark Discontinuance Event shall have occurred with respect

to any Benchmark (including, but not limited to, LIBOR), then the

term “Benchmark” shall mean the applicable replacement rate as

determined following such Benchmark Discontinuance Event in

accordance with the provisions specified under “Effect of

Benchmark Discontinuance Event”.15

Structured Finance industry group SFig liBor task Force green Paper

www.iclg.com2 iclg to: SecuritiSation 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London

“Benchmark Discontinuance Event” means the occurrence of one

or more of the following events with respect to the Benchmark. The

base rate of the securities will be re-indexed from the Benchmark to

the Replacement Rate, on the next Determination Date (the

“Benchmark Discontinuance Event Date”), following the earliest

of:16

(1) the date set in a public statement or publication of

information by or on behalf of the administrator of the

Benchmark announcing that it has ceased or will cease to

provide the Benchmark permanently or indefinitely, provided

that, at that time, there is no successor administrator that will

continue to provide the Benchmark;

(2) the date set in a public statement or publication of

information by the regulatory supervisor for the administrator

of the Benchmark, the central bank for the currency of the

Benchmark, an insolvency official with jurisdiction over the

administrator for the Benchmark, a resolution authority with

jurisdiction over the administrator for the Benchmark or a

court or an entity with similar insolvency or resolution

authority over the administrator for the Benchmark, which

states that the administrator of the Benchmark has ceased or

will cease to provide the Benchmark permanently or

indefinitely, provided that, at that time, there is no successor

administrator that will continue to provide the Benchmark;

(3) the [fifth (5th)] consecutive business day on which a

Benchmark is not published by the Benchmark administrator

and such failure is not a result of a temporary moratorium,

embargo or disruption declared by the Benchmark

administrator or any regulator or relevant regulatory

supervisor;

(4) the date on which the Asset Replacement Percentage is

greater than [50]%, as reported in the most recent servicer

report. For avoidance of doubt, once the securities are

converted to the replacement rate, the securities will not be

converted back to the previous Benchmark due to this clause

(4); or17

(5) the date which is [5] business days after the date of a

published statement by the administrator of the Benchmark,

or the regulatory supervisor for the administrator of the

Benchmark that has the effect that such Benchmark is no

longer representative or may no longer be used as a

benchmark reference rate in new transactions,

provided, however, following the public statement or publication of

information described in clause (1) or clause (2) above, the

[Sponsor/Servicer/Independent Third Party]18 at its option may

select any date within the [60]-day period prior to the cessation date

set by such public statement or publication and such date shall be

deemed to be the Benchmark Discontinuance Event Date; provided,

further, that (i) the [Sponsor/Servicer/Independent Third Party] shall

be required to [represent/confirm] that such action is required to

[ensure][facilitate] an orderly transition to the Replacement Rate,

(ii) notice must be provided to the noteholders at least 30 days prior

to such date selected by the [Sponsor/Servicer/Independent Third

Party], and (iii) at the time of notification to the noteholders

provided in clause (ii) of this proviso, there is no successor

administrator that will continue to provide the Benchmark.19

For the avoidance of doubt, to the extent the Benchmark in effect at

any time is based on the Relevant Tenor SOFR pursuant to a prior

application of clause (1) under “Effect of Benchmark

Discontinuance Event”, then the occurrence of any event as

described in this definition with respect to the Relevant Tenor SOFR

shall result in a Benchmark Discontinuance Event.20

NOTE: Implementation of triggers and replacement benchmark

rates must be carefully considered and should occur in such a way

that all changes are identical for all parts of a transaction. For

example, if a deal includes a hedge, the triggers and replacement

rates for the transaction should be identical to those included in the

hedge so that there is not a mismatch between the two.

“Compounded SOFR” means, as of any Determination Date, the

compounded average of daily SOFR, either (i) as published by the

Relevant Governmental Sponsor for the Relevant Tenor, or (ii) if not

so published, then calculated according to the provisions describing

the methodology for compounding as set forth in the definition of

“USD-SOFR-COMPOUND” published by ISDA on May 16, 2018,

using a Calculation Period that is the [X] month period ending on

the day prior to such Determination Date.21, 22, 23

“Determination Date” means the second London banking day prior

to the relevant interest reset date; provided that if a Benchmark

Discontinuance Event has occurred, each following Determination

Date shall be the second New York business day prior to the relevant

interest reset date.

“Determination Time” means, with respect to any Replacement

Base Rate or Replacement Floating-Rate Spread on any date, the

time that such rate or spread is published on such date [or, if such

rate or spread is not a published rate or spread, such time as is

determined by the Calculation Agent].24

“Interpolated Term Period” with respect to SOFR means the rate

per annum equal to the rate that results from interpolating on a linear

basis between: (a) SOFR as determined for the longest period (for

which such Benchmark is available) that is shorter than the Relevant

Tenor; and (b) SOFR for the shortest period (for which such

Benchmark is available) that is longer than the Relevant Tenor, in

each case as of the applicable Determination Time on the

Determination Date. For the avoidance of doubt, Interpolated Term

Period shall be inapplicable if the rates described in both clause (a)

and (b) are not available.

“ISDA” means the International Swaps and Derivatives

Association, Inc. or any successor thereto.

“LIBOR” means, with respect to any given interest reset date, if a

Benchmark Discontinuance Event has not occurred on or prior to

the Determination Date for such interest reset period, shall be

determined pursuant to the following provisions (in each case

rounded to the nearest 0.00001%):

(i) On each Determination Date for such interest reset date,

LIBOR shall equal the rate, as obtained by the Calculation

Agent from Bloomberg Financial Markets Commodities

News, for [X] month Eurodollar deposits that are compiled

by the ICE Benchmark Administration or any successor

thereto, as of 11:00 a.m. (London time) on such Determination

Date.

(ii) If, on any Determination Date for such interest reset date,

such rate is not reported by Bloomberg Financial Markets

Commodities News or other information data vendors

selected by the Calculation Agent, the Relevant Tenor

LIBOR will be Relevant Tenor LIBOR in respect of the first

preceding day for which the Relevant Tenor LIBOR was

most recently published.25, 26

“New York Fed’s Website” means the website of the Federal

Reserve Bank of New York at http://www.newyorkfed.org, or any

successor source.

“Relevant Body” means the administrator of the Benchmark, the

regulatory supervisor for the administrator of the Benchmark, the

central bank for the currency of the Benchmark, an insolvency

official with jurisdiction over the administrator for the Benchmark,

a resolution authority with jurisdiction over the administrator for the

Benchmark or a court or an entity with similar insolvency or

resolution authority over the administrator for the Benchmark.

“Relevant Governmental Sponsor” means the Federal Reserve

Board and/or the Federal Reserve Bank of New York, or by a

iclg to: SecuritiSation 2019 3www.iclg.com

Structured Finance industry group SFig liBor task Force green Paper

© Published and reproduced with kind permission by Global Legal Group Ltd, London

committee officially endorsed or convened by the Federal Reserve

Board and/or the Federal Reserve Bank of New York or any

successor thereto.

“Relevant Tenor” means the maturity that corresponds to the

relevant interest period.

“Replacement Base Rate” means the applicable base rate

determined in accordance with “Effect of Benchmark

Discontinuance Event” and which, for the avoidance of doubt, does

not include the applicable Replacement Floating Rate Spread, if any.

“Replacement Floating-Rate Spread” means, in respect of any

interest reset date:

(1) if the Replacement Base Rate has been determined pursuant

to clause (1), (2), (3) or (4) of the mechanics described under

“Effect of Benchmark Discontinuance Event”, then such

spread shall be the base rate modifier that shall have been

selected, endorsed or recommended by the Relevant

Governmental Sponsor, as the spread, or method for

calculating or determining the spread, which is necessary to

be added to or subtracted from the applicable Replacement

Base Rate to make it comparable to Relevant Tenor

Benchmark, as of Determination Time on the Determination

Date for such interest reset date; provided that

(2) if the Replacement Base Rate has been determined pursuant

to clause (5) of the mechanics described under “Effect of

Benchmark Discontinuance Event”, then such spread shall

be, then the base rate modifier that shall have been selected,

endorsed or recommended by ISDA as the spread, or method

for calculating or determining the spread, which is necessary

to be added to or subtracted from the applicable Replacement

Rate to make it comparable to the Relevant Tenor

Benchmark, as of Determination Time on the Determination

Date for such interest reset date; provided, further, that27

(3) in any event, [within X days after][following] (i) the

determination of a base rate modifier pursuant to clause (1) or

(2), or (ii) the date on which no base rate modifier has been

able to be determined pursuant to clause (1) or (2), the

sponsor may propose an amendment28 to designate a base rate

modifier or replace such base rate modifier (the “Substitute

Spread”). Such Substitute Spread shall become the

Replacement Floating-Rate Spread upon the execution of

such amendment [SEE THREE ALTERNATIVE OPTIONS

BELOW REGARDING WHETHER SUCH AMENDMENT

SHOULD RELY ON AFFIRMATIVE CONSENT OF

HOLDERS, WHETHER AMENDMENT WILL PROCEED

UNLESS REQUISITE HOLDERS OBJECT TO SUCH

AMENDMENT, OR WHETHER SUCH AMENDMENT

MAY BE DONE WITHOUT ANY HOLDER CONSENT

OR OBJECTION REQUIREMENTS].29 If a Replacement

Floating-Rate Spread has been determined pursuant to clause

(1) or (2) above, then [FOR USE WITH OPTION 1: prior to

the execution of the amendment to effect the Substitute

Spread][FOR USE WITH OPTION 2: (x) prior to the

execution of the amendment to effect the Sponsor Selected

Spread; or (y) following rejection of the Substitute Spread by

the requisite noteholders], the Replacement Floating-Rate

Spread shall remain the spread as so determined pursuant to

clause (1) or (2). If a Replacement Floating-Rate Spread was

not able to be determined pursuant to clause (1) or (2) above,

then [FOR USE WITH OPTION 1: prior to the execution of

the amendment to effect the Substitute Spread][FOR USE

WITH OPTION 2: (x) prior to the execution of the

amendment to effect the Substitute Spread; or (y) following

rejection of the Substitute Spread by the requisite

noteholders] then there shall be deemed to be no

Replacement Floating-Rate Spread.

OPTION 1 – CONSENT OF HOLDERS: on the Determination Date

following the date on which a [majority of noteholders][a majority

of noteholders that have responded to such consent solicitation]

have provided their consent to such amendment [; provided, that the

requisite noteholder quorum has been satisfied with respect to such

consent solicitation].

OPTION 2 – HOLDER OBJECTION RIGHTS: on the Determination

Date following the date that is X days after notice of the proposed

Substitute Spread has been provided to noteholders unless a

[majority] of noteholders have objected to such amendment prior to

such date.

OPTION 3 – NO HOLDER CONSENT/OBJECTION RIGHTS: on

the Determination Date following the date that is X days after notice

of the proposed Substitute Sponsor-Selected Spread has been

provided to noteholders. For the avoidance of doubt, no consent

from any noteholder is required to execute such amendment to

effect the selection of a Substitute Spread.

“Replacement Rate” means the Replacement Base Rate plus the

Replacement Floating-Rate Spread, if any.

“SOFR” means the Secured Overnight Financing Rate as published

by the Federal Reserve Bank of New York or any entity that assumes

responsibility for publishing such rate; provided, that if, on any

Determination Date for such interest reset date, such rate is not

reported by the Federal Reserve Bank of New York or such

successor entity, SOFR will be SOFR in respect of the first

preceding day for which SOFR was most recently published.

Please see SFIG LIBOR Greenpaper for Open Discussion Points.

Endnotes

1. Please note that the endnotes and related discussion points

contained in this Green Paper refer to the provisions set forth

under this “Effect of Benchmark Discontinuance Event”

heading as the “fallback waterfall”.

2. Note that the fallback waterfall provisions apply to a

“Benchmark” generally rather than solely to LIBOR. As a

result, if, for example, a deal switches from LIBOR to SOFR

and then SOFR is no longer available, the same triggers and

fallback waterfall would apply in determining a replacement

for SOFR.

3. Note that the party responsible for determining which

Replacement Rate is to be selected by application of the

fallback waterfall, including any calculations required

thereby, will need to be identified in each transaction

pursuant to the agreement of the transaction parties.

4. The Determination Date for USD LIBOR is typically defined

in the transaction documents and is usually two London

business days before the interest reset date. Given that

holders of LIBOR denominated notes would expect the

interest rate to be calculated as of that date, it would seem

prudent to leave the defined term as is (though not necessarily

for new SOFR products). Additionally, note that the proviso

in the definition of “Determination Date” provides that

following the occurrence of a Benchmark Discontinuance

Event, references to London business days shall be replaced

with references to New York business days.

5. Trustee and Calculation Agents in the group have raised

concerns regarding the calculation of interpolation and

compounding. They have expressed that they are

uncomfortable performing such interpolation or compounding

calculations and would instead prefer a party with an

economic interest in the transaction be the party to perform

such calculations.

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6. Clause (2) in the fallback waterfall allows for the use of

either an average of overnight SOFR or Compounded SOFR.

Some parties have noted that the average of overnight SOFR

may be a calculation that is simpler to perform.

7. Appropriate disclosure will be required to highlight that the

fallback will be to an overnight rate where previously there

was a term structure.

8. See open discussion point below regarding the possibility of

step 3 of the fallback waterfall being duplicative of step 2.

9. This provision will need to be adjusted depending on the

specifics of the transaction to tie to the relevant amendment

procedures and requirements (e.g., certain notice periods,

opinion requirements, requisite directions to the trustee

regarding solicitation of consents, etc.).

10. Generally, changes to this amendment provision may need to

be considered on a transaction-specific basis. There are

certain asset classes, e.g., mortgage loans in a REMIC

securitization, for which this language may not be

appropriate.

11. Note that the implementation of changes to the reference rate

may also require certain additional administrative and/or

ministerial amendments in order to properly effect such

reference rate change. Depending on the specifics of the

underlying transaction documents, clarification may need to

be added to the relevant amendment provisions to clarify that

such amendments may be done without requiring noteholder

consent.

12. This language is intended to account for a situation where the

assets were initially pegged to LIBOR then transitioned to

being based off a non-SOFR rate. For example, if the assets

in a transaction were initially LIBOR-based but later

transitioned to being based off of the treasury rate, this would

result in the occurrence of a Benchmark Discontinuance

Event.

13. In certain transactions, there may be a mismatch between the

tenor of the assets and liabilities at the time of issuance. For

example, some CLOs include assets tied to 1MO LIBOR but

have liabilities tied to 3MO LIBOR. In such a case, even

though the Relevant Tenor Benchmark is 3MO LIBOR, we

would want to trigger a Benchmark Discontinuance Event

based on the assets switching to the 1MO tenor of a

benchmark other than LIBOR. In transactions where such

mismatch is contemplated, the bracketed language regarding

any tenor of the Benchmark should be used instead

14. The proviso is meant to cover any non-business days on

which SOFR is not published, so that a rate is assigned for all

calendar days within the period for the purposes of

calculating Average SOFR.

15. The transaction documents should include a provision

specifically addressing how to handle a temporary

discontinuance of a Benchmark (e.g., if [X] Month SOFR has

not been published as of [time] on the Determination Date for

such interest reset date and a Benchmark Discontinuance

Event has not occurred, then [X] Month SOFR shall be [X]

Month SOFR as published on the first preceding business day

for which [X] Month SOFR was published).

16. Note that the party responsible for monitoring whether a

Benchmark Discontinuance Event has occurred will need to

be identified in each transaction pursuant to the agreement of

the transaction parties.

17. This provision, if included in a transaction, should be tailored

to the specifics of the transaction, including the structure of

the deal and the nature of the underlying assets as well as the

specific reporting mechanics (i.e., how it should be

specifically calculated; who should calculate, notify and

report the Asset Replacement Percentage; how often and on

what date(s)). Additionally, if this trigger is to be included, it

should only be included in transactions where both assets and

liabilities were LIBOR-based at the time of the transaction.

Please see the above discussion in Scope and Overview

regarding the appropriateness of including this trigger.

Further, parties should consider the applicability of such a

trigger in the case of a transaction that where some, but not

all, of the liabilities are tied to LIBOR.

18. In many instances, the Sponsor or Servicer (often one and the

same) are best placed to make this determination (note: in

certain deals the Sponsor might not exist for the duration of

the transaction). In other deals, an independent third party

may be best positioned to make this determination. In either

scenario, one of the key mandates is to ensure value transfer

is minimized.

19. The proviso in this definition is not intended to serve as a

standalone trigger but, instead, provides that the Benchmark

Discontinuance Event Date for a Benchmark Discontinuance

Event described in clause (1) or clause (2) may be triggered

early upon the requisite representation/confirmation and

notice. As this option provides for discretion as to when the

trigger is hit, this should likely be limited to use by the party

that has a need to switch on a certain date (e.g., out of certain

operational concerns) rather than a third-party service

provider.

20. The intent of this provision is to account for a situation

where, for example, a transaction has switched from

referencing 3MO LIBOR to 3MO SOFR and 3MO SOFR

later becomes unavailable. This language clarifies that, for

example, the failure to publish 3MO SOFR for five

business days would result in a Benchmark Discontinuance

Event. To the extent that term SOFR of bookending tenors

are available at such time, the new Benchmark would be

based on the interpolation of such tenors pursuant to step 1 of

the fallback waterfall. If bookending tenors of SOFR are

unavailable, the Benchmark would be determined pursuant

to the later clauses of the fallback waterfall.

21. The compound rate determined in accordance with the ISDA

definitions involves looking back at prior rates. As such,

there will be a lag in changes in the rates. As discussed

above, consider whether calculating the rates in arrears would

be a better option. Also, consider whether the benefit of

eliminating the lag in the compound rate is offset by the rate

not being known as of the Determination Date (as the

compounding would be done throughout the period).

Additionally, Trustee and Calculation Agents in the group

have raised concerns regarding these calculations. They have

expressed that they are uncomfortable performing such

compounding calculations and would instead prefer a party

with an economic interest in the transaction be the party to

perform such calculations.

22. The ISDA definition of USD-SOFR-COMPOUND may be

found at: https://www.isda.org/a/kKHEE/Supplement-57-

USD-SOFR-COMPOUND.pdf.

23. As indicated in the discussion points below, some parties

have noted that the average of overnight SOFR may be a

calculation that is simpler for calculation agents to perform.

Additionally, as indicated above, it will need to be agreed in

each transaction which party will be responsible for

performing any calculations in connection with a

replacement benchmark. The Trustee Committee has also

indicated that to the extent compounded SOFR is to remain in

the fallback language, they would prefer that the calculations

are explicitly described, rather than solely by reference to the

ISDA definition. The Trustee Committee has observed that

to the extent a Calculation Agent (in such capacity) is

requested to agree to perform any of the calculations in

connection with a Replacement Rate, such Calculation Agent

may be reluctant to do so unless (i) such calculations are void

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of any discretion on the part of the Calculation Agent, and (ii)

such calculations are explicitly described in the transaction

documents so that all market participants would be able to

agree upon the required calculations.

24. See open discussion point regarding calculation agents’

desire to not have discretion in selecting the source of the

Replacement Rate.

25. This definition is included as an example for illustrative

purposes only. Industry participants should consider defining

“LIBOR” consistent with market convention for their

particular asset sector at the time of deal issuance. In this

particular definition, we have removed the provision

requiring the Calculation Agent to solicit bids from banks

that is often seen in legacy deals. This was done because we

understand that banks rarely, if ever, respond to such

requests and as we are adding explicit provisions with

respect to switching to an alternative reference rate.

Additionally, we understand that ISDA is contemplating

removing the requirement to solicit quotes from panel banks

in their upcoming updates to the IBOR definitions.

26. Note that trustees and calculation agents have indicated that

they would prefer that they be provided direction for the

sources of any rates (including LIBOR).

27. Some parties have expressed concern that clause (2) in this

definition refers to the method selected by ISDA and that

such selection is not yet known. ISDA currently

contemplates choosing between three different methods to

determine the replacement spread: (1) forwards; (2) historical

mean; or (3) a spot-spread. In the absence of having such

method known at the time of the transaction, some parties

would prefer to leave out clause (2). Additionally, parties

have raised concerns about the use of a spot-spread in

determining the Replacement Floating-Rate Spread. Please

see the SFIG Response to ISDA Consultation on this point

generally.

28. This provision will need to be adjusted depending on the

specifics of the transaction to tie to the relevant amendment

procedures and requirements (e.g., certain notice periods,

opinion requirements, requisite directions to the trustee

regarding solicitation of consents, etc.).

29. Generally, changes to this amendment provision may need to

be considered on a transaction-specific basis. There are

certain asset classes, e.g., mortgage loans in a REMIC

securitization, for which this language may not be

appropriate.

Acknowledgments

We would like to thank Steve Kudenholdt and Kyle Matula of

Dentons US LLP for their very significant assistance in drafting this

Green Paper.

Structured Finance industry group SFig liBor task Force green Paper

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Jennifer Wolfe

Structured Finance Industry Group 1776 I Street NW Suite 501 Washington, DC 20006 USA Tel: +1 202 524 6312 / +1 917 414 3095

Email: Jennifer.Wolfe@sfindustry.org

URL: www.sfindustry.org

Sairah Burki

Structured Finance Industry Group 1776 I Street NW Suite 501 Washington, DC 20006 USA Tel: +1 202 524 6302 / +1 703 201 4294

Email: Sairah.Burki@sfindustry.org

URL: www.sfindustry.org

Jennifer Wolfe is a Director at SFIG covering ABS policy. She has 15 years of experience working in financial services, including capital markets, securitization, and asset-based lending.

Prior to joining SFIG, she was Director of Finance at FS Card Inc., a credit card venture based in Washington, DC. Prior to that, Jennifer was a Vice President at Merrill Lynch, where she focused on credit card receivables financing and principal investments in credit card portfolios. As an Associate at Merrill Lynch, she advised banks and finance companies on public market securitizations across many asset classes. Before joining Merrill Lynch in 2000, Jennifer was an account manager at Financial Guaranty Insurance Company, issuing bond insurance policies for RMBS issuers. Jennifer holds an MBA from Columbia Business School, and a BA in Economics from Barnard College.

SFIG was established with the core mission of supporting a robust and liquid securitization market, recognising that securitization is an essential source of core funding for the real economy. Under this mission, SFIG is dedicated to:

1. Educating members, legislators, regulators, and other constituencies about structured finance, securitization and related capital markets.

2. Building the Broadest Possible Consensus among members on policy, legal, regulatory and other matters affecting or potentially affecting the industry.

3. Advocating with respect to policy, legal, regulatory and other matters affecting or potentially affecting the industry.

4. Core Principles of Governance, Financial Transparency, Inclusion and respectful accommodation of divergent member views.

SFIG provides a representative and transparent member-driven platform for industry education and advocacy. While we are based in Washington, DC, our members’ interests extend globally.

We boast approximately 350 institutional members (and growing), including investors, issuers, and all other participants in the structured finance industry. As a member-driven organization our advocacy is committee-based, with nearly 70 committees and taskforces actively engaged in representing broad industry viewpoints across all aspects of the regulatory and legislative agenda.

Sairah Burki is the Head of ABS policy at SFIG. Sairah focuses on regulation and policy making that has broad impact across the securitization industry. Prior to joining SFIG, Sairah was the Director of Treasury Policy Affairs at Capital One, leading the company’s response to policy initiatives with significant capital markets and corporate finance implications. She previously held positions with Xerox, UBS and the Federal Reserve Bank of New York. Sairah is also the Executive Director of the SFIG Foundation, which supports youth education via scholarship funding.

Ms. Burki holds a Bachelor of Arts from Princeton University and a Masters in Business Administration from the University of Pennsylvania’s Wharton School.

Structured Finance industry group SFig liBor task Force green Paper

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chapter 2

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association for Financial markets in europe anna Bak

a new era for Securitisation?

A Year in Review

The new legislative framework for securitisation, which includes

the Simple, Transparent and Standardised (STS) Securitisation

Regulation (Securitisation Regulation) and related CRR

Amendment (the Securitisation Package), was intended to mark a

fresh start for securitisation within Europe. On 1 January 2019, the

Securitisation Package began to apply in EU and while reaching this

stage is in many ways a considerable achievement, the fact that so

much of the underlying technical framework remains incomplete

has created considerable uncertainty for the sector. January 2019

was in fact the first January since 2009 without any European ABS

issuance, with only a few billion euros of issuance since then. Thus,

one may ask a question: is this a new era for securitisation, or is the

new European framework all wrong?

However, before reviewing where we currently stand in the process

in more detail, let us recap briefly the main developments since we

contributed to this publication last year.

After nearly four years of drafting and intensive negotiations, the

new legislative package for securitisation entered into force on 18

January 2018.1 Entry into force marked the start of the technical

work on numerous, important implementing measures, without

which the Securitisation Regulation and the CRR Amendment will

not work in practice.

The EBA and ESMA received together over 30 different mandates

to develop various technical standards, guidelines and reports,

dealing with matters such as disclosure, the definition of

homogeneity, the STS notification template and rules governing the

securitisation data repositories and third-party verification agents.

Those, and several other key issues, were discussed in more detail in

this publication last year,2 and therefore this chapter does not

propose to repeat that discussion. It is, however, worth taking a

closer look at developments regarding ESMA’s proposed technical

standards on disclosure requirements.3

Controversy Over ESMA’s RTS on

Disclosures

In December 2017, ESMA published its initial consultation on draft

technical standards on disclosure requirements (including the

reporting templates) (the Disclosure RTS). ESMA based its

proposals on the existing ECB and CRA34 templates; ESMA has

also essentially exempted private transactions from the scope of the

reporting templates. The consultation closed in March 2018 and

ESMA’s approach was generally seen as encouraging by the

industry as it addressed many previously raised concerns, especially

with regards to private transactions.

Therefore, market participants were taken by surprise when, in

August 2019, ESMA published its final draft Disclosure RTS which

contained substantial changes from the version that was previously

consulted on: special arrangements for private transactions were no

longer included and the flexibility with regards to the use of “no

data” (ND) fields in reporting templates was significantly reduced.

Unsurprisingly, ESMA’s new approach created a great deal of

controversy, not only because of the significant change in policy

from its initial proposals but also by doing so without reopening the

consultation and not giving market participants any meaningful

opportunity to comment on such substantial changes.

ESMA’s final report was then submitted to the European

Commission (the Commission). After feedback provided by AFME

and others, the Commission did not endorse the RTS but instead, in

November 2018, sent them back to ESMA for redrafting.

Finally, on 31 January 2019, ESMA published the revised draft of

the Disclosure RTS. This included a number of adjustments, the

most helpful being a broadening in the ability for reporting entities

to use the ND options. While the revised approach is helpful and

has addressed some of the industry’s concerns, certain key issues

remain of concern: such as the lack of clarity on what is required for

many reporting fields, and the absence of a sensible and

proportionate transition period. The regime also remains highly

unsuitable for private transactions.

The next step is for the Commission to adopt the Disclosure RTS;

this is now expected not before late May, causing yet further delay

and uncertainty for the market.

As Well as the Disclosure RTS, Several

Critical Mandates for Technical Standards

and Guidelines are Still to be Completed…

Although the Securitisation Package took effect on 1 January 2019,

at the time of writing none of the Level 2 mandates have yet been

completed and published in the Official Journal of the EU (OJ).

This continues to create a significant level of uncertainty among

market participants.

The current status is that all technical standards which have been

drafted by the EBA and ESMA have been submitted to the

Commission for it to decide whether to endorse them which, as for

the Disclosure RTS, is now expected not before late May. It is

therefore expected that the next step – which is the scrutiny period

by the European Council and the European Parliament – will now

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commence after the summer of 2019 and the texts of the Level 2

technical standards will not be finalised and published in the OJ

until Q3 2019 at the earliest.

Tracking the developments of each of the many STS dossiers can be

challenging, therefore we have summarised the status of the key

RTS in the table below.

association for Financial markets in europe a new era for Securitisation?

Topic European Supervisory

Authority (ESA)

Status/Next step

Under the Securitisation Regulation

Risk retention RTS EBA Final draft submitted to the EC; adoption now delayed to Q3 2019/scrutiny period and approval by the EP and the Council expected later in 2019.

Homogeneity RTS EBA Final draft submitted to the EC; adoption expected end-May/scrutiny period and approval by the EP and the Council expected in Q3.

STS notification RTS and ITS

ESMA Final draft submitted to the EC; adoption expected end-May/scrutiny period and approval by the EP and the Council expected in Q3.

Third-party STS verification services RTS

ESMA Final draft adopted and published by the EC; publication in OJ expected end-May.

STS Criteria Guidelines EBA English language final guidelines issued/now in translation into other EU languages.

Clearing and collateral posting obligation exemption RTS

Joint ESAs Final draft submitted to the EC/scrutiny period and approval by the EP and the Council expected in Q3.

Securitisation repository fees Delegated Act

ESMA Final draft ESMA technical advice submitted to the EC/scrutiny period and approval by the EP and the Council expected in Q3.

Securitisation data repositories application RTS and ITS

ESMA Final draft ESMA technical advice submitted to the EC/scrutiny period and approval by the EP and the Council expected in Q3.

Disclosure requirements RTS and ITS

ESMA Final draft submitted to the EC; adoption expected end-May/scrutiny period and approval by the EP and the Council expected in Q3.

Under the CRR

Purchased receivables/

internal models/proxy data RTS

EBA Final draft submitted to the EC; adoption expected later in 2019.

Tranche maturity definition guidelines

EBA Consultation paper under development; expected to be published in 2019.

SRT supervisory recognition report

EBA Expected late 2019.

Despite a Very Slow Start to 2019, March

has Seen the First STS Transactions

Coming to the Market

Over a decade on from the financial crisis, issuance in Europe is still

at a fraction of the level it once was, having dropped from €819

billion in 2008 to just €269 billion in 20185 – of which only half was

actually placed with investors, with the remaining part being

retained by originators and used to support repo funding from

central banks. And as mentioned at the start of this chapter, January

2019 was the first January in a decade with no ABS issuance and

year-to-date (at the time of writing) placed European ABS issuance

was just €13.1 billion6.

However, despite this very slow start, March has brought the first

STS transactions to the market, starting with Volkswagen’s

successful VCL Multi-Compartment, Compartment VCL 28 auto

transaction and a private French RMBS deal which has been

included in ESMA’s STS register (Private Harmony French Home

Loans FCT7). In April, Nationwide BS announced its public RMBS

transaction Silverstone, which will be also the first UK STS-

compliant securitisation. Market soundings suggest more STS

supply expected in the second half of Q2. And although it all sounds

optimistic, we must not forget that the securitisation market is still

just a fraction of its former size and that the lack of full legal clarity

about the final rules continues to hold back some of the market

participants – including some investors – from entering the STS

market.

The Commission has said it hopes the STS framework will be the

catalyst for reigniting issuance and investment. However, while

much of the underlying detail supporting the regulation remains to

be finalised, this ambition will continue to be unfulfilled.

A certain level of disruption is inevitable whenever significant

regulatory reforms are introduced, and in that sense STS

securitisation is no different. But in order for the new framework to

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begin making a positive impact, these outstanding issues need to be

resolved as rapidly as possible.

Whether, in the long term, the arrival of STS securitisation marks

the beginning of a significant recovery for European securitisation

is something which only time will tell. Arguably the market can

only improve from where it currently is.

What is clear is that over the coming months Europe’s policymakers

must “renew their vows” and recommit to creating an environment

which helps European securitisation to thrive. Maintaining that

focus will be essential if we are to see a vibrant, high-quality and

dynamic European securitisation market emerge, delivering funding

for Europe’s businesses and consumers and adding stability to our

banking system.

Endnotes

1. https://ec.europa.eu/info/business-economy-euro/banking-

and - f inance / f inanc ia l -marke t s / s ecu r i t i e s -marke t s /

securitisation_en#new-rules-for-simple-and-transparent-

securitisation.

2. “Reviving Securitisation in Europe: From Regulation to

Implementation”, The International Comparative Legal Guide

to: Securitisation 2018.

3. https://www.esma.europa.eu/sites/default/files/library/esma

33-128-600_securitisation_disclosure_technical_standards-

esma_opinion.pdf.

4. Regulation (EU) NO 462/2013 on Credit Rating Agencies.

5. AFME Securitisation Data Report Q4 2018 https://www.

afme.eu/en/reports/Statistics/securitisation-data-report-q4-

2018/.

association for Financial markets in europe a new era for Securitisation?

Anna Bak

Association for Financial Markets in Europe 39th Floor, 25 Canada Square Canary Wharf London E14 5LQ United Kingdom Tel: +44 203 828 2673

Email: anna.bak@afme.eu

URL: www.afme.eu

Anna Bak is an Associate Director in the Securitisation Division at The Association for Financial Markets in Europe (“AFME”) where she is responsible for developing positions on a wide variety of securitisation-related topics and representing those positions to the European institutions and international organisations, as well as a wide range of national authorities. Anna joined AFME in February 2014 to work in the Securitisation Division. She is involved in negotiating industry standpoints on many critical regulatory initiatives, including calibration of the Basel capital and liquidity rules, Solvency 2 rules, derivatives and transparency rules as well as establishing “simple transparent and standardised securitisation” under the European securitisation framework. Earlier in her career, Anna was a transaction lawyer in Amsterdam. Previously, she worked at TMF Group and later at Citco where she spent six years working on variety of ABS transactions, including RMBS, SME and auto-loans structures. Anna holds an LL.M. degree from the University of Utrecht (the Netherlands) with a specialisation in European Law and a Master of Laws degree from the University of Lodz (Poland).

AFME (Association for Financial Markets in Europe) advocates for deep and integrated European capital markets which serve the needs of companies and investors, supporting economic growth and benefitting society. AFME is the voice of all Europe’s wholesale financial markets, providing expertise across a broad range of regulatory and capital markets issues. AFME aims to act as a bridge between market participants and policy makers across Europe, drawing on its strong and longstanding relationships, its technical knowledge and fact-based work. Its members comprise pan-EU and global banks, as well as key regional banks, brokers, law firms, investors and other financial market participants. AFME participates in a global alliance with the Securities Industry and Financial Markets Association (“SIFMA”) in the US, and the Asia Securities Industry and Financial Markets Association (“ASIFMA”) through the GFMA (Global Financial Markets Association). For more information please visit the AFME website: www.afme.eu.

Follow us on Twitter: @AFME_EU.

6. h t t p s : / / m a r k e t s . j p m o r g a n . c o m / r e s e a r c h / e m a i l / -

obcnj7h/72Ql0sgXubWQgTped8n7Fg/GPS-2971387-0.

7. h t t p s : / / w w w. e s m a . e u r o p a . e u / p o l i c y - a c t i v i t i e s /

securitisation/simple-transparent-and-standardised-sts-

securitisation.

11

chapter 3

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latham & watkins llP

Sanjev warna-kula-suriya

christopher Sullivan

unlocking Value in Private equity transactions

Introduction

Securitisation markets have been off to a cautious but steady start in

2019, despite lingering uncertainty over transparency requirements

under the new EU Securitisation Regulation, risk retention in Japan,

and political headwinds such as Brexit and the end of net asset

purchases by the European Central Bank. By the end of March

2019, over €12 billion of new issuance priced in Europe, across a

variety of asset classes. A number of transactions are in the pipeline,

even in the midst of regulatory uncertainty. One of the asset classes

that has attracted increased attention in recent times is private

equity.

We discuss below how securitisation can be a valuable tool as a

means of:

■ financing or refinancing all or part of acquisitions of portfolio

companies by private equity houses; and

■ realising value in, or providing leveraged exposure to, private

equity investments and illiquid assets.

Acquisition Financing

Private equity backed acquisitions customarily involve an equity

component and a debt component. Typically, the “true” equity

component of an acquisition will be provided by one or more

limited partnerships using funds raised and managed by private

equity sponsors for that purpose. In some cases, these limited

partnerships will incur debt financing against either the limited

partners’ investment commitments, the limited partnership’s

investments, or both, using securitisation structures and techniques.

In that manner, private equity sponsors can leverage their equity

funding even before it is invested in acquisitions.

The debt component of a private equity acquisition will typically be

provided in the form of leveraged loans (whether senior or

subordinated, first, or second lien), high-yield bonds, or some

combination. Of course, funding that acts like equity for purposes

of the senior debt financing can also be provided in the form of debt

incurred at one or more parent companies and then downstreamed to

the acquisition vehicle, creating so-called structural subordination.

Financing will be incurred at various stages in an acquisition,

including:

■ initial bridge financing;

■ more permanent take-out financing;

■ incremental financing, which permits private equity sponsors

to extract some value after a period of initial success with an

acquisition;

■ refinancing all or any of that debt; and

■ funding as part of an exit from an acquisition.

Due to its structural integrity, securitisation customarily incurs

lower funding costs than leveraged loans or high-yield bonds.

Securitisations generally result in highly liquid assets (for example,

customer payables that turn into cash within a few months) being

ring-fenced from the other credit risks of the target group operating

companies. Typically, the more homogenous and predictable the

cash flows from the receivables, and the more impenetrable the

ring-fencing, the lower the cost of the financing.

Securitisation financing can help lower the average cost of debt in

an acquisition, therefore it permits private equity sponsors to bid

more for target groups and can help private equity sponsors increase

returns on equity – potentially both.

While securitisations can play an important role in each stage of

financing, the complexity of structuring and documenting

securitisation transactions means that these transactions are more

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”

securitisation financings that later transformed into permanent

securitisation financings once certain longer-term conditions were

satisfied (and at which time the advance rates in the securitisations

increased and funding costs decreased).

Raising financing via the securitisation of trade receivables

alongside leveraged loans and high-yield bonds in private equity

acquisition transactions is now very widely used. Typically, the

package of operating covenants for such securitisation transactions

will be lighter than the covenants for leveraged loans and even high-

yield bonds, and such transactions may or may not have financial

covenants given their focus on ring-fenced short-term receivables.

It has, for example, become typical for an acquisition to be

completed using leveraged loans and/or high-yield bonds and then,

at a later date, to use the proceeds of a trade receivables securitisation

to fund a shareholder dividend.

Securitisation financing can also be raised via so-called “whole-

business” securitisations, in which a special purpose vehicle is

established to lend, to the target group, funds raised via rated debt

securities secured over the assets of the target group.

The cash flows of the target group as a whole are applied to repay

the loans to the issuer and to repay the rated securities to investors.

Operating and financial covenants for a whole-business

securitisation tend to be largely similar to those for leveraged loans.

Whole-business securitisations generally require target groups with

stable cash flows and strong market positions (including high

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barriers to entry). Liquidity supporting the rated securities will be

essential, and there may be some sort of credit enhancement

depending on the target group involved. This enhanced structure

will likely enable the target group to achieve higher levels of

borrowing and longer maturities than what is available in the

leveraged loan or high-yield bond markets.

Similarly, securitisation financing can be raised via so-called

“Opco-Propco” structures, pursuant to which a target group is split

into a property-owning part and an operating part. The property-

owning part raises funds via rated debt securities secured over the

properties. With the proceeds of these securities, the property-

owning companies then acquire the properties and lease them to the

operating part of the group. Rent on the leases is then applied to

repay the securities to investors. Operating and financial covenants

tend to be largely similar to those for the leveraged loans. Opco-

Propco securitisations generally require target groups to have stable

cash flows and strong market positions (including high barriers to

entry), as well as properties that can be sold should cash flows be

insufficient to service the securities.

Finally, debt financing for private equity acquisitions is often raised

by securitising the leveraged loans that lenders in the acquisitions

originally provided. In fact, collateralised loan obligations (CLOs)

are now one of the biggest buyers of leveraged loans. With

increasing frequency, leveraged loans are being acquired by

specialist funds established by private equity sponsors for the

purpose of acquiring and securitising leveraged loans and acquiring

equity tranches in CLO transactions.

A traditional CLO transaction begins with a fund manager

establishing a warehouse facility, usually with an arranger, pursuant

to which leveraged loans are acquired from the secondary market

(often, immediately after the loans have been made at the time of the

acquisition). Once a sufficient volume of loans has been acquired,

the arranger helps a special purpose vehicle to issue rated securities

to investors secured by the loan portfolio. The proceeds of the

securities are used to repay the warehouse financing and, often, to

acquire more loans during a subsequent brief ramp-up period. The

manager will then reinvest the proceeds of loan repayments and loan

sales over a several-year reinvestment period, and thereafter the

CLO will be repaid as the loans are repaid.

Specialist private equity sponsor vehicles are a more recent

phenomenon. Originally set up to hold retention tranches in CLO

transactions in order to meet the requirements of the EU (and, later,

the U.S.) risk retention rules, these vehicles gradually became long-

term owners of leveraged loans and other non-securitised

investments, in part due to the EU requirement that “originators”

(one type of entity permitted under EU rules to hold 5% retention

interests) not be “solely” in the business of securitising assets. A

number of private equity sponsors have established such vehicles

that not only provide an additional source of financing for their own

acquisitions without using their own balance sheet or limited

partnership funding, but can also earn several layers of management

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.

Realising Value

A private equity sponsor can use securitisation to realise the value of

its investments in several ways. For example, the sponsor can, when

selling a target group, encourage bidders to include one or more of

the forms of securitisation financing described above to maximise

the sale price. In addition, private equity sponsors can securitise

their investments in target groups by selling those investments to

special purpose vehicles established to acquire such equity interests.

These vehicles, sometimes known as collateralised fund obligations

or CFOs, acquire such equity interests with funds raised in the

capital markets (whether or not publicly rated) or through bank

financing.

The benefits such vehicles offer to private equity sponsors are

manifold, including the benefits described above (e.g., earning

management fees). For example, whilst the primary route to

realising value in investments will remain an M&A or capital

markets transaction in relation to a single portfolio company,

sponsors may be able to use such vehicles to monetise all or part of

a portfolio investment earlier than the M&A or capital markets

might otherwise allow. If pricing for an IPO is not attractive,

securitisation can be a beneficial (even if temporary) way to raise

funds at competitive pricing from investors who want a leveraged

exposure to the investment.

Such vehicles might permit a sponsor to dispose of part of a

portfolio investment without losing control over the remainder.

Alternatively, such vehicles might permit a sponsor to dispose of

control of such a portfolio investment (and, depending on the facts,

achieving off-balance sheet treatment of the target group) while

retaining a minority investment and thus participating in future

profits. Finally, a sponsor might be able to negotiate a right to

repurchase assets from the vehicle, and thus enhance the sponsor’s

flexibility and the potential profitability of an alternative exit in

future.

In order for such vehicles to appeal to and successfully perform for

investors, however, they will need to apply a variety of

securitisation techniques. The cash flows from private equity

investments are more unpredictable than from debt investments for

several reasons, and their value is more volatile. The portfolio

should have an expected realisation profile that, to the greatest

extent possible, smooths out the cash flows to be received by the

vehicle. Even then, a liquidity facility to pay interest in a timely

manner on the most senior tranche of debt securities, as well as

perhaps a funding reserve or other credit or liquidity enhancement,

may well be needed. Over-collateralisation requirements for CFOs

are greater than for normal CLOs.

The structure customarily involves the transfer of limited

partnership (LP) interests by the private equity sponsor to a special

purpose vehicle. In most cases, the general partner of the LP will be

required to consent to such transfer, and to consent to the subsequent

creation of security over the LP interests in favour of the security

trustee for the securitisation. Additional points for due diligence are

the provisions for “clawback” of distributions made to limited

partners and indemnities given by LPs in the partnership agreement.

These features, which do not exist in normal CLOs, are factored into

the rating analysis for CFOs. The structure will include over-

collateralisation and interest cover tests similar to those used in

CLOs and, sometimes, additional leverage ratios that need to be

satisfied to permit distributions to the equity holder.

A New Regulatory Landscape

The EU Securitisation Regulation defines “securitisation” broadly

and refers to a transaction or scheme whereby the credit risk

associated with an exposure or a pool of exposures is tranched and

has certain characteristics, including that: (a) payments in the

transaction or scheme are dependent upon the performance of the

exposure or of the pool of exposures; and (b) the subordination of

tranches determines the distribution of losses during the ongoing

life of the transaction or scheme.

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While there is typically a transfer of risk in a whole-business

securitisation, the risk is based on the value of a group of operating

companies, reflected by the residual cash flows of the business.

Whole-business securitisations could be structured in such a way as

to conclude that the transfer of operational equity type risk falls out

of scope of the EU Securitisation Regulation’s risk retention, due

diligence, and transparency requirements.

Market participants (and arguably regulators) have historically

accepted this approach. However, such an equity-focused approach

raises an equally important question – does the investment

constitute an alternative investment fund (AIF) under the EU

Alternative Investment Fund Managers Directive (AIFMD), or

equivalent in other jurisdictions? For example, while CFO

structures may look like CLOs, the notes are backed by funds rather

than loan obligations. Falling within the AIFMD’s scope comes

with its own host of disclosure, authorisation, and conduct of

business requirements (among others). In any event, the analysis

will be fact-specific and individual transactions should be structured

carefully to ensure the best result, whether by way of a

securitisation, CFO, fund, or other structure.

Under the new EU Securitisation Regulation, originators, sponsors

and issuers must comply with a direct obligation to make significant

amounts of information and documentation relating to

securitisations available to regulators, investors, and, upon request,

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,

any material non-public information that the originator, sponsor, or

issuer must disclose under market abuse legislation and any other

“significant events” such as changes to the transaction’s structure,

risk profile, or documentation.

EU-regulated institutional investors already required much of this

information as part of their own due diligence requirements under

the previous rules. However, the new direct disclosure requirements

come with administrative sanctions for non-compliance, even

though the Commission has not yet finalised the reporting

templates. The extent to which wider disclosure and transparency

requirements apply to originators and sponsors established outside

the EU remains uncertain, even where the only EU nexus is

European investors.

At the same time, CFO structures may avoid some costs normally

associated with securitisations. For example, hedging for FX

exposure may be avoided because of the significant equity cushion

used for over-collateralisation. CFOs also should be structured to

fall outside of the new EU Securitisation Regulation risk retention,

credit granting and disclosure requirements, as they are more akin to

a leveraged acquisition. The risk being tranched in relation to

private equity funds that invest in leveraged buyouts is more equity

in nature. The performance risk being taken by investors is

effectively equity price risk and dividend risk on equity, rather than

credit risk. This risk can be contrasted with classic securitisations

such as residential mortgage loan securitisations and CLOs, in

which case the risk shared by the different classes of notes would be

the credit risk in relation to those loans.

In light of these developments, well-established private equity-

related transaction structures may carry added appeal. Historically,

such structures fell outside of EU risk retention and reporting

obligations because they are structured to extract the residual cash

flows of an operating group of companies, rather than to repackage

the credit risk of debt obligations.

Conclusion

Securitisation provides multiple tools for private equity sponsors to

achieve higher bid prices, higher levels of acquisition financing,

lower costs of funding, earlier monetisation of investments, and

higher returns to investors. In light of recent developments,

securitisation transactions can be a challenge to structure and

complete relative to other forms of financing. However, they

potentially offer a unique set of benefits and therefore are worth

considering for private equity assets.

latham & watkins llP unlocking Value in Private equity transactions

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Sanjev Warna-kula-suriya

Latham & Watkins LLP 99 Bishopsgate London EC2M 3XF United Kingdom Tel: +44 20 7710 3034

Email: sanjev.warna-kula-suriya@lw.com

URL: www.lw.com

Christopher Sullivan

Latham & Watkins LLP 99 Bishopsgate London EC2M 3XF United Kingdom Tel: +44 20 7710 4524

Email: christopher.sullivan@lw.com

URL: www.lw.com

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 share with Latham & Watkins any confidential information regarding this potential engagement unless and until an attorney/client relationship is established and agreed-upon in writing.

Sanjev Warna-kula-suriya is a partner in the London office of Latham & Watkins and a member of the Finance Practice. He is also Co-Chair of the Global Structured Finance Practice. Mr. Warna-kula-suriya advises private equity sponsors, hedge funds, commercial and investment banks, and corporates on a broad range of inn