Introduction
As the securitisation markets in Asia continue to develop, structures and techniques which have gained prominence in other jurisdictions (especially the United States and European countries) may have application in Asia.
This article will examine two particular securitisation techniques which are popular in other parts of the world and examines their potential impact in Asia.
Whole Business Securitisation
Whole business securitisation ("WBS") - sometimes called "operating company securitisation" - falls somewhere between a secured loan and a future flow transaction. It is essentially a securitisation of cash flow without any actual assignment of that cash flow, often because the cash flow is literally "cash" and there is therefore no receivable to assign. The technique has been used significantly in the UK, primarily involving a secured loan structure.
The key steps are:
- A special purpose vehicle (an "SPV") issues notes in various tranches to investors.
- The net proceeds of the note issuance will, on the closing date, be advanced to an operating company or companies by way of a secured loan.
- The security will consist of fixed and floating charges over all the assets of the operating companies especially the business generating assets.
The key element to the security package is the ability of the WBS investors to control events in time of trouble and, for example, prevent the appointment of an administrator and, if they wish, appoint a receiver to run the business or dismantle the business. If there is more than one secured creditor, some form of inter-creditor arrangements will need to be put in place at closing to give the WBS investors the necessary control.
The benefits of such a structure to a company are various and include:
- Higher debt levels
- Higher leverage (compared to traditional bank borrowing)
- longer tenor
Typically companies that would be candidates for WBS would have a mature business and a stable and predictable cash flow. Transactions have closed in the UK for companies in such diverse industries as theme parks, motorway service areas, airports and ferry services.
A related type of transaction structure which has been used in Europe and draws on a number of WBS features is so called "inventory securitisation" involving security interests over inventory and/or assignments of receivables and insurances. Assets/inventory that have been securitised this way include champagne, diamonds and base metals.
In Asia, to date, there has only been one true WBS for 1st Silicon in Malaysia. In many ways, 1st Silicon (which manufactures silicon wafers) was an unusual candidate for WBS. It was at the time of the deal (2001) a new company in its ramp up phase and in a volatile industry. In addition, the notes which were issued to investors benefited from certain forms of economic support from the State of Sarawak. However the transaction was structured, legally, as a WBS following the UK model. This was helped by Malaysia's creditor friendly corporate bankruptcy regime which follows the UK. Jurisdictions such as Hong Kong (with its English law based system) could also sustain a WBS type deal.
In other parts of Asia, however, the corporate insolvency laws are less favourable to WBS. In particular, the ability of certain creditors to have a moratorium imposed on a company's debts and to prevent secured creditors from exercising their rights with respect to the assets over which they have security (similar to Chapter 11 in the US) would at first sight seem to make a WBS transaction impossible. As outlined above, the ability to control the company and its assets when the company is in difficulties is at the core of successful WBS.
There are a number of measures that can be introduced into a transaction to minimise the creditor moratorium risk.
- transfer key assets to a bankruptcy remote SPV (there may be, of course, issues especially tax and accounting issues).
- restrict further indebtedness and employees
- have a number of key external directors of the WBS company
- have providers of services to the WBS company contract with a third party service provider
Nevertheless, some transactions have closed which use WBS techniques but adapted for local issues. For example, in Japan, a WBS type transaction has closed supported primarily by golf course revenues. Security was taken over a number of key golf courses and there was an assignment of revenues. Providers of services to the operating company contracted with a servicing company appointed for the purpose, thereby reducing the number of potential creditors. These steps and the other set out above do not remove the moratorium risk but try to mitigate against it as much as possible under current Japanese law.
Asia has a large number of businesses which would be excellent candidates for a WBS transaction. Most jurisdictions however do have legal (especially creditor moratorium) risks to be resolved. The challenge is for structured finance lawyers to develop ways of mitigating these risks in order that the securities which are supported by the WBS are attractive to investors. This would provide a much needed impetus for the further development of the securitisation market in Asia.
Master Trusts in South Korea
On May 27, 2004, the Financial Supervisory Service in South Korea (the "FSS") announced that LG Card had been granted approval to issue asset-backed securities ("ABS") through a master trust structure. The ABS will be backed by LG Card's credit card receivables and the initial issuance amount will be KRW525 billion. The FSS expects the master trust structure to be used widely by local credit card issuers to securitise their receivables.
The issuance by LG Card will be the first of its kind in South Korea and will pave the way for other originators to set up master trusts to securitise their assets. To date, single issuance vehicles have been the most commonly used structure in Korea for securitising assets domestically and internationally. During the credit card securitisation boom in Korea in 2001 and 2002, several market participants lobbied the FSS for permission to set up master trusts. At the time, approval was not given for the structures and originators of multiple series of ABS were forced to use multiple single issuance vehicles for the purpose.
The benefits of the master trust structure are clearly seen in jurisdictions such as the U.S. where they are commonly used for the securitisation of homogenous assets such as credit card receivables and residential mortgages. The ease of issuance of ABS from a master trust structure has made securitisation a common funding source for originators (such as MBNA) in the U.S. The master trust structure allows the originator to pool assets (which satisfy certain rating agency approved criteria) in one trust which issues multiple series of ABS from time to time depending on the funding needs of the originator. By taking advantage of the large pool of collateral in the trust, originators can issue series of ABS with varying terms, including legal final maturities which are shorter than the maturity of the assets in the pool. As the legal structure is already in place for the transfer of assets into the trust and the issuance of ABS, originators benefit from reduced legal costs related to each issuance of ABS. Investors also benefit from familiarity with the asset class and the structure which gives them greater certainty when making decisions to invest in a particular series of securities issued under the master trust.
Originators in Korea will benefit from the master trust structure in several ways. Currently, an originator wishing to issue ABS to domestic investors backed by its credit card portfolio, would use an on-shore trust and an on-shore SPV. For off-shore ABS issuance, an off-shore SPV would be added to the structure. In each case, the credit card receivables would be entrusted to the trust by the originator (at closing and from time to time during the revolving period). The on-shore SPV has an undivided interest in the assets of the trust represented by a trust certificate and would either issue securities directly to domestic investors backed by its interests in the assets of the trust or issue a bond to an off-shore SPV to be repackaged into ABS. The whole procedure is repeated each time the originator wishes to raise funds through securitisation. The advantage to the originator of the master trust structure is that it will not have to create a new trust and appoint a trustee each time it wishes to securitise its assets thereby saving on fees and expenses connected with the creation of the trust. Although an asset-backed securitisation plan will need to be filed with the Financial Supervisory Commission each time ABS is to be issued backed by receivables entrusted to the master trust, the documentation and negotiation time for each transaction will be reduced by the fact that the trust already exists and the rating agencies and other relevant parties have approved the eligibility criteria for the assets in the trust.
As the financial standing of the remaining credit card companies in Korea continues to improve, we can expect to see a return to credit card securitisation as a form of funding for these companies and the introduction of the master trust structure should facilitate multiple issuance.
About Paul Hastings.
Paul, Hastings, Janofsky & Walker LLP is an international law firm with over 950 lawyers in 15 offices on three continents: Asia, Europe and North America. Our lawyers in Hong Kong, Tokyo, Beijing and Shanghai offer a broad range of multi-jurisdictional legal services to clients in Asia and those wishing to access Asian markets and investors. Our Asian Securitisation and Structured Finance Group includes English, Japanese, Hong Kong and U.S. qualified lawyers. We are recognised for our breadth and depth of securitisation and structured finance expertise in Asia and our team members are consistently featured in the rankings of regional publications including the Asia Pacific Legal 500, Asia Law Profiles and Euromoney's Guide to the World's Leading Structured Finance Lawyers.
For further information, please visit www.paulhastings.com or contact:
HONG KONG:
Neil Campbell, tel: 852-2867-9908 email: [email protected]
Michelle Taylor, tel: 852-2867-9057 email: [email protected]
TOKYO:
Norifusa Hashimoto, tel: 81-3-3586-4711 email: [email protected]
Kaoru Umino, tel: 81-3-3586-5643 email: [email protected]
