After a year-long legislative review, the Italian Parliament
enacted Law no. 130 of April 30 1999 concerning the securitization
of receivables by Italian originators. The Italian financial and
legal communities have welcomed Law no.130 as a much needed
improvement to the legal framework that Italian originators and
their advisors face when structuring a securitization
transaction.
Before the adoption of Law no.130, securitization transactions
involving Italian originators had to be implemented through
complicated structures, including foreign entities, to avoid the
restrictions and limitations of the Italian legal system and
unfavourable tax treatment. The principal obstacles created by the
Italian legal system to the implementation of securitization
transactions included:
-
burdensome formalities for perfecting an assignment of
receivables from an originator to a special purpose
vehicle;
-
the prohibition against the issuance by Italian
companies of bonds for amounts exceeding their paid-in
capital; and
the application of a 12.5% withholding tax on the payment of
interest by an Italian issuer to holders (including any
non-resident holders) of its bonds.
Law no.130 eliminates many of those restrictions and limitations
and provides for favourable tax treatment, thus facilitating the
structuring of Italian securitization transactions.
Scope
Law no.130 applies to securitization transactions implemented
through the assignment for consideration of existing or future
accounts receivable, identifiable en bloc, provided that:
- the assignee is a securitization company, ie, a company
having as its sole purpose the implementation of one or more
securitization transactions; and
- proceeds generated by the assigned receivables are used by
the assignee exclusively to satisfy the obligations deriving
from the securities issued by the securitization company to
finance the acquisition of the receivables and pay transaction
costs, for so long as such obligations remain outstanding and
such costs unpaid (however, certain provisions of Law no.130
imply that such proceeds may also be used otherwise, see below,
Prospectus and rating requirements).
Securitization company
A securitization company is subject to the same regime
applicable to financial companies, eg, supervision of the Bank of
Italy when certain quantitative thresholds are met; competence
requirements for directors, auditors and officers; and moral
standing requirements for stockholders, directors, auditors and
officers. However, unlike financial companies, securitization
companies need not have a minimum capitalization.
p>Receivables assigned to a securitization company in the
context of a given transaction are segregated from other assets of
the securitization company (including receivables assigned to it in
the context of other transactions) and may be attached only by
holders of the securitization securities pertaining to those
receivables.
Law no.130 also indicates that the assignee of the receivables
and the issuer of the securities may be two separate entities, both
subject to the rules applicable to securitization companies.
Prospectus and rating requirements
Securitization securities are subject to the same regime
applicable to other securities and their offer to the public in
Italy is conditional upon the publication of a prospectus. Unlike
other securities, however, the offer of securitization securities
to institutional investors is subject to the publication of a
short-form prospectus, the content of which is set forth by Law
no.130.
Among other things, the prospectus for institutional investors
must specify under what circumstances the securitization company
may reassign the assigned receivables or reinvest proceeds
generated by the assigned receivables, thus suggesting that such
proceeds may be used for purposes other than paying interest on and
the principal of securitization securities and transaction
costs.
If the securitization securities are offered to the public, the
credit-worthiness of the transaction must be assessed by a credit
rating agency meeting certain requirements to be set forth by
CONSOB (the Italian Securities and Exchange Commission).
Assignment of receivables and transfer of security
interest
Under ordinary rules, an assignment of Italian receivables
is:
-
valid as between the parties upon a meeting of the
minds;
-
perfected vis-à-vis the assigned debtors upon (a)
notification of the assignment to, or acceptance of the
assignment by, the assigned debtors or (b) the assigned
debtors' becoming otherwise aware of the assignment;
and
perfected vis-à-vis third parties upon notification of the
assignment to the assigned debtors or upon acceptance of the
assignment by the assigned debtors through an instrument whose date
may be established with certainty (eg, such as a notarial
deed).
Under Law no.130, assignment of the receivables to the
securitization company is perfected vis-à-vis the assigned debtors
and third parties upon publication of an assignment notice in the
Official Journal of the Republic of Italy. As of the date of such
publication, the assigned receivables, and the proceeds generated
by them, may be attached only for satisfying obligations deriving
from the securitization securities and, although a strict
interpretation of Law no.130 would indicate otherwise, transaction
costs.
Liens and security interests of any kind securing payment by the
assigned debtors are automatically transferred in favour of the
securitization company (and maintain their priority ranking)
without formalities or annotations upon the assignment of the
receivables to the securitization company.
Bankruptcy provisions
Under ordinary Italian bankruptcy rules, payment of outstanding
debts in the year or two years (depending on the circumstances)
prior to the adjudication in bankruptcy of the payor may be subject
to avoidance in bankruptcy. However, Law no.130 provides that
payments made by the assigned debtors to the securitization company
are not subject to avoidance.
Similarly, any other transactions taking place in the context of
a securitization transaction (eg, the assignment of the receivables
to the securitization company) during the year or two years
(depending on the circumstances) prior to the adjudication in
bankruptcy of one of the parties may be subject to avoidance in
bankruptcy. However, Law no.130 provides that, for securitization
transactions, the above-mentioned terms are reduced to six months
(instead of two years) and three months (instead of one year). Law
no.130 does not further specify the scope of this special
regime.
Therefore, it is not clear whether this special regime applies,
for example, in the case of bankruptcy of any of the entities
involved in a securitization transaction or only of certain
entities (eg, the securitization company). If the special regime
applied only in the case of bankruptcy of the securitization
company, the issue would still arise as to whether it should apply
to all transactions entered into by the securitization company in
the context of a securitization transaction or only to specific
transactions, such as the assignment of the receivables. One of the
first commentators has expressed the view that this regime should
only apply to the assignment of the receivables in case of
bankruptcy of the securitization company. Another commentator is of
the opinion that this regime should apply to any transactions
entered into in the context of a securitization transaction.
Issuance of the securitization securities
Under ordinary rules, Italian companies may not issue bonds for
an amount exceeding their paid-in capital unless certain guarantees
are provided, or a special exemption is granted for reasons of
national economic interest. Law no.130 provides that these rules
(and other procedural rules applicable to corporate bonds in
general) do not apply to the issuance of securitization securities,
thus eliminating one of the main obstacles to the implementation of
securitization transactions by Italian originators.
Law no.130 expressly provides that securitization securities are
subject to Section 129 of Legislative Decree no.385 of September 1
1993 (Section 129), under which the issuance and offering of
securities in Italy requires prior notification to the Bank of
Italy (20 to 30 days prior to the transaction). The Bank of Italy,
in turn, can delay or prohibit the issuance or the offering to
ensure the stability and efficient functioning of financial markets
(the Bank of Italy's failure to respond within 20 days is deemed
approval).
Tax and accounting aspects
Law no.130 provides that securitization securities are subject
to taxation in the same manner as corporate bonds issued by
companies listed in regulated Italian markets. A tax of 12.5% on
interest payments applies if interest is paid to, among others,
individuals, real estate investment funds and pension funds. This
tax does not apply if interest is paid to, among others, Italian
companies and investment funds (other than real estate investment
funds), provided that the securitization securities are deposited
with a financial intermediary. Such interest payments must be
included in the overall taxable income of the recipient.
The tax also does not apply if interest is paid to foreign
recipients residing in a country with which Italy has entered into
a double taxation convention providing for a mutual exchange of
information clause and which do not reside in a so-called tax
haven. To that effect, the securitization securities must be
deposited, directly or indirectly, with an Italian resident bank or
investment services company, or with the Italian permanent
establishment of a non-resident bank or investment services
company, both having certain direct computerized links with the
Italian tax authorities.
As to registration tax, despite the absence of specific
provisions in Law no.130, legislative history suggests, and the
Report to the House of Representatives expressly states, that the
tax applicable to the assignment of the receivables to the
securitization company is due in the fixed amount of L250,000
(about $130), and not in a proportional amount.
Finally, as an incentive for securitization transactions
effected shortly after the entry into force of Law no.130, for both
accounting and fiscal purposes, any loss recognized by the assignor
from the assignment of the receivables may be spread over five
years.
In fact, any losses in value, recorded by the originator on the
receivables assigned to the securitization company, on the
guarantees granted to the securitization company and on assets,
other than the receivables themselves, serving as collateral for
the securitization, as well as any funds set aside with respect to
guarantees granted to the securitization company, may be accounted
for as reserves on the balance sheet of the originator if they
relate to "securitization contracts executed within two years of
the date of entry into force" of Law no.130. These losses and funds
are then to be accounted for in the income statement of the
originator in the fiscal year in which the losses are suffered or
the funds are set aside and in the four subsequent fiscal years, in
equal shares. The originator's taxable income for the same fiscal
years is decreased accordingly.
Other types of securitization transactions
Law no.130 also applies, as far as compatible, to (a)
securitization transactions effected through the grant of financing
by the securitization company to a financed entity and (b) the
assignment of receivables to investment funds trading in
receivables.
Other open issues
The general terms of securitization securities (which are to be
specified in the prospectus distributed to investors) are not set
forth by Law no.130. The definition of these general terms is,
therefore, left to market practice or, possibly, the regulatory
powers of the Bank of Italy.
Also, Law no.130 does not specify which future receivables may
be assigned in the context of a securitization transaction. Some
commentators argue that the principles applicable to ordinary
assignments of receivables should apply, thus allowing assignment
of future receivables only if arising from contracts entered into
by the assignor before the assignment. Others argue that the
principles of the law on factoring (Law no.52 of February 21 1991)
should apply, thus also allowing assignment of future receivables
when arising from contracts to be entered into by the assignor
within two years of the assignment.
Conclusion
To conclude, Law no.130 appears to be a major step forward in
the development of a solid legal framework for securitization
transactions in Italy. In particular, provisions concerning
bankruptcy and perfection of assignment of receivables,
substantially modifying the general rules of Italian law, eliminate
major obstacles to the implementation of Italian securitization
transactions. Law no.130, in general, adapts the Italian legal
framework to deal with transactions that could not easily fit into
the ordinary rules and categories of Italian law. The contributions
of the Bank of Italy and CONSOB will prove essential in completing
this adaptation.
Contact Details:
Cleary Gottlieb Steen & Hamilton
Piazza Di Spagna 15
00187 Rome
Italy
Tel: +39 06 69 52 21
Fax: +39 06 69 20 06 65