True-sale securitization

Author: | Published: 1 Dec 2005
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Wolf Theiss (Romania)

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Bucharest Corporate Center (BCC) 58-60 Gheorghe Polizu Street Floor 12-13, Sector 1 RO - 011062 Bucharest

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True-sale securitization has recently become one of the most attractive ways to reform the financial system. For emerging markets such as those in south and eastern Europe, securitization can be seen as a tool for institutions to access financial markets directly. Securitization can also be regarded as an incentive for banks to become more efficient in order to offer the most competitive financial product.

The following issues are fundamental to anyone deciding to securitize in Romania:

  • bankruptcy remoteness often raises concerns regarding the protection ensured to investors by the special purpose vehicle (SPV);
  • specific formalities that might be required for the transfer of receivables to the SPV; and
  • capital markets' requirements that can be attached to the securitization.

The legal implications of the above issues are dealt with here in the context of existing legislation with reference to the proposed draft securitization law that is expected to be enacted soon. The topic is analyzed here from the perspective of true-sale securitization.

Bankruptcy remoteness

The primary purpose of securitization is to protect investors against the creditors of the originator. Romanian law does not yet provide bankruptcy remoteness for an SPV. Under Chapter VI of the Securities Act (Law no. 99/1999), the sale of receivables is construed as security interest, rather than true sale of receivables. In insolvency, the bankruptcy judge might view the securitization transaction as an assignment of receivables for the purposes of providing security interest and validate the claims of the originator's creditors against the SPV's investors. To prevent this, and achieve the true sale of receivables, a real price of receivables must be provided once the transaction is finalized. There should also be a clear identification of existing or future receivables to be sold, even if this implies an obligation to continuously transfer the receivables of the originator after the transaction.

The draft law recognizes the sale of receivables for the purpose of securitization and establishes bankruptcy remoteness. Since the draft requires norms to be issued, they should outline the minimum requirements for providing a true price for the sale of receivables. The value of the receivables sold must be at least equal to the value of the notes issued by SPV.

Formalities required for transfer of receivables

Under Romanian law the transfer of receivables can be achieved in different ways, including novation, assignment, and subrogation. To be valid, an assignment of receivables requires notification or acceptance of the transferred debtor through a notarial deed. However, the Securities Act allows the buyer of receivables to register the transfer of receivables using the Electronic Archives of Movable Security, to ensure opposability of the transfer.

The draft law requires the transfer of receivables to be notified to the archive within the 15 days before issuing the prospectus to the transferred debtors.

The notifications made by registered mail for the transferred debtors, and by registered mail or posting of the announcement (at the transferred debtor's headquarters) for the creditors of the transferred debtor.

Capital markets requirements

Romanian law provides private placement exemptions from prospectus requirements for offers of securities (including the issue of notes through an SPV by way of securitization). The exemptions apply where sales are made:

  • to qualified investors (large companies, regulated financial institutions, governments and high-net-worth individuals); or
  • to fewer than 100 non-qualified investors; or
  • in tranches of at least €50,000 per investor, per offer; or
  • in denominations of at least €50,000 per unit; or
  • for less than €100,000, per year.

These exemptions are in line with the European Prospectus Directive. However, if the subsequent sale of securities is made to retail investors, the offering must comply with disclosure requirements of public offerings. Offering securities to the public involves extra accounting, auditing, and legal compliance requirements. Authorization of the prospectus, in an issue of securities to the public, must be obtained from the national regulator.

Under the draft law, the issuing of notes by SPVs must be done in accordance with requirements for a public offering and is based on a prospectus approved by the national regulator. It is unclear, yet it seems that, under the current draft law, the Romanian legislator does not allow private placements in securitization, but rather requires involvement of the national regulator when authorizing the offering.

Edward Dobre