Austria struggles to make most of securitization

Author: | Published: 24 May 2005
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When looking at transaction statistics, it immediately becomes apparent that securitization is not a widely used tool for obtaining debt financing and/or reducing the regulatory capital burden in Austria.

According to statistics published in April 2004 by the Austrian National Bank (Oesterreichische Nationalbank - OeNB) and the Financial Markets Supervisory Authority (Finanzmarktaufsichtsbehörde - FMA) (Leitfaden zum Kreditrisiko - Best Practice im Risikomanagement von Verbriefungen; available at www.oenb.at) only four term transactions have been completed in the past two years:

  • St Anton CDO I, a true sale securitization by UNIQA Alternative Investments GmbH, a subsidiary of the UNIQA group of insurances (€400 million)
  • Edelweiss Autofunding, a true sale securitization of car leasing receivables by EBV Leasing, a subsidiary of Erste Bank der oesterreichischen Sparkassen AG (€200 million)
  • Promise Austria 2002, a synthetic securitization of loans to small and medium-sized enterprises by Bank Austria Creditanstalt AG (€1 billion)
  • Aspen Funding I, a true sale securitization by UNIQA Alternative Investments GmbH (€200 million).

Out of these, Schönherr has advised on three transactions with an aggregate volume of €1.6 billion ($1.9 billion).

These statistics do, however, not take into account the numerous (commercial paper) conduit transactions involving Austrian assets that have been completed during the past years (starting in the mid-1990s). These transactions involve various types of asset classes, including leasing, trade and mail-order receivables.

The reasons why no more term transactions are originated in Austria are numerous, the most important being the relatively small number of (potential) originators that are able to generate a sizeable pool of assets (leaving aside bank assets) and are in need of funding. Another reason may be the perceived legal (and tax) uncertainties that lead to increased funding costs for Austrian originators.

Challenges

Contrary to synthetic transactions, in which the most challenging issue is to structure the deal so as to obtain regulatory capital relief, true sale transactions concerning Austrian assets involve a variety of legal challenges to be overcome.

Transfer of assets and collateral
When it comes to transferring/assigning (future) receivables governed by Austrian law the following peculiarities need to be considered:

  • Whereas the obligation to transfer/assign (Verpflichtungsgeschäft) the receivables to the special purpose vehicle (SPV) can be governed by the law chosen between the parties, the actual transfer/assignment (Verfügungsgeschäft) of the receivables is determined by reference to the law governing the assigned receivables. It follows from this that receivables governed by Austrian law mandatorily require a transfer/assignment (clause) governed by Austrian law. In practice, split law clauses in receivables purchase agreements that are governed by foreign law are quite common.
  • Contrary to certain other jurisdictions (for example, Germany) a contractually agreed upon prohibition to assign a receivable prevents the effective transfer/assignment of this receivable. Obtaining the counterparties' consent will not be feasible in most transactions. Trust structures, in which the originator declares to hold the receivables in trust for the SPV, which give the SPV a right of preferential satisfaction in the originator's insolvency, are used to overcome this obstacle.
  • Particular attention has to be paid to the transfer/assignment of rights to the collateral securing the transferred/assigned receivables. The steps required to create/perfect a security interest over the collateral will have to be replicated to achieve an effective transfer/assignment of rights to the collateral from the originator to the SPV. The steps that need to be taken range from a bookmark in the originator's books and accounts, or the notification of the originator's counterparties (the debtors under the assigned receivables and the holders of the leased vehicles, for example), to re-registration of mortgages with the land register in the case of residential and commercial mortgage-backed deals. The Supreme Court has held that the effective transfer of a claim secured by a mortgage over real estate requires the re-registration of the mortgage with the land register. The above mentioned trust structure or a transfer of the receivables by way of subrogation (Einlösung) may be a way to overcome these issues and in particular to avoid the costs involved in the re-registration of mortgages over real estate (see below).

Set-off risk
Another issue at the core of the rating agencies' attention is the set-off risk associated with the assignment of (future) receivables. Under Austrian law, the originator's debtor may set off any counterclaim it has against the originator that arises until the debtor is notified of the transfer/assignment. With respect to future receivables, the debtor may, irrespective of such notification, set off any counterclaim that arises until the future receivable comes into existence.

Servicing
Under Austrian law a (servicing) agreement, under which the SPV appoints the originator to collect the receivables and to realize the security interests will not be effective in the event the receivables/security interests need to be enforced in front of (Austrian) courts. The Supreme Court considers the right to enforce a claim (and to realize a security interest) to be inseparable from the right to the receivable/security interest. Accordingly, either the SPV has to sue the debtor (in which case a non-EU SPV may be required to post security for litigation costs) or the transferred/assigned receivable, once disputed, is re-assigned for collection to the originator. Again, trust structures may be used to overcome this impediment.

Stamp duties
A true peculiarity of Austrian law is the imposition of stamp duties on facility agreements and assignment agreements. If not drafted (and also handled) carefully, the transfer/assignment of receivables may give rise to a stamp duty of 0.8% of the consideration paid for the receivables. If a true sale is re-characterized (for stamp duty purposes) as a secured facility, the facility may be subject to stamp duties (0.8% for non revolving facilities and revolving facilities with a term of up to five years and 1.5% for revolving facilities with a term in excess of five years). In addition, a duty of 1.2% would be levied upon the re-registration of a mortgage over real estate (see above). Structures commonly used to mitigate stamp duty exposure involve the written offer/tacit acceptance of the receivables purchase agreement, trust structures and the transfer of receivables by way of subrogation (Einlösung). In any event it needs to be borne in mind that not only the receivables purchase agreement may trigger stamp duty, but also substitute recordings of this agreement, in other transaction documents or in a notice of assignment to the originator's debtors (if such a notice is not drafted carefully).

Transfer of data
Not specific to Austria but worth mentioning are the limitations imposed on the transfer of data from the originator to the SPV/(substitute) servicer. The processing of encoded data that only indirectly relate to the debtor's identity and which would not allow the SPV/(substitute) servicer, to obtain (by lawful means) the debtors identity (indirekt personenbezogene Daten) is permissible. However, the processing of these data, once they have been decoded, is only permissible in case the interests of the SPV outweigh the interests of the debtors on keeping their personal data secret. In addition, the Austrian Banking Act (Bankwesengesetz - BWG) provides for a (rather strict) banking secrecy. However, whereas the Supreme Court has ruled that other professions that are subject to statutory obligations of confidentiality (for example, attorneys and auditors) must not transfer/assign their receivables because of their professional duties of secrecy, it has also held that banking secrecy does not contravene a transfer/assignment of bank receivables. In practice, structures similar to the data trustee structures commonly used in international securitization transactions are widely accepted in Austria.

Regulation
Finally, it is worth mentioning that no unqualified opinion can be given under the laws of Austria, whether the purchase of receivables by the SPV constitutes banking business or not. According to the BWG, the purchase of receivables on a commercial basis (factoring) constitutes a banking business, subject to licensing/passporting requirements. The Austrian regulator (Finanzmarktaufsichtsbehörde - FMA) yet has to voice a clear opinion, whether a purchase of receivables by the (foreign or Austrian) SPV constitutes banking business. In practice, the risk that the SPV is considered conducting banking business in Austria is small, also because in most transactions the SPV is not located in Austria and the transaction documents are signed outside Austria for stamp duty reasons (see above).

The draft Securitization Act

In 2003 the Austrian Securitization Forum (ASF) mandated a small group of law firms active in this field of law (including Schönherr) to draft a piece of legislation dealing with, among other things, the issues mentioned above. As well as the legal issues outlined above, the draft Austrian Securitization Act contains a section tailored to create a bankruptcy remote Austrian SPV (to date an Austrian SPV has been used only in the 2001 Blue Danube transaction). Despite the continuing lobbying efforts of the Austrian Securitization Forum and the Austrian credit institutions, the draft Austrian Securitization Act has not been submitted to parliament yet. Accordingly, transactions continue to be structured under the existing legal framework.

Other structures

Whereas the following structures closely resemble securitization in many ways, they do not provide for a segregation of credit risk from the originator providing the assets to secure the notes/bonds. In this respect they are similar to whole-business securitization.

Covered bonds
Based on a law as old as 1905, Austrian credit institutions may issue bonds/notes (recourse obligations of the credit institution) that are secured by a ring-fenced pool of assets of the credit institution, so-called covered bonds (fundierte Bankschuldverschreibungen). While these instruments are an efficient tool to obtain funding, the issuing credit institution will not obtain regulatory capital relief because the assets remain with the originator.

Only gilt-edged assets (for example, Austrian treasury bonds and mortgage bonds (Pfandbriefe)) and receivables guaranteed by the Republic of Austria, its Federal States or other public law entities having the authority to levy taxes (for example, municipalities) or secured by a registered mortgage over real estate may serve as collateral for covered bonds. The holder of covered bonds is granted a preferential right over the collateral as a security for principal, interest and certain costs.

The pool of assets is safeguarded by a trustee (Regierungskommissär) appointed by the Federal Minister of Finance, who among other things is obliged to notify the courts if execution was levied against assets serving as collateral for the covered bonds. Assets serving as collateral for the covered bonds may only be disposed of with the trustee's consent, which may only be granted if the trustee is of the opinion that such disposal does not adversely affect the bonds' cover/collateral.

Set-off risk is reduced by a statutory provision, stipulating that a debtor of assets serving as collateral may only set-off those claims against the issuing credit institution that were already in existence at the time it was notified that the assets should serve as collateral and that have been notified to the trustee.

Mortgage bonds
The issuance of mortgage bonds is regulated by the Act on Mortgage Banks (Hypothekenbankgesetz - HypBG) and the Mortgage Bond Act (Pfandbriefgesetz - PfandbriefG).

Similar to covered bonds (see above) mortgage bonds do not effectively separate the credit risk from the issuing credit institution (and are thus full recourse obligations of the issuer) but provide for a preferential right of satisfaction of the bond holders in the issuer's insolvency.

Unlike covered bonds, which can be issued by any Austrian credit institution, the issuance of mortgage bonds requires a special (banking) license.

The asset pool for mortgage bonds (Hypothekenpfandbriefe) may consist of loans secured by mortgages over real estate located in Austria, in member states of the European Economic Area (EEA) or in Switzerland, provided that foreign laws provide protection for the holders of mortgage bonds which is equivalent to the protection afforded by Austrian law. Only assets with a loan to value ratio not exceeding 60% may be included in the collateral pool.

Public mortgage bonds (öffentliche Pfandbriefe or Kommunalschuldverschreibungen) need to be secured on loans granted to Austrian public law entities, to Switzerland or to any member state of the EEA other than Austria, as well as to their regional governments or to public law entities for which the competent authority has set a solvency ratio of no more than 20% or by securities issued or guaranteed by such entities.

A trustee (Treuhänder) appointed by the Federal Minister of Finance is in charge of controlling and verifying the provisions as to prescribed minimum cover and registration of the mortgage bond in the mortgage register kept by the issuing institution. An annotation (Kautionsband) with the competent land register is a precondition for inclusion of the underlying asset in this mortgage register.

Additional safeguards in Austrian law to protect the holders of mortgage bonds include mandatory hedging against currency fluctuations and prescribed minimum interests yields on the underlying assets (as compared to interest payable on the mortgage bonds).

The Mortgage Bond Agency (Pfandbriefstelle der Österreichischen Lan-des-Hypothekenbanken), a public law credit institution (öffentlich-rechtliches Kreditinstitut) serves as joint issuing vehicle for the eight Austrian state mortgage banks (Landes-Hypothekenbanken). It may issue mortgage bonds and public mortgage bonds secured on the assets generated by its members. All eight state mortgage banks are jointly and severally liable for the obligations of the Mortgage Bond Agency. Irrespective of this joint and several liability, the holders of bonds issued by the Mortgage Bond Agency have a preferential claim on the asset pool of the respective state mortgage bank only.

Summary

Securitization is not yet a widely used financing tool in Austria. With the Basel II Accord approaching, Austrian corporates will be forced to access new sources of funding, while Austrian banks will need to free regulatory capital by either synthetic or true-sale transactions. Despite the fact that many (potential) originators are hesitant, pending enactment of the Austrian Securitization Act, several interesting transactions are expected to be launched in 2004.