The Netherlands

Author: | Published: 10 Oct 2001
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Before 1996 some Dutch portfolios of mortgage loans had been sold and transferred in a way similar to a securitization transaction (Hooge Huys Hypotheken). A significant number of securitization transactions and multi-seller conduits had been set up for originators located outside The Netherlands using Dutch bankruptcy remote special purpose vehicles (SPVs), and asset-backed securities had been sold to investors in The Netherlands under a private placement. The first domestic securitization was introduced in the Dutch market in 1996 with a residential mortgage securitization involving residential mortgages originated by Fortis, FIMS (FI Mortgage Securities). In 1997, ABN AMRO followed with the first EMS (European Mortgage Securities I) transaction. Since then the residential mortgage-backed securitization market is the most active securitization market in The Netherlands. The vast majority of originators of deals are Dutch commercial banks and insurance companies such as ABN AMRO, DNIB, Fortis, Rabobank, Delta Lloyd, SNS and Aegon.

The market has seen securitizations involving a number of asset classes other than residential mortgage receivables as well, including (secured) consumer loans (Amstel 1 and 2), trade receivables (mostly via multi-seller conduits sponsored by Dutch banks), credit card receivables (Diners), securities-leases (Bank Labouchere), corporate loans (Amstel CLO), publishing rights (Chrysalis Music Publishing) and property leases (ProLogis).

Most major Dutch banks have their own sponsored multi-seller conduits, such as ABN AMRO's TAPCO, ING's Mont Blanc and Rabobank's Erasmus ABCP conduit vehicles. These conduits are very active and securitize both Dutch originated assets and non-Dutch originated assets, as well as a broad variety of asset classes.

Notable recent transactions include the Amstel euro 8.5 billion ($7.8 billion) pan-European synthetic securitization (see below) by ABN AMRO, which closed in December 2000 and consisted of two separate credit default swaps with two SPVs, both relating to a large corporate loan portfolio of ABN AMRO and various subsidiaries. The notes issued by the SPVs are listed on the official segment of the stock market of Euronext (Amsterdam).

THE FUTURE

The Dutch market continues and will continue to diversify to different asset classes. Residential mortgages continue to supply the majority of the transactions, but new asset types and structures are being introduced and the use of securitization for corporate funding purposes is increasing.

Apart from the diversification of assets, two distinct trends are developing: (i) from only "earned" receivables to "unearned" receivables (ie future cashflows) as well; and (b) one asset cashflow to the cash flow of an entire business (whole-business securitization). In addition, synthetic structures (see below) are becoming more common and are especially used by banks to remove receivables from their regulatory balance sheet, therefore releasing capital necessary in order to fulfil the applicable capital adequacy requirements. Finally, we expect to see Dutch managers entering into the European collateralized debt obligations (CDO) market.

FUTURE CASHFLOWS

In the UK a number of securitizations of future revenues of operating companies have taken place and the Dutch market is investigating the possibility for extrapolating such transactions to Dutch securitizations. In general, it is possible under Netherlands law to assign in advance (bij voorbaat) receivables which do not yet exist (future receivables), provided that: (i) the debtors of the future receivables are identified and are given notice (but see below) of the assignment; (ii) the future receivables that are being assigned can be identified afterwards on the basis of the description in the deed of assignment; and (iii) the originator has power and capacity to dispose of its assets as and when the future receivables come into existence. Legal title only passes to the assignee once all three requirements have been met. The last element in particular complicates future cashflow transactions in The Netherlands, as it would be very difficult to isolate the assets from the corporate risk of the originator and therefore allow the funding raised by the SPV to have a higher rating than the corporate rating of the originator. However, one could imagine structures that might diminish the effect of the requirement under (iii) above.

WHOLE BUSINESS SECURITIZATIONS

A whole business securitization does not focus on one identifiable pool of receivables, but instead allows debt to be raised on the basis of the value of an entire business. Typically these types of transactions involve a secured loan, pursuant to which the SPV lends the proceeds of a bond issue to the company owning the business, with the loan being secured by security rights over all of the relevant business assets. Rather than focusing on the "true sale" of the relevant receivables, the structure is set up to achieve "true control" of the income-producing assets, allowing investors to take control of the receivables upon the occurrence of default under the secured loan and manage the assets themselves to service the debt owing to the SPV. Stable cash flows are critical for such a structure to be successful. As under Dutch law no concept of floating charges exist, separate security needs to be created on all the different types of assets comprising the business. To date no Dutch whole business securitization has been concluded, although it is expected that we will see such structures coming to the market quite soon.

SYNTHETIC SECURITIZATIONS

A structure that is gaining popularity uses credit default swaps as a way to transfer economic risk. Rather than selling receivables to an SPV that issues debt instruments to fund the purchase price, a credit default swap (CDS) is entered into. Under the CDS, the SPV is obligated to pay credit protection amounts to the originator upon the occurrence of certain credit events as described in the CDS. The originator in turn will make periodic payments to the SPV, which are calculated by reference to the cost of funding of the SPV. The proceeds of the funding raised by the SPV is used firstly as collateral for the originator, and secondly for the noteholders.

A key element to be addressed in these types of structures is the risk of the CDS being re-characterized as an insurance contract, which would result in, for instance, licence obligations for the SPV as insurer. However, if structured correctly, the CDS used in these structures should not qualify as an insurance contract because: (i) the arrangement does not contain all the elements that must be present in order to qualify it as such (and rating agency-standard legal opinions have been issued to that effect); and (ii) its entry into is not motivated by a wish to transfer or avoid credit risk, but is often used as a means for economic or regulatory balance sheet or portfolio management.

DUTCH-MANAGED CDOS

So far there has not been a European CDO transaction managed by a Dutch collateral manager. One of the very few non-European CDOs involving a Dutch collateral manager is a high-yield dollar transaction named ROBECO CBO I, managed by the Robeco Group out of The Netherlands.

Given the increasing popularity of European CDO transactions and the number of sophisticated Dutch investment managers, Dutch-managed European CDO transactions can be expected.

LEGAL AND TAX FRAMEWORK

Legal

When structuring a securitization in The Netherlands, there are various Dutch legal issues to be taken into account. The main ones are briefly described in summary below.

Transfer of legal title to receivables, security over receivables

Under Dutch law a receivable can be transferred unless a statutory or contractual provision or the nature of the receivables restricts or prohibits its transfer. Transfer of legal title to a receivable under Dutch law requires: (i) a written instrument evidencing the assignment (cessieakte); and (ii) notification to the debtor of the receivable which is being assigned.

Typically, originators do not want notification to be given to their debtors, which is why it has become practice to sell the receivables and postpone the notification necessary to have title to the receivables pass to the SPV until the occurrence of certain trigger events. As notification is a constitutive requirement for a legal transfer, notification needs to be given while the originator still has power and capacity to dispose of its assets. In order to protect the SPV against the situations where notification is no longer effective to make the transfer (so basically where the originator has been declared bankrupt (failliet) or has been granted a suspension of payments (surséance van betaling)) an undisclosed right of pledge (stil pandrecht) is granted, of which notification can be validly given at any time. Notification of the pledge to the debtor would give the SPV as pledgee the right to collect the receivables.

In international transactions, another way to avoid notification would be to opt for a foreign law that does not require notification to be given for a valid assignment

Act on the supervision of credit institutions 1992

A Dutch SPV raising funds would fall under the definition of credit institution as given in the Act on the Supervision of Credit Institutions 1992 (Wet Toezicht Kredietwezen 1992, ASCI) unless it also engages in other commercial or industrial business which is proportionally more important than its financing activities. The Ministerial Resolution of February 4 1993 provides certain exemptions from the application of the ASCI. In addition to these exemptions, individual dispensations can be granted by the Dutch Central Bank. The most commonly used exemptions in securitization transactions are the following:

  • the SPV funds itself, apart from equity: (i) from professional market parties; (ii) with a minimum maturity of two years. However, relatively limited and short term overdrafts with banks are permitted to meet normal liquidity requirements. The Dutch Central Bank takes the view that any funding having a maturity of two years or more, but with: (i) voluntary pre-payment option in favour of the SPV (even in the first two years); (ii) a mandatory repayment in case the SPV decides (voluntarily) to dispose of the investments or receivables (even in the first two years); or (iii) mandatory repayment in case of customary events of default, will still be regarded as long term funding for the purposes of this exemption; and
  • the requirement that the funding should always have a minimum maturity of at least two years has lead to complaints from the financial sector. As a result, the Ministry of Finance amended the Ministerial Resolution on July 11 1997 to allow SPVs involved in securitization or repackaging transactions to raise funding with a maturity of less than two years, provided the following conditions are met: (i) the SPV engages only in the business of borrowing by issuing short term debt instruments to professional market parties; (ii) these debt instruments are rated by a recognized rating agency; and (iii) its funding is used exclusively to acquire and hold assets originating from a pre-defined and homogeneous pool of assets of another enterprise or institution.

Securities Market Supervision Act 1995

Issuing securities in, from or into The Netherlands could trigger prospectus and continuous disclosure requirements on the SPV pursuant to the Securities Market Supervision Act 1995 (Wet Toezicht Effectenverkeer 1995, SMSA). Again, as with the ASCI, certain exemptions are available, such as issuing debt instruments having a minimum denomination of NLG100,000 ($50,000)

Tax

As is the case with most jurisdictions, in The Netherlands there are typically four tax aspects of these structures which require particular attention: (i) tax on the transfer of the receivables; (ii) withholding tax on the receivables and the SPV notes; (iii) tax position of the SPV; and (iv) value added tax (VAT) on fees.

Transfer of receivables

The sale of receivables by a Dutch originator for cash is considered to be a taxable disposal for Dutch tax purposes. In principle the originator will be taxed on any gain (ie the difference between the sale price and the fiscal bookvalue of the receivables). Whether or not a gain arises will depend on a number of factors, including the nature of the receivables (trade receivables, long term loans etc) and the possibility of a provision for bad debts on the originator's balance sheet. The purchase price is another relevant factor. In certain transactions the consideration consists of an initial purchase price and a deferred purchase price. The latter is often a variable amount that is subordinated to all other obligations of the SPV providing credit enhancement to the transaction. The degree of uncertainty regarding the receipt of a deferred and variable purchase price element is the deciding factor from a tax perspective.

As mentioned above, typical of a synthetic securitization is the absence of a sale of receivables by an originator to an SPV. Therefore, none of the issues mentioned above should come into play.

Withholding on receivables and SPV notes

Depending on the nature of the receivables and jurisdiction of residence of the underlying obligors, payments under the receivables may have been subject to withholding tax. The transfer of receivables may have an effect on the withholding tax position of these payments. This will be elaborated upon below.

As in a synthetic securitization the SPV will not acquire any receivables, withholding tax on receivables should not be an issue. In a synthetic transaction the SPV typically applies the proceeds of the issue of bonds to acquire collateral securities consisting of AAA-rated government bonds and/or make a cash deposit with a financial institution with an appropriate credit rating. Interest payments on such investments can generally be made free of withholding and consequently, the SPV would not need to rely on the Dutch double tax treaty network to receive such interest payments gross.

As The Netherlands does not generally levy withholding tax on interest payments, payments of interest by a Dutch SPV to investors can be made gross. Interest paid on profit sharing debt, however, is subject to Dutch withholding tax. In our experience it is usually possible to structure a transaction such that all interest payments made by a Dutch SPV can be made without withholding.

Tax position of SPV

It is common in Dutch securitizations to establish the SPV in The Netherlands for reasons mentioned below. Apart from these reasons, it is convenient, practical and sometimes desirable for publicity reasons to use a Dutch SPV in a Dutch securitization transaction.

The minimum level of taxable profit that the Dutch tax authorities require a Dutch SPV to earn from a securitization transaction depends on a number of factors, including the residence of the originator (Dutch or foreign), the class of assets, the type of transaction (traditional or synthetic) and the identity of the other parties involved in the transaction (swap counterparty, corporate service provider etc). It is customary to obtain an advance tax ruling from the Dutch tax authorities confirming the minimum profit margin that the SPV needs to earn from the securitization transaction.

Dutch VAT

The assignment of receivables from the originator to the SPV is exempt from Dutch VAT. In a securitization transaction the originator will often be appointed as servicer of the portfolio of receivables transferred to the SPV. This means that the originator renders administrative and collection services relating to the securitized receivables pursuant to a servicing agreement between it, the SPV and the trustee. Servicing fees payable by the SPV to the originator may be subject to Dutch VAT, in full, in part or not at all.

The VAT position of a Dutch SPV involved in an asset-backed securities transaction depends on several factors, the main ones being:

  • type of transaction (traditional or synthetic securitization, balance sheet or arbitrage CDO etc);
  • type of assets (trade receivables, primary or secondary market loans etc);
  • jurisdiction of residence of the servicer or collateral manager; and
  • type of services rendered to the SPV.

Depending on, among other things, these factors it can be determined what the VAT position of the Dutch SPV is. It can be considered an entrepreneur, non-entrepreneur or entrepreneur on a pro rata basis for VAT purposes. In CDO transactions, for example, the VAT status of the SPV is of great importance, as fees payable by the SPV to the collateral manager are usually quite substantial and any VAT costs in relation to such fees will have a negative effect on the transaction.

Dutch SPVs in cross-border transactions

Many of the asset-backed securities transactions that use a Dutch SPV have been cross-border transactions; the originator and the arranger of the transaction are often incorporated outside The Netherlands and the underlying assets are typically not governed by Dutch law.

There are a number of reasons why The Netherlands is an attractive jurisdiction to set up the SPV in transactions such as securitizations, repackagings and CDO/CBO/CLOs.

Tax

Depending on the nature of the underlying assets and jurisdiction of residence of the obligors of these assets, payments under the underlying assets could become subject to (increased) withholding tax if transferred to an SPV in a tax haven jurisdiction. The transfer of the assets to a Dutch SPV may avoid such negative effect or indeed may have a positive effect on the withholding tax position of payments under the underlying assets. Under Dutch double tax treaties withholding taxes are usually substantially reduced or even eliminated. The Netherlands has concluded double tax treaties with over 60 countries and the availability of this treaty network is usually an important factor in determining the location of the SPV.

An SPV incorporated and tax resident in The Netherlands will be subject to Dutch corporate tax on its income. It is important to ensure that the profit margin retained by the SPV pursuant to the terms of the transaction qualifies as being at arm's length. Where there is any doubt that a particular anticipated profit margin will be acceptable for Dutch tax purposes (ie there is a risk that any of the transactions in question may be challenged as not being at arm's length), the possibility exists to obtain in advance a binding ruling from the Dutch tax authorities as to the minimum profit margin that will be acceptable as being an at arm's length margin. The Dutch tax authorities are willing for asset-backed securities transactions to grant advance tax rulings based on a marginal profit level and grant such tax rulings within a short timeframe. Furthermore, as opposed to SPVs established in certain other EU member states (such as the UK), timing mismatches of income and expenses do generally not occur in The Netherlands, as a more economic approach is taken for Dutch tax purposes.

Investor driven

The Netherlands is a member state of the EU which makes a Dutch SPV attractive to European investors. Based on domestic regulations in their home country, many European investors are limited or restricted in investing in debt instruments issued by vehicles established outside the EU or OECD (such as the Cayman Islands and Jersey). The jurisdiction of residence of the SPV appears to be an increasingly important issue that may seriously impact on the sale of asset-backed securities to regulated EU investors.

Also, as opposed to tax haven SPVs, a Dutch SPV passes the "smell test". Certain investors are from a reputational perspective less comfortable with investing in a tax haven SPV than in an SPV incorporated in the EU.

Summary

Undoubtedly, the number of and the variety in securitization transactions in The Netherlands will continue to grow, influenced in part by UK and US investment banks extrapolating their home jurisdiction structures to the Dutch market.


Clifford Chance
Droogbak 1A
Amsterdam
1013 GE
The Netherlands
Tel: +31 20 711 9000
Fax: +31 20 711 9999
Internet: www.cliffordchance.com