Securitization is an expanding market in Portugal, involving a variety of assets as well as various types of originator.
It should be noted that all transactions to date were structured and implemented in a legal environment which did not contain any specific securitization legislation. However, Decree Law 453/99 of November 5 1999 introduced a specific securitization legal framework.
Before its publication, securitized deals in Portugal had to rely on numerous laws and regulations, and therefore required intricate legal and fiscal structuring. DL 453/99 should simplify the process, increase the use of securitization and expand the eligible classes of assets, particularly as it addresses key issues such as perfection of assignment, bankruptcy remoteness and set-off.
Under DL 453/99, the assets (credits) forming the subject of a securitization must be: i) transferable; ii) of an economic nature; iii) not subject to conditions; iv) not yet due; and v) not subject to any litigation proceedings, nor have been granted as a guarantee, or been seized by the court.
Future credits may be securitized provided that they flow from existing relationships, and their amount is known or estimable.
The assignment of credits must be complete and cannot be subject to conditions.
If the assignor (the originator) is a credit institution, financial company or insurance company, the parties must enter into a management agreement whereby the originator continues to manage and service the credits and, most importantly, maintains its relationship with the debtors. If the originator is any other type of entity, the management and servicing of the credits may be effected by the originator or a third party.
Importantly, DL 453/99 establishes that an assignment of credits by a credit institution, financial company, insurance company, pension fund or pension fund management company is valid and enforceable against debtors, where such assignment is valid and enforceable between the originator and the assignee. Accordingly, knowledge and acceptance of the assignment by the debtors is not required (unless provided otherwise by agreement).
If the originator is not one of these entities, the assignment is only valid and enforceable against debtors who have been notified.
DL 453/99 establishes that debtors may only use a means of defence (ie set-off) against the originator where the right to this defence arises from facts that occurred before the assignment becoming enforceable between the originator and the assignee.
An important innovation of DL 453/99 was to establish the bankruptcy remoteness of credits assigned for the purposes of securitization. Such assets cannot be included in the bankruptcy estate of the originator or the manager/servicer of credits.
The assignment can be effected by a written agreement. A notarized deed is not required, even where the transaction relates to mortgages (for the purposes of registration with the property registry, certification of signatures by a notary or by the secretary of the originator and assignee will suffice).
The assignment of mortgages or other credits guaranteed by assets subject to registration (eg cars, boats or aeroplanes), requires registration with the competent registry office if the assignment involves the transfer of underlying guarantees. It is hoped that an exemption from registration will be granted in legislation yet to be approved.
DL 453/99 further exempts assignments from registration and notary fees, particularly relevant to the securitization of mortgages, which were previously not attractive given the high costs involved.
Parties – originator
Under DL 453/99, the originator can be the state, a public entity, a credit institution, financial company, insurance company, pension fund, pension fund management company or any other entity with its last three years' accounts duly certified by an auditor registered with the CMVM.
Parties – issuer
DL 453/99 also sets out two mechanisms for issuing securities in a securitization: i) using a credit securitization fund (fundo de titularização de créditos), (FTC); and ii) using a credit securitization company (sociedade de titularização de créditos) (STC).
An FTC is an autonomous block of assets (regulated by the special regime applicable to jointly-owned property), which belong to various entities (credit securitization unit holders). An FTC is not liable for debts of the credit securitization unit holders, or debts of the entities that manage a specific FTC. The securitization units can be issued in different categories, thus conferring preference rights in the payment of interest and reimbursement of capital.
The FTC structure involves three different legal entities: i) the FTC; ii) the FTC management company; and iii) the depository, which holds all the assets of the FTC.
The creation of an FTC requires authorization from the Portuguese Stock Market Commission (Comissão do Mercado de Valores Mobiliários) (CMVM).
The FTC management company must be a financial company and, accordingly, its creation legally requires authorization from the Bank of Portugal.
An FTC can have variable or fixed asset funds depending on whether or not the respective assets and liabilities can be changed. The credits acquired by an FTC cannot represent less than 75% of its assets. An FTC may enter into loan agreements in order to promote liquidity, if this is provided for in the FTC's management regulations. The holders of securitization units issued by an FTC cannot require the liquidation of the FTC.
An STC is a financial company, the exclusive object of which is to effect credit securitization operations by acquiring and managing credits and issuing bonds to finance the acquisitions.
As it is a financial company, the creation of an STC requires authorization from the Bank of Portugal.
An STC can only finance its activity with its own funds and bond issues. An STC may issue any type of bond, including secured bonds, the reimbursement of which is guaranteed by credits assigned exclusively to that secured bond issue (without liability for any other debts of the STC).
There is no withholding tax exemption for FTCs and STCs, and this is creating some obstacles to securitization in Portugal.
By establishing a legal regime specifically applicable to securitization, and in particular to mortgage securitization, DL 453/99 provides the Portuguese market with an important financial tool, enabling it to be more competitive, dynamic and diverse. However, there is still much to be done before the first securitization under DL 453/99 can be completed, particularly in relation to implementing specific aspects of DL 453/99 and defining the applicable tax regime.