Securitisations involve the acquisition of financial assets financed by the issuance of bonds. Unlike AIFS and UCITs, which are equity-based structures, securitisations are debt-based.
The shares of a Section 110 securitisation SPV always have little intrinsic value as essentially all of the proceeds generated from the acquired financial assets are returned to the bondholders under the terms of the bonds/notes. Nevertheless, a small pre-determined amount of the ‘profits’ will always be retained by the SPV as a corporate benefit. What do we do then with the SPV’s shares?
In considering how to structure the ownership of an SPV, it is important that the SPV’s shareholders should be fully independent from the originator in the securitisation to reduce the risk of substantive consolidation. In addition, SPV shareholders should not create a risk that the SPV could be drawn into a shareholder’s own bankruptcy. Finally, it is important that the SPV shareholders do not take any action to wind up the SPV or try to engage it in other activities.
Achieving these goals is not that straightforward. The market-standard SPV ownership solution emerged in the UK many years ago, whereby SPVs are established as ‘orphan’ entities whose shares are held by a trustee on charitable trust. This means that the nominal value realised by the SPV’s shares on winding-up will be paid to a registered charity, such as the Red Cross.
Securitisations are not charitable ventures and while any financial benefit that might accrue to charities from the winding up of SPVs seems like something positive, this technical, risk-mitigating solution to the SPV ownership problem frequently creates confusion for the general public. While it is also possible to create non-charitable share trusts, why deprive charities of any source of funds?
After years of discussion and debate, the European Commission put forward proposals to promote 'simple, transparent and standardised' (STS) securitisation in September 2015. The main objectives were:
On 10 March, the ECB responded to worryingly low European growth and the growing prospect of several months of negative European inflation by cutting its main refinancing rate to zero and expanding its quantitative easing program. These are new dramatic, unprecedented steps in the battle to urgently revive growth in Europe.
In sharp contrast, the European Parliament is not in a hurry to progress the STS legislation. Paul Tang, the Dutch member of the European Parliament’s socialist group, who is heading the review of the STS proposals, has set out a timetable that will see the Parliament voting on the STS proposal at least nine months from now, in December 2016. In view of the current state of the European economy and the paucity of funding available to SMEs, many will regard this long delay as irresponsible and unacceptable.
The institutions of the European Union need to act together effectively, decisively and with agility in times of crisis. If not, the likelihood that Europe will break apart will surely increase further.