Demystifying Securitisation and Enforcement
Thursday 11 September 2008
Jonathan Lawrence, Partner, K&L Gates LLP
jonathan.lawrence@klgates.com
020 7360 8242
Securitisation
 A means of raising finance secured on the back of
identifiable and predictable cash flows derived from
a particular class of assets (such as rents,
receivables, mortgages or operating properties).
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CMBS
 Commercial Mortgage Backed Securitisation
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Swap
Counterparty
Typical CMBS deal
Trustee
Swap
SPV
Borrower
Mortgages
Loans
SPV
Borrower
Originator/
Seller
Mortgages
&
Loan Sale
£
SPV
Issuer
Secs
Investors
£
Liquidity
Loan
Servicer
Liquidity
Provider
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Typical CMBS cashflows
Originator
Borrowers
SPVs
rent
Tenant
£ mortgage
P&I
Collection
Account
Issuer
SPV
£ mortgage
P&I
Issuer
Account
rent
Tenant
£ note
P&I
Investors
Note
Purchase
Price
Tenant
£ Swap payment
Swap
Counterparty
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Originator / Seller





Creates or acquires receivables
e.g. banks making loans
Offers lower cost of borrowing e.g. lower margin
Remove receivables from balance sheet
Redeploy capital
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Issuer
 A special purpose vehicle (“SPV”) company
 Typically shares held by charitable trust i.e.
separate from all other participants
 Remote from Originator / Seller
 Established in low-tax or no-tax country e.g. Jersey,
Cayman Islands
 Issues securities
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Investors
 Buy the securities issued by the SPV
 Receive interest and capital payments
 e.g. insurance companies, hedge funds, high net
worth individuals
 Consider yield, liquidity and exposure
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Arranger




Structure transaction
Ensure maximum return available on assets
Introduce appropriate counterparties
Tranching / slicing the securities
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Trustee
 Holds benefit of covenants and rights in securities
on behalf of Investors
 May also hold security over assets on behalf of
Investors
 Appointed by issuer under a Trust Deed which
defines duties, roles and fees
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Servicer
 Ensures underlying receivables, e.g. interest and
principal repayments, continue to be collected
 Issuer may initially perform function in-house or
employ third party
 Fees must be competitive to enable third party
servicer to be appointed
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Swap counterparty
 Takes on risks in securitisation in return for fee
 e.g. interest rate changes, currency exchange rate
movements
 Will be financial institution
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Liquidity provider
 Often bank supplying loan facility to Issuer on a
standby basis
 Ensure adequate cashflow received by Issuer to
meet its payment obligations to Investors
 Guard against underlying Bs not paying or late
paying
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Securities
 Divided into different classes carrying differing rights
to payment and differing rates of interest
 Given credit rating by credit rating agency e.g.
Moody’s, Fitch, Standard & Poor’s
 S&P ratings: AAA (extremely strong capacity to pay
interest and capital) to D (in default)
 Analysis of default likelihood
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Worldwide CMBS issuance 2007 compared to 2008
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CMBS
 Advantages:
 Liquidity
 Favourable financing rates
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CMBS
 Disadvantages:
 Lack of transparency or financial disclosure
 Lack of borrower/property diversity
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UK Real Estate Finance Market - 2007
 The banks took on a record level of commercial real
estate debt - as much as £247bn
 Gross lending totalled £83.7bn, the highest level
recorded
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UK Real Estate Finance Market Perspective
2007 represented 3% per cent increase on 2006
levels, which was the lowest since the survey began
in 1998, and much lower than the average annual
growth of 24% between 1999 and 2006
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Enforcement
 B unable to repay loan
 B has breached its covenants
 Enforcing security and insolvency procedures
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What is insolvency?
 When a corporate entity “is unable to pay its debts”
(Section 123 Insolvency Act 1986)
 Tests
 Failure to pay a statutory demand
 Execution on a judgement is unsatisfied
 Unable to pay its debts as they fall due (“cash flow”
test)
 Value of assets less than liabilities (“balance sheet”
test)
 Threshold amount: £750
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Relevance to Lenders?
 Likelihood of repayment of loans if B insolvent?
 Loan agreement contains safeguards: chiefly
through events of default and acceleration
 How does acceleration help L?
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Pre-insolvency: Protection for the Lender
 Most importantly through security
 Fixed charge
 Floating charge
 Security Trustee
 Effect? Enforcement and realisation
 100% flawless?
 No…
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Deficiencies with taking security




Floating charges and the “prescribed part”
Statutory order of priority of proceeds
Moratorium (with certain insolvency proceedings)
Deficiencies in realisation
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Insolvency Procedures
 Liquidation
 Administration
 Administrative receivership and fixed asset
receivers (e.g. LPA receiver)
 Compromise arrangements
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Background to the Enterprise Act 2002




Came into force on 15 September 2003
Promotion of “rescue culture”
Abolition of Crown preference
Creation of the prescribed part
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Receiverships, Administrations and Company Voluntary Arrangements in
England and Wales registered at Companies House (figures from the
Insolvency Service website)
Year
Receivership
Appointments
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1,837
1,713
1,618
1,595
1,914
1,541
1,261
864
590
588
477
Administrator
Appointments
196
338
440
438
698
643
497
1
4
0
2
In Administration
(Enterprise Act
2002)
:
:
:
:
:
:
247
1,601
2,257
3,560
2,327
Company
Voluntary
Arrangements
629
470
475
557
597
651
726
597
604
534
399
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Insolvency Procedures: Administration
 Active businesses, significant assets, potential
 Statutory “purposes” brought in by Enterprise Act 2002
 Rescue company as a going concern
 Achieve a better result than in liquidation
 Realise property for secured (or preferential) creditor
 Moratorium
 Appointment is by notice (company, directors or QFC, who
has overriding powers) or by application to court (company,
directors, all creditors)
 First ranking QFC can appoint its own choice of administrator
 Administrator owes duties to all creditors
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Insolvency Procedures: Receivership
 The appointment of a person to administer (i.e. sell) specific
property charged to a creditor
 Administrative Receivership, now relatively rare – Enterprise Act
2002 limits this to security created before 15 September 2003 and
certain other exceptions
 Realise certain assets of B charged to appointor to repay
indebtedness to appointor
 No moratorium
 Appointment by a qualifying floating charge holder with a floating
charge over all, or substantially all, of the assets of the debtor
company
 Administrative receiver owes duties solely to appointor
 Blocks appointment of administrator
 LPA Receivership and Fixed Charge Receivership
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Administration






vs
Moratorium
Duty to act in the interests of all
creditors
Deemed agent of the company
Administrators must provide
proposals and information to all
creditors
Lasts for 12 months unless
extended
Administrator has wider statutory
powers
Administrative
Receivership



No Moratorium
Main duty is to appointor (i.e. to
chargeholder)
Also deemed to be the agent of
the company
 e.g. to dismiss/appoint directors
 call meetings
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Insolvency Procedures: Liquidation
 Terminal procedure
 Appointment? Shareholder resolution (voluntary
liquidation) or court order (compulsory liquidation)
 Realisation, distribution, dissolution
 Order of priorities
 Delay in enforcement
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Insolvency Procedures: Compromise Arrangements
 Creditors agree procedure for B’s survival
 Two main types:
 Scheme of arrangement
 Requires application to court for an order that a meeting of creditors is
summoned
 Need ¾ by value and simple majority of creditors to agree to the scheme
 Binding on all creditors once approved by the court
 Company voluntary arrangement (CVA)
 75% of creditors by value and simple majority of members to agree to the
arrangement
 Not binding on secured creditors unless they have agreed to the
arrangement
 Supervised by an insolvency practitioner
 No automatic moratorium
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Administrative Receivership
 May be appointed by:
 Holder of floating charge (created before 15 September 2003)
over whole/substantially the whole of assets
 Holder of floating charge (created after 15 September 2003)
over whole/substantially the whole of assets where a statutory
exception applies
 Floating charge crystallises
 Control and management passes to administrative
receiver (“AR”)
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Administrative Receivership
 No moratorium triggered
 AR’s principal duty – realise property in order to repay
debt owing to appointer
 Often results in quick sale at price sufficient to discharge
secured creditor only
 Company then usually placed in liquidation
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Administration
 Company’s assets can be reorganised or assets
realised under the protection of a moratorium
 Enterprise Act 2002 – floating charge holder
prohibited from appointing an administrative
receiver
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Administration
 Moratorium only possible where one of the statutory
purposes of administration is likely to be achieved
 rescuing the company as a going concern
 Achieving a better result for company’s creditors as a
whole
 Realising property to make distribution to one or
more secured or preferential creditors
 N.B. hierarchy
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Administration
 Appointment of administrator
 By court - (company/company directors/creditor etc
can apply)
 Out of court – company/company directors/holder of
“qualifying floating charge”
 N.B. restrictions/notice
 Officer of the court
 Interests of ALL creditors
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LPA Receivership
 L with fixed charge over property can enforce by
appointing an LPA receiver
 LPA receiver will act as B’s agent to sell the charged
property/collect rental income for L’s account
 Advantages:
 Alternative to L taking possession of property
 LPA receiver often an experienced property
professional
 Quicker and cheaper for L
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Liquidation
 Assets of company realised and distributed to
creditors in statutory order of priority
 Company is then dissolved
 Compulsory liquidation (court order) OR
 Voluntary liquidation (shareholder resolution)
 Can be a slow process
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