legal criteria for rating securitisation instruments & covered bonds

Reff&Associates is the correspondent law firm of Deloitte Romania

Introduction to the legal criteria for rating securitisation / mortgage bonds Romanian law perspective

Moody's 2nd Annual CEE Credit Risk Conference12 June 2008, Bucharest

Andrei Burz PinzaruSenior Manager


Legal criteria for rating securitisation / mortgage bondsIntroduction

Legal Issues are analysed in rating any securitisation / mortgage bonds transaction, but are particularly significant in new markets

Reasons

- the local laws and the nature of the legal system are less well known

- legal precedents may be limited or less applicable to securitisations / mortgage bonds


Legal criteria for rating securitisation / mortgage bondsRomanian legal framework for securitisation and mortgage bonds

The main legal framework for securitisation and mortgage bonds in Romania

The main legal framework for securitisation and mortgage bonds in Romania

Amendments to the Mortgage Lending Act (Law No. 34/2006, published on 3 March 2006, amending Law 190/1999)Amendments to the Mortgage Lending Act (Law No. 34/2006, published on 3 March 2006, amending Law 190/1999)

The Securitisation Law (Law 31/2006, published on 13 March 2006)The Securitisation Law (Law 31/2006, published on 13 March 2006)

The Mortgage Bonds Law (Law 32/2006, published on 23 March 2006)The Mortgage Bonds Law (Law 32/2006, published on 23 March 2006)

•CNVM/NBR Regulation 12/2006 on the authorisation of agents

•NBR Norm19/2006 on eligible assets for “refreshing” MB cover pools

•CNVM Regulation11/2006 on securitisation

•CNVM&NBR Regulation 21/2006 on the credit risk in securitisation


Legal criteria for rating securitisation / mortgage bondsRomanian securitisation framework: key features

Pay through and pass-through structures available:SPV set up as securitisation companySPV set up as civil partnership (no legal personality)

Key legal aspectsSPV’s unchallenged ownership of asset pool – no insolvency claw-backSPV’s bankruptcy remoteness: limited purpose, operational and management independency, SPV insolvency protection for investors regarding the assetInvestors’ interest in the collateral (limited statute of limitation of challenge of collateral)

Key regulatory aspects Entities involved in securitisation need authorisation by Securities Commission and Central Bank

Agent (trustee)SPV administrator (corporate servicer) – minimum EUR125,000 equityPortfolio management company (payment agent)

A financial operation whereby an investment vehicle purchases pecuniary claims (all accessory rights included), (“assets”), groups them in pools and issues securities backed by the respective assets’ corresponding cash-flows (“asset-backed securities”, in Romanian “instrumente financiare securitizate”).

A financial operation whereby an investment vehicle purchases pecuniary claims (all accessory rights included), (“assets”), groups them in pools and issues securities backed by the respective assets’ corresponding cash-flows (“asset-backed securities”, in Romanian “instrumente financiare securitizate”).

Definition of securitisation under Romanian law

Definition of securitisation under Romanian law


Legal criteria for rating securitisation / mortgage bondsRomanian mortgage bonds framework: key features

Mortgage bonds: financial instruments accessible only to banks

Key legal aspectsDetailed regulation of Assets eligible for the cover pool and refreshment of the cover pool (replacement of assets)Protection of the investors’ interest in the cover poolIsolation of the cover pool. Bankruptcy remoteness

Key regulatory aspectsEntities involved in securitisation need authorisation by Securities Commission and Central Bank

Agent (trustee) – mandatory for mortgage bonds (as opposed to securitisation)Portfolio management company (payment agent)

Securities issued by banks, under CNVM’s supervision, based on a offering circular approved by CNVM, for the purpose of refinancing the mortgage lending activity of the issuer, based on a cover pool of mortgage loans over which the investors are granted a first rank security interest and a preference right against any other creditors of the issuer.

Securities issued by banks, under CNVM’s supervision, based on a offering circular approved by CNVM, for the purpose of refinancing the mortgage lending activity of the issuer, based on a cover pool of mortgage loans over which the investors are granted a first rank security interest and a preference right against any other creditors of the issuer.

Definition of mortgage bonds under Romanian law

Definition of mortgage bonds under Romanian law


Legal criteria for rating securitisation / mortgage bondsPreliminary legal considerations in rating securitisation / mortgage bonds

Does the necessary infrastructure exist to accommodate regulatory concerns?

- It is important to ascertain whether or not the necessary infrastructure exists, to accommodate structural, accounting, and other regulatory concerns.

- The extent to which relevant originators (e.g., banks, consumer lenders) are regulated influences normally the credit quality of their products as well as their motivation to securitise / issue mortgage bonds.

- Data/consumer protection rights

- Foreclosure

- Regulations of the rated instruments

- The nature of the accounting and tax treatment of the transaction.


Legal criteria for rating securitisation / mortgage bondsPreliminary legal considerations in rating securitisation

- The structure of the special purpose vehicle (SPV) that issues the securities

- Type of asset backed securities (debt or equity)

- Impact of local laws on issues such as bankruptcy, transfer of assets to SPV or foreclosure?

- Could the ‘true sale’ of the assets to the SPV be challenged in the event of the originator’s insolvency (‘claw back’)?

- The noteholders’ security interest in the assets, data/consumer protection rights, foreclosure, etc.


Legal criteria for rating securitisation / mortgage bondsPreliminary considerations in rating mortgage bonds

- Is there a special legal framework for mortgage bonds?

- How is protected the bondholders’ security interest in the cover pool?

- Impact of bankruptcy of the originator on the cover pool and mortgage bonds investors


Legal criteria for rating securitisation / mortgage bondsLegal Issues Frequently Encountered in New Markets: Borrower/Loan Related

- Enforceability of loan documents, including the underlying security

- Average time to enforce security and average recovery costs

- Enforceability of prepayment penalties

- Consumer protection laws –limitations on the data that banks/lenders can share with investors / other third parties?


Legal criteria for rating securitisation / mortgage bondsLegal Issues Frequently Encountered in New Markets: Transfer of receivables- Is a notification to borrowers needed? If so, what are the implications if no notice is

given?

- Are there any other requirements in order to perfect the transfer of the receivables?

- Is there any registration required in connection with certain assets (e.g., mortgage loans)?

- Is there a stamp tax or transfer tax?

- True sale – What is the possibility that a court would re-characterise the transfer as a secured loan in case of the seller’s bankruptcy? Is there relevant case law?

- Claw back – How far back in time can a court go to cancel the transfer, in the case of a fraudulent conveyance or a preference?


Legal criteria for rating securitisation / mortgage bondsLegal Issues Frequently Encountered in New Markets: SPV

- Is there a specific law for its structure and conditions?

- Is there a minimum capital required? Restricted actions? Minimum number of officers? etc.

- Is the SPV and/or its assets legally segregated from its affiliates and/or creditors?

- Is it eligible to file for, or be placed in, bankruptcy? If so, how will the underlying assets be treated in its bankruptcy?


Legal criteria for rating securitisation / mortgage bondsLegal Issues Frequently Encountered in New Markets: Bankruptcy

- Specifics of the bankruptcy law

- The typical time frame of the proceedings

- How are secured creditors treated differently from unsecured creditors?

- Typical priority order of claims

- Who has the capacity to decide on the plan of liquidation / re-organisation?


Legal criteria for rating securitisation / mortgage bondsLegal Issues Frequently Encountered in New Markets: Taxation

- Taxation on the revenues of the SPV

- Stamp or transfer tax - with respect to the transfer of receivables

- Value added tax (VAT)

- Withholding tax – applied to the payments made by the SPV to investors

- Other taxes under securities laws


Legal criteria for rating securitisation / mortgage bondsConcluding comments

How well does Romanian legal framework “serve” the rating of securitisation / mortgage bonds?

Local versus cross – border transactions


Securitisation Services : Financial Advisoryin Romania Legal assistance

Tax assistance

Contacts

Legal and regulatoryAndrei Burz PinzaruSenior Manager

Direct:+40 21 207 52 05Fax: +40 21 319 51 02Mobile:+40 728 328 928Email: [email protected]/ro/legal

4-8 Nicolae Titulescu Road,East Entrance, 3rd floor,Sector 1, Bucharest, 011141Romania

Tax ServicesRodica SegarceanuPartner

Direct:+40 21 207 53 64Fax: +40 21 319 51 03Mobile:+40 744 328 381Email: [email protected]

4-8 Nicolae Titulescu Road,East Entrance, 3rd floor,Sector 1, Bucharest, 011141Romania

legal criteria for rating securitisation instruments & covered bonds

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