1.

In order for a securitisation transaction to be successful, it is important that the transaction should present low levels of legal risk to the investors who hold the bonds issued by the special purpose vehicle/issuer. Explain how securitizations are structured to ensure this is achieved. (expects us to write about... a little bit about originators bankruptcy risks in transfer; recharacterisation; substantive consolidation, i.e. you have to make sure there is no connection with originator; credit enhancement and liquidity support (the instrument is very inflexible so it needs flexibility which is provided by liquidity support); ) Plan: - Identify the risks that need to be covered and then discuss them in detail - Securitization is about the financing of the underlying portfolio of assets and it is how you achieve that. Three parts 1. To make sure that assets effectively transferred to the SPV (talk about -methods of transfer, - re-characterisation risk, (true sale is really is about a re-characterisation analysis) - originators insolvency related risks (undervalue, preference) - insolvency remoteness aspects (substantive consolidation issues)) 2. The way in which noteholders are protected in relation to the performance/non-performance of the assets ( - liquidity issues, - credit enhancement, - prepayment risk (eligibility criteria in revolving assets structure)) 3. How the noteholders are protected within the context of the T&Cs of the notes issue (-subordination: making sure it works, -security: security trustee) 1) When there is no facts given, we dont need discuss positive/negatives aspects of smth. go straight to issues. The most effective method of transfer is novation, it transfers rights and obligations providing for clean break. Assignment if it is a full legal assignment, you cannot transfer obligations, if there is a non-notified assignment there are deficiencies: set-off, priority, good discharge to originator, no direct claim (irrevocable P of A given by way of security, secured power of Attorney (s.4 Powers of Attorney Act 1971) Area of risk is a transfer by method of sub-participation (talk about double credit risks and why it is double, and then about security over underlying assets to mitigate the risk), trust transfers, proceeds trust (identify the risks in terms of potential insolvency when the trust in bankruptcy is not effectively required to enforce onerous liabilities, and whether the structure would protect you by power of attorney given by way of security that are taken in order to enforce security to make sure you can effectively bring claims or in the context of disclaiming onerous property (s. 315 IA 1985) having some benefit which is structured within the deal that enables trust in bankruptcy take the benefit out post-bankruptcy situation . so obligations are not onerous (unprofitable, unsalable, not readily saleable or give rise to pay money or to another onerous obligations). Explain how the issues are addressed.

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Talk about re-characterisation risk (transfer method that is used needs to be clear spelt out in the documentation so that we covering any risk of re-characterisation provided the documentation is clear as a matter of English law. Insolvency risk (transaction at an undervalue, preference, disclaiming onerous property) Talk about substantive consolidation risk and that this risk is remote under English law but the SPV should not have the US parent company Talk about insolvency remoteness succinctly. 2) Say what are the credit enhancement/ liquidity support It is important to make the difference b/w the credit enhancement and liquidity support. How credit enhancement maybe incorporated in the deal. Talk about when liquidity facility shall be available to the SPV, how it addresses problems of the inflexibility of the bonds and covers time mismatches b/w maturity of underlying assets and bonds. Inflexibility of the instrument issued by the SPV is going to present a problem, that is the risk that bondholders will not have a certainty that their principal and interest will be paid on time, this covered and addressed by liquidity support. Liquidity needs to be available to the SPV at the time when it makes payment to the noteholders (interest and principal) and more important the way it is structured needs to ensure that it will not being used to cover credit losses/risk (say smth how you achieve that, how you try to ensure that it is really providing only liquidity support and not covering situations where could be losses on underlying portfolio) Losses are covered by credit enhancement and then go on about C/E: C/E needs to be structured in a way that covers risks against credit deficiencies in that context. C/E needs to be available to cover credit losses in underlying portfolio. It typically provided in two ways: Over-collateralisation which is given to the SPV on day one, if it is external credit enhancement it needs to be available for drawing at the time when SPV is due to pay the bondholders and suffer the losses. The second type is subordinated capital raising structure (tranching of the bonds to several classes) which enhance credit quality of the underlying assets Another risk is that bondholders do not get what they bargained for in terms of maturity. Two key issues: - buying bonds backed by the collateral (enforcement of security) - buying the bonds which will generate interest for a period of years (prepayment risk) Talk about risk of prepayment and the ways the deal is structured so as to avoid a prepayment risk A revolving structure whereby if the underlying assets perform too quickly, what to do with the money. To avoid that prepayment risk is by enabling the SPV to buy more assets from the originator to keep the deal going for the life of transaction. The other risk is that the assets coming to the deal after day one may not be as good as the original assets. If the quality is

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How do we protect to ensure the quality of the collateral that backs the notes noteholders are buying is maintained. This can be addressed by the concept of eligibility criteria procuring that the quality of the collateral will not diminish. 3)
Subordination is not just about enforcing rights as between bondholders and SPV, but about priority as between the creditors themselves (bondholders, liquidity provider, trustee, service agent and etc) ... moreover bondholders may go into insolvency and trustee in bankruptcy may try to challenge subordination clause to improve its cash flow for bankruptcy estate for all unsecured creditors of the insolvent bondholder.

The risk of the SPV or noteholders going insolvent because according to s.107 Insolvency Act (the companysproperty in a voluntary winding up shall on the winding up be applied in satisfactionof the companys liabilities pari passu) The pari passu principle is about people elevating themselves above other creditors, if you subordinate yourself you do not offend that principle. So securitisation transactions are structured in that way. It is about contractual subordination. Pari passu principal applies to unsecured creditors whereas secured creditors are at another level Therefore, security may mitigate the risk of equal treatment of bondholders because pari passu principle does not apply to secured creditors. Bondholders and all other parties are subordinating their claims in different classes, which is done through contractual documentation; this structure shall work even in the insolvency proceedings. It is critical to avoid pari passu principal, and not only in insolvency, i.e. pari passu treatment needs to be maintained in a pre-default scenario as well as in a post-default. You can agree to subordinate yourself, but not elevate yourself among other creditors. (Re Maxwell Communications) Talk about the problem, i.e. identify what the problem is Talk about structurally how the contract provides for different treatment subordinating (stepping back, tracnhing) Talk about how the structure reinforce that further by insuring that it is built-in in the security documents. Security structure protects against insolvency issues, without insolvency you dont have this issue.

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2. Securitisation transactions are fraught with legal complexity that arises primarily because of the problems associated with transferring the assets from the Originator to the SPV Issuer in a manner that will address the risk of Originator insolvency. Discuss. Originators insolvency risk and re-characterisation (you should discuss current position in law in terms of re-characterisation risk, will give you a pass or distinction): - Talking through true sale analysis, the law is complex is a good place to start - talking through the three indicia that comes through Inglefield - finishing where the law currently stands (WDA, Orion) (notwithstanding, provided the transaction documentation is carefully drafted and it reflex parties intention - adding that we have concerns about Brumark type of thinking in the context of charges (whether the English court might apply as a consequence re-characterisation now more liberally in a sale v. security structure (however, there is a line of reasoning that has been applied to security, where notwithstanding that level certainty of drafting, the court said there are certain features of security (in this case question of control) which are so fundamental and if they are not present, the fact the parties made clear they wanted to create one form of security, the court held you cant have that. There is therefore a concern that that type of policy analysis may be applied to the true sale analysis. However, there are no any indicia identified using the Inglefield analysis that are so fundamental to the sale which may be compared with a question of control in the Brumark case distinguishing fixed and floating charge, and this is reinforced by Romer LJ judgment in Re George Inglefield and WDA v. Export Finance Co. ) - reaching a conclusion that the concern is little and the court would not apply Brumark type to the true sale analysis, there is no such indicia in a sale such as in a fixed charge. Bankruptcy/insolvency related issues: There is a risk if the originator goes into bankruptcy, i.e. insolvency legislation will provide grounds upon which the trustee in bankruptcy can claw back the assets into originators insolvency estate. Implications of that the BH will end up as unsecured creditors in the originators bankruptcy estate and that is a huge risk. Having said that we need to go through the law: - Talking about transactions at an undervalue in particular and preferences, - identifying why they relevant in securitisation and - then critically talking about how those legal complexity may apply - showing you really understand the law in relation to transactions at an undervalue (insolvency at the time transaction entered into, or as a consequence of the transaction within two years from the onset of insolvency, connected counterparties, it is not at undervalue if it is entered into in a good faith in order to carry on its business; ) - concluding that notwithstanding relatively complex legal issues here they are not or shouldnt be of the concern because... you may say 2-3 sentences on profit extraction two ensure that transaction at an undervalue is not be triggered because it is not substantially less, what you are getting back superficially may look less a lot on day one but if the asset perform through deferred consideration, through trust structure whatever you use, the originator is getting full value potentially back and not losing any substantial amounts.
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s.238 (5) IA 1986 The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied (a) that the company which entered into the transaction did so in good faith andfor the purpose of carrying on its business, and (b) that at the time it did so there were reasonable grounds for believing that thetransaction would benefit the company. Preference (s.239 IA) an individual gives a preferenceto a person if (a) that person is one of the individuals creditors or a surety or guarantor for any of his debts or other liabilities, and (b) the individual does anything which has the effect of putting that person into a position which will be better than the position he would have been in if that thing had not been done. Disclaimer of onerous property (s.315 IA) The following is onerous property for the purposes of this section, that is to say (a) any unprofitable contract, and (b) any other property comprised in the bankrupts estate which is unsaleable ornot readily saleable, or is such that it may give rise to a liability to pay moneyor perform any other onerous act. Insolvency risks related with transfer of assets: By way of novation is a clean sale By way of silent assignment or sub-participation and the originator goes into bankruptcy e.g. we have a double credit r.isk. Talk about issues only through the methods if they present risk as a consequence of insolvency.

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3. Although it is essential for the success of a securitisation transaction that the Special Purpose Vehicle is insolvency remote, this objective has proved difficult to achieve. Discuss.
Identify why the SPV is needed to be insolvency remote Discuss different ways which this can be addressed Why it is important to separate SPV from originator

Pass: SPVs establishing insolvency remoteness - the objectives of insolvency remoteness (about insolvency remoteness of SPV structure; establishing new company (why? It might have transactions liabilities, including contingent liabilities; we dont know whether it is solvent or insolvent. This is question of fact. Implications of it being insolvent are so horrendous that it is not even worth to take that risk), - low or no-tax jurisdictions (tax neutral) since you cant restrain tax authorities from filing for bankruptcy of SPV; - limitations on SPV activities through constitutional and contractual provisions, since SPV is a single purpose company and we need to limit it may incur new external liabilities not connected with securitisation deal; - no US parents and the Board of directors should be independent from the originator (substantive consolidation problem; originators insolvency may contaminate SPV and lead to its insolvency if it is consolidated with the originator. Should say that substantive consolidation doesnt apply in England, however there is a potential risk in some jurisdictions in case if connection b/w SPV and originator is so close, you might find if the originator goes into bankruptcy the SPV will be substantively consolidated into the bankruptcy of the originator) - no employees in SPV (why: because SPV will need to pay wages to the employees, and you cant limit their recourse or sign them up for non-petition clause, hence, employees may put SPV into bankruptcy) - subordination of the claims (not only of the bondholders but of all other contractual parties of SPV (security trustee, liquidity provider, credit enhancement providers) (*Re Maxwell Communications) - limited recourse covenants (doesnt limit parties ability to file a claim... all the parties will only be paid to the extent the SPV has money, that is concept of limited recourse. The difficulty is can the obligation be enforced in circumstances clause is drafted in such a way when you cannot render the SPV liable to make a payment when it falls due... the distinction is that you can make the SPV liable for all of its debts even though it doesnt have any money, but the recourse you have against it is limited. Your recourse through the enforcement of security is limited to the value of the assets the SPV has available to it, you cant pursue the SPV beyond the value of its assets. But you are able to trigger its liability in terms of the enforcement of the security. It doesnt prevent from against filing for bankruptcy; protection against filing for bankruptcy is non-petition covenant. The second type of the clause that says the debt is never due is not working in that it completely prevents the noteholders from enforcing the security against the underlying assets, its against the public policy. - non-petition clause protect against putting SPV into insolvency (all of the parties need to sign up, and we have cases such as Re Colt Telecom Group which reinforces non-petition clause) Second part of question is it essential for the success of a securitisation transaction that the Special Purpose Vehicle is insolvency remote? It is not essential, since the notes are fully secured and to large extent even if SPV goes into bankruptcy creditors are protected because they have full security. The issue is one of control, there is no material risk that creditors will lose money because they have security. What will happen the deal will be liquidated, the whole deal will be accelerated and noteholders will be paid out earlier because they have bargained for a longer period (1.if you sell assets the bondholders will recover less for them because you selling them in distressed situation; 2.you are accelerating maturity of the bonds, the bondholders have not agreed to the earlier payment) 6 Yerzhan KZ