Spanish securitizations are in store for an early Christmas gift as the push for changes to the existing securitization law will yield some result before year-end. The competitive handicaps that have dampened growth in certain areas of the Spanish securitization market are at the forefront of the changes sought by market participants. These changes will potentially give Spain the footing needed to put it at the top of the ranks for European ABS issuance.
Earlier this month the European Securitisation Forum (ESF) filed a letter to the Spanish market regulator recommending changes to the Spanish Securitisation law. The ESF has requested amendments to Spanish bankruptcy laws allowing companies to securitize future cashflows. "Specifically, the ESF has asked for clarification that future flows from securitized assets do not form part of the insolvent originator's estate," explained Deutsche Bank Securities analysts. "We note that French securitization market participants lobbied for similar modifications to their legal framework in 2003, but the Senat rejected changes to the enforceability of the transfer of future receivables to French issuing vehicles."
Since 1998, local Fondo de Titulizacion de Activos, or FTAs (essentially Spanish SPVs), have been formally allowed to securitize present and future collection rights. The latter could be securitized to the extent they represent income of a known or estimated volume, explained Ramiro Rivera, securitization partner at the Spanish law firm Uria Menendez in Madrid. But in 1998 the regulator restricted the approval to deals securitizing toll road revenues, while postponing the ability to securitize other future flows until the issuance of further specific regulations under the form of a Ministerial Order. These Orders were expected to provide for special rules depending on the legal nature of the different rights.
"To the dismay of the market, after seven years, the authorities had still to produce those Orders even though following a 2004 amendment in the Public Administrations Contract Law, the basic conditions for securitization of rights arising from concession contracts other than toll roads were laid out," said Rivera. "Therefore, no future collection rights have thus far been securitized in Spain."
At the beginning of the year Spanish authorities released a draft regulation intended to outline all relevant conditions, allowing the securitization of future collection rights. The regulation, still in draft form and therefore subject to amendments, sets forth different classes of future rights eligible for securitization by specifying the conditions for securitization.
Additionally, local market regulators Comision Nacional del Mercado de Valores became authorized to produce further rules, which should facilitate the securitization process. Among eligible rights, the draft regulation includes the right of the lessor to collect payments from lease agreements, certain intellectual property payments and certain contractual rights. As of press time, the Spanish Official Gazette had published the new rules on securitization of future collection rights, which were expected to be implemented by the end of last week.
Spanish synthetic law set right
Despite the introduction of synthetic legislation at the end of 2003, the Spanish market has yet to take off. The ESF is pushing for clearer rules on the capital relief achieved through synthetic securitizations. "Though fairly vague, the  rule did cover most of the basic items required to structure a synthetic deal - the ability to acquire listed assets and/or to enter into structured deposits with credit entities, to enter into complex collateral schemes and to execute derivative contracts," said Rivera.
"However, a further regulatory development was contemplated, though it was never completed. That said, the fact of the matter is that there have been no on-shore synthetics deals in Spain. Prior to December 2003, two local banks did structure synthetic securitizations using off-shore vehicles. However, it seems that regulatory and accounting uncertainties have kept originators from this market."
Rivera said that local originators blame the lack of clear accounting guidelines and, most importantly, the Bank of Spain's failure to produce specific rules on the treatment of synthetics for capital adequacy purposes, as the single most important reason for the lack of synthetics in Spain. This push for heightened regulation is expected to improve and enhance local securitization alternatives, which include the issuance of clear guidelines by the Bank of Spain on the capital treatment of securitizations originated by credit entities.
Should this occur, it would bode for a fruitful Spanish synthetic market next year. "There [are] a lot of expectations in the market, as the authorities have promised to release the new rules before year-end," said Rivera. "Therefore, the prospects for 2006 look very promising."
The ESF is also looking for revisions to the legal configuration of the FTA, including the transformation of the FTA into a multi-transaction vehicle through legal recognition of segregated compartments; the possibility for management companies to actively manage the portfolios of securitized assets (for managed CDOs); and the removal of requirements that all bonds be rated. ESF head Scott Rankin said changes to the bankruptcy laws may take longer than others.
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