Because Europe doesn't have the equivalent of U.K. insolvency legislation, it's that much harder to get whole business deals off the ground. Whole business securitizations gained a foothold in the U.K. markets primarily because the establishment of a trust - a key dynamic in these deals - is already addressed under common law jurisdiction.
"The basic issues should be the same under the EU directive but they aren't, particularly in terms of tax treatment," said Margaret Boswell of Gide Loyrette Nouel's London offices.
The Gide team is working toward establishing a pan-European structure that could be applied as a template for future cross-jurisdictional deals. It's an ambitious plan, considering that under most European civil law jurisdictions the establishment of trust has to be reconstructed. "Given the extent of EU legislation, you might expect the issues to be more-or-less the same across member states, but this is not the case, especially in the area of tax, where harmonization remains a long way off," said Boswell. "The concept of a trust is not generally recognized."
Aside from tax divergences, employment laws also must be considered. Although Europeans are free to work across the EU, employment laws vary from jurisdiction to jurisdiction. From an ABS point of view there are undesirable consequences and substantial liabilities that can come with the transfer of a business into a bankruptcy remote vehicle. "If we achieve to do this pan-European whole business deal - several other deals will be able to work from the same formula," said Boswell.
Individually, many continental European jurisdictions have worked to establish insolvency and tax legislation that would facilitate whole business deals (see ASR 5/31/05). "We have offices in a number of jurisdictions working towards creating an environment for ABS, and I think in the case of civil law jurisdictions, the French Fonds Comuns de Creances (FCC) have been very attractive, maybe not to an Anglo Saxon lawyer who would obviously prefer these deals be executed via an offshore vehicle," Boswell said.
France has already executed a couple of whole business deals - one completed for Xerox and another for FCC Eurotruck. "Going forward there is a need to do these whole business deals in the context of LBOs. I think that securitization is recognized as a way to organize stable financing for target growth," said Patrice Doan at the Paris-based Gide office. "The LBO market is stronger and stronger and these buyouts are made by the private equity firms who are using the whole business market as a way of getting back out."
In France - and in general under civil law jurisdictions - it has been much easier to do leasing type whole business deals when the business has fewer employees. More employees mean more pension issues and liabilities. "Nonetheless we have to find tricks to get whole business types deals done in France," said Doan. "The bankruptcy legislation has been changed, but it's not very creditor friendly and its takes some sophisticated lawyering because in essence these deals fight against a natural environment."
Bypassing local restriction via an offshore SPV is a formula that has worked for many European civil law jurisdiction-based companies looking to get these deals done. The Gide team said developments in Eastern European ABS, for example, have been well underway but that these deals typically get less press because most are executed via offshore vehicles from issuers that have ties to more established ABS jurisdictions - Hungary and Polish receivables have been securitized in the past via this route.
But the standalone deals have yet to come, primarily because of the less developed securitization laws. The French FCC creates the notion of trust by operators of law and thus makes securitization very secure for creditors and banks; it facilitates the execution of a true-sale. "China is looking at the French model," said Doan. "If you look at Italy, the law there works well for Italian receivables but not if you are doing a deal which involves another jurisdiction."
As the legal obstacles become less of an issue on the Continent, countries that are better poised to deliver deals that work across jurisdictions are those likely to have the fastest growth stories, said the Gide team. "In every jurisdiction there is some attention being paid on how to facilitate securitizations," said Rob MacDonald from the New York-based Gide offices.
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