Although the 13 banks participating in the German true sale initiative completed the groundwork on their securitization platform last month, a sluggish economy is likely to keep those banks from needing to securitize until next year, several market observers said.

In the meantime, some key changes to Germany's Insolvency Code and Banking Act are nearing approval. The changes - which will facilitate securitization for mortgages in particular - are spelled out in current draft legislation. The issue will go to the Parliament after the comment period on the draft legislation ends in several weeks.

The changes are widely expected to be approved. "The government has expressed its intention to support further securitization in Germany, particularly true sale securitization, so that one can expect that the Parliament will vote favorably on the proposal," said Kurt Dittrich, a Frankfurt partner of Linklaters, one of the law firms that worked on the true sale initiative.

The pending changes will relax the requirement for registering mortgages that are securitized - addressing a key problem related to achieving a true sale.

"It is costly to effect registration for a large portfolio of mortgage loans," said Michael Weller, a partner in the Frankfurt office of Clifford Chance, another law firm that worked on the true sale initiative. "Some mortgage transactions in Germany have worked around that problem by incorporating trigger events. So they don't have to register immediately. If insolvency looms, the registration process is triggered. But some risk comes with that approach."

The draft legislation, in effect, would enable banks to create a private register, both Dittrich and Weller said. "Each bank trying to securitize its mortgage loans can have such a register, and if the mortgages are entered in the register, the bank does not need to transfer the mortgages in order to achieve insolvency-remoteness of the structure," Dittrich said.

Under the proposed law, the registration could be done only by banks, with the individual doing the job being supervised by the bank regulator, Weller added.

That is meant to ensure some security, while still allowing banks to register mortgages without going through "an onerous process with public authorities," he said.

The change would simplify the steps necessary for true sale securitization. "In the case of an insolvency of the originator, mortgages entered into the register will not be available to the insolvency administrator," Weller said.

Launching true sale international

Even without the pending legislation, however, the securitization framework created by the banks - called True Sale International GmbH, or TSI - is ready to be used. (A GmbH is similar to a Limited Liability Company.)

The structure, which will enable German SPVs to be bankruptcy remote, involves three charitable trusts that would own equal shares of the issuing SPVs. Each SPV would also be a GmbH.

The paperwork for establishing the charitable trusts was complete as of September. Still, the initial deals are likely a few months away.

Hartmut Bechtold, the business manager for TSI, said although the growth rate has picked up in the last few months, the German economy has been so sluggish this year he doesn't expect banks to use the new securitization platform until 2005. "The credit demand is starting again," he said. "But at the moment, German banks have liquidity and they are building up assets still. Therefore, the actual need for securitization is not present, but will come. It will come in the course of the next year."

TSI has a website ( that offers extensive information in German and English, including the steps necessary for originators to use the securitization platform.

The intent is to establish a securitization standard, improving market transparency and liquidity. To that end, it intends to label securitizations that meet certain criteria as "Certified by True Sale International." The criteria, which are listed on the website, include a minimum size and adherence to specific investor reporting standards, among other things.

Because of the legal and tax changes adopted since the initiative started its work in early 2003, it is possible to create a German true sale vehicle without TSI. And at least one deal has done so.

However, TSI offers some advantages over other structures, Dittrich said. "The structure is already in place and has been agreed to by the 13 TSI banks. Therefore, we expect it to play an important role in the market," he said.

What's next

Now that the legal hurdles for securitizating bank assets are mostly cleared away, TSI is preparing to target unfavorable tax laws that hinder true sale securitization of trade receivables.

"We have come very far in the reform of our law, but trade receivables are still a very open point," TSI's Bechtold said.

The first meeting of the TSI advisory council took place in late September. The council consists of representatives from the 13 member banks, the three rating agencies, auditing firms PricewaterhouseCoopers and KPMG, two universities, and two German ministries, the Ministry of Finance and the Ministry of Economics.

The council agreed to make trade receivables the next item on the agenda. So TSI is investigating the market potential for those assets and how to better facilitate such securitizations, Bechtold said. The results will be presented at the next advisory council meeting in April 2005, he said. The goal is to advocate additional reforms before the next election.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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