The legal evolution of securitization laws among European countries has provided a much-needed platform for structural innovation, as well as bridging the gap of jurisdictional nuances, bringing domestic laws more in line with each other.
"The European market is up in both volume and developments within the legal environment of the market," said Yaron Ernst, Moody's Investors Service senior credit officer, on a teleconference held last week. "The legal innovations display signs of maturity in the securitization market."
The European ABS market grew by 13% last year, with volume reaching 280 billion. "We noticed repeat issuance in all markets, with some newcomers coming in with structural innovation," said Ernst. On the global front, Basel II and IAS 39 continue to be discussed, Ernst added. The EU adopted the International Financial Reporting Standards at the beginning of 2005, and is expected to reach some resolution on IAS 39 later this year. The International Accounting Standards Board will hold a meeting in March to discuss a new draft of the standard, according to industry sources, which could lead to an April approval (see ASR 4/5/04).
On the domestic side, legal improvements made to existing securitization laws have opened the door to structural innovations as well as new investor participation. "We saw improvements to jurisdictional ABS laws," said Ernst. Among the changes he highlighted was French legislation looking to allow French SPVs - known as Fonds Commun de Creances or FCCs - to enter into credit derivatives.
The courts must still decide whether to allow FCCs to enter into credit derivative transactions, as either credit protection buyers or sellers; and if FCCs will be permitted to issue transferable debt securities such as notes, bonds or commercial paper, in addition to FCC units, which would enable these vehicles to tap a larger investor base that does not currently invest in FCC units.
Also up for discussion is the introduction of the comptes d'affectation speciale ("specially dedicated accounts") concept, which would be treated as segregated bank accounts administered by the originator as servicer to credit collections on securitized assets. These accounts would be protected from servicer bankruptcy and therefore, once the relevant conditions have been stipulated in the decree, constitute a strong mitigating factor against commingling risk in structured finance transactions.
"The Netherlands also amended its securitization law to outline stronger bank remoteness," Ernst said. "And in Luxembourg, a new law for securitization was created. The U.K. saw changes applied to the Enterprise Act of 2002 and a new FSA regulation placed [the FSA] as supervisor of mortgage products. In Germany, TSI saw a first deal launched and Spain also made changes to its insolvency law."
There is talk of upcoming changes in the German law that should facilitate the structuring on NPL deals, some industry players expect activity on that side at some point in 2005. Under current German legislation many of the loans that are considered to be NPLs on an economic basis would actually require borrower consent under the banking secrecy law, or are otherwise restricted and would require third-party consent, making due diligence/transfer difficult.
Italy is also busy reworking it securitization law 130 to allow for new asset classes. Last year closed with talk of a new covered bond deal from Cassa Depositi e Prestiti. A bill to introduce a specific covered bond law was proposed two years ago, but it is more likely that financial institutions could find a safer harbour or quicker solution under an amended Italian securitization law that would allow guarantees to be issued by the SPV set up to ring-fence the selected mortgage assets.
Also on the table are changes in respect to CMBS structuring. Currently, the market expects the Bank of Italy to announce changes to the securitization law that would allow them to approve public CMBS issuance rated above investment grade, which should prompt a number of transactions to follow, due to the number of commercial mortgage loans in need of financing. "Italian Public CMBS has not occurred in recent years due to the Bank of Italy's concern over compliance with securitisation law 130," explained analysts at Commerzbank. "Principally the concern was that a strict interpretation of the rule meant that loans that did not amortise could not be included as CMBS collateral, resulting in the lack of issuance to date."
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