Portugal may be ready to ease into the MBS market now that a "not so new" securitization law is warming up to its missing link - revised tax-witholding regulations.

A long-awaited piece of legislation that addresses tax-withholding statutes for foreign investors was approved three weeks ago. There is a 40-day reviewing period that follows and market participants expect the law to be amended before the end of July.

This month's legislation is expected to delineate that a withholding tax will no longer be deducted on payments to a securitization vehicle from a domestic obligor or from a securitization vehicle to off-shore buyers. Underwriters had been waiting for the witholding tax to be dropped since 1999, sources say, and had even postponed Portuguese deals that were to be marketed to foreign investors.

"This really is the final piece of the jigsaw," said William Smithson, a partner at Simmons & Simmons Grupo Legal Portugues . "The original law provided a base plate which required administrative orders to enable the structure to be implemented."

The actual law itself, passed in late 1999, distinguished two types of vehicles that could be used for domestic securitizations: credit securitization funds (fundos de titlarizacao de creditos) or credit securitization companies (sociedades de titularzacao de creditos).

It did not, however, settle the required 20% withholding tax on any interest payment received by foreign investors, which made it difficult for underwriters to manage ABS issues for Portuguese companies.

"The intention has been to change the law, to bring it in line with what we have been seeing in Europe and it could lead to many banks issuing RMBS," said Birgit Specht, debt research head of ABS at Dresdner Kleinwort Wasserstein.

Getting around the issue

Ironically, though, the tax-withholding clause has prompted the country to issue innovative securitizations that work around the excess charge, says Simmons & Simmons, Smithson. Underwriters have so far been able to avoid the issue by going through their Lisbon subsidiaries that are fully registered and accredited Portuguese banks. Only a handful of banks, including Deutsche Bank, have such subsidiearies, which are eligible to market deals to foreign investors without a withholding tax.

According to S&P, foreign investors have been able to dodge the withholding tax for Portuguese securitizations because they are structured as intercompany loans from the issuing entity to the Lisbon subsidiary of the bank.

"We have been working on structures that could have been implemented with MBS deals that did get around the tax problem for ABS finance," said Smithson, which incidentally has led the country in experimenting with more complicated asset classes. The reluctance to issue MBS structures primarily stems from the expectation that the 1999 draft of the law would eventually be amended and potential issuers opted to wait and see, he added.

To date the Portuguese ABS market has issued an auto-receivables deal for Sofinloc Banco Finatia. BPN Creditus and BPN Leasing originated Tecnicredito and the Chaves funding deal. This list of progressive structures includes the first collateralized bond obligation (CBO) originated from the country, the EURO312 million Tagus Global Bond Securitization No. 1 originated by Banco Comercial Portugues, last year.

The bank braved the market again this year, issuing the EURO350 million Tagus No.2. And it's already taking second place to this month's Banco Espirito Santo EURO1.128 billion CDO, Lustiano Global CDO 1.

As for the potential this tax alleviation might have for structures to come, market analysts say it's likely to buttress Portuguese issuance, especially those hesitant to originate MBS.

More Reasons for MBS

Modification to the reregistration of mortgages is also on the list of changes, said Smithson. Prior to these revision measures, the transfer of mortgagees required stamp duty/notaries fees.

"If you have got a large number of mortgages in a portfolio you would have to go to each one and reregister when that could well be done with a public announcement like the Gazette in the Italian market," he added.

If the amendment is passed, mortgages transferred for the purpose of securitization would be exempt of fees on mortgage interests.

Still, although these changes certainly create ripe opportunity for the country's mortgage-backed securities sector, whether a deal emerges before the end of 2001 depends on the Bank of Portugal's readiness to approve and authorize either the fund structure management company or the financial institutions.

If an exception is considered and these entities can bypass the minimum two-year existence period before it can issue bonds, the Portuguese market is sure to burst onto the MBS front, said market analysts.

"There is going to have to be a willingness, a political willingness to do so," added Smithson.

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