The International Comparative Legal Guide to: Securitisation 2013

414 Pages·2013·4.61 MB·English

The International Comparative Legal Guide to: Securitisation 2013
General Chapters:
1 Documenting Securitisations in Leveraged Finance Transactions– Dan Maze & James Burnett,
Latham & Watkins LLP 1
2 CLOs: An Expanding Platform– Craig Stein & Paul N. Watterson, Jr., Schulte Roth & Zabel LLP 7
3 US Taxation of Non-US Investors in Securitisation Transactions– David Z. Nirenberg, Ashurst LLP 12
Contributing Editor
4 Debt Trading: A Practical Guide for Buyers and Sellers– Paul Severs & Lucy Oddy, Berwin Leighton
Paisner LLP 24
5 Cliffhanger: The CMBS Refinancing Challenge– Stuart Axford & Colin Tan, Kaye Scholer LLP 30
Mark Nicolaides,
Latham & Watkins LLP Country Question and Answer Chapters:
Account Managers 6 Argentina Estudio Beccar Varela: Damián F. Beccar Varela & Roberto A. Fortunati 34
Beth Bassett, Dror Levy,
Maria Lopez, Florjan 7 Australia King & Wood Mallesons: Anne-Marie Neagle & Ian Edmonds-Wilson 44
Osmani, Oliver Smith, Rory
Smith 8 Austria Fellner Wratzfeld & Partners: Markus Fellner 54
Sales Support Manager 9 Brazil Levy & Salomão Advogados: Ana Cecília Giorgi Manente & Fernando
Toni Wyatt
de Azevedo Peraçoli 63
Sub Editor
Beatriz Arroyo 10 Canada Torys LLP: Michael Feldman & Jim Hong 73
Fiona Canning
11 Chile Bofill Mir & Álvarez Jana Abogados: Octavio Bofill Genzsch &
Editor Daniela Buscaglia Llanos 83
Suzie Kidd
12 China King & Wood Mallesons: Roy Zhang & Ma Feng 92
Senior Editor
Penny Smale 13 Czech Republic TGC Corporate Lawyers: Jana Střížová & Andrea Majerčíková 104
Group Consulting Editor
14 Denmark Accura Advokatpartnerselskab: Kim Toftgaard & Christian Sahlertz 113
Alan Falach
Group Publisher 15 England & Wales Weil, Gotshal & Manges: Rupert Wall & Jacky Kelly 123
Richard Firth
16 France Freshfields Bruckhaus Deringer LLP: Hervé Touraine & Laureen Gauriot 135
Published by
Global Legal Group Ltd. 17 Germany Cleary Gottlieb Steen & Hamilton LLP: Werner Meier & Michael Kern 146
59 Tanner Street
London SE1 3PL, UK 18 Greece KG Law Firm: Christina Papanikolopoulou & Athina Diamanti 160
Tel: [phone]
19 Hong Kong King & Wood Mallesons: Paul McBride & Michael Capsalis 169
Fax: [phone]
Email: [email protected]
20 India Dave & Girish & Co.: Mona Bhide 180
URL: www.glgroup.co.uk
GLG Cover Design 21 Ireland A&L Goodbody: Peter Walker & Jack Sheehy 190
F&F Studio Design
22 Israel Caspi & Co.: Norman Menachem Feder & Oded Bejarano 201
GLG Cover Image Source
iStock Photo 23 Italy Chiomenti Studio Legale: Francesco Ago & Gregorio Consoli 211
Printed by 24 Japan Nishimura & Asahi: Hajime Ueno 221
Ashford Colour Press Ltd.
April 2013 25 Luxembourg Bonn & Schmitt: Alex Schmitt & Andreas Heinzmann 234
Copyright © 2013 26 Mexico Cervantes Sainz, S.C.: Diego Martínez Rueda-Chapital 245
Global Legal Group Ltd.
All rights reserved 27 Morocco Benzakour Law Firm: Rachid Benzakour 254
No photocopying
28 Netherlands Loyens & Loeff N.V.: Mariëtte van 't Westeinde & Jan Bart Schober 262
ISBN978-1-908070-58-6
ISSN 1745-7661 29 Norway Advokatfirmaet Thommessen AS: Berit Stokke & Sigve Braaten 275
Strategic Partners 30 Panama Patton, Moreno & Asvat: Ivette Elisa Martínez Saenz & Ana Isabel Díaz Vallejo 284
31 Poland TGC Corporate Lawyers: Marcin Gruszko & Grzegorz Witczak 294
32 Portugal Vieira de Almeida & Associados: Paula Gomes Freire & Benedita Aires 304
33 Saudi Arabia King & Spalding LLP: Nabil A. Issa 316
34 Scotland Brodies LLP: Bruce Stephen & Marion MacInnes 324
35 Slovakia TGC Corporate Lawyers: Kristína Drábiková & Soňa Pindešová 333
Continued Overleaf
Further copies of this book and others in the series can be ordered from the publisher. Please call [phone]
Disclaimer
This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice.
Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.
This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified
professional when dealing with specific situations.
www.ICLG.co.uk
The International Comparative Legal Guide to: Securitisation 2013
Country Question and Answer Chapters:
36 Spain Uría Menéndez Abogados, S.L.P.: Ramiro Rivera Romero & Jorge Martín Sainz 342
37 Switzerland Pestalozzi Attorneys at Law Ltd: Oliver Widmer & Urs Klöti 356
38 Taiwan Lee and Li, Attorneys-at-Law: Hsin-Lan Hsu & Mark Yu 368
39 Trinidad & Tobago J.D. Sellier + Co.: William David Clarke & Donna-Marie Johnson 379
40 UAE King & Spalding LLP: Rizwan H. Kanji 389
41 USA Latham & Watkins LLP: Lawrence Safran & Kevin T. Fingeret 397
EDITORIAL
Welcome to the sixth edition of The International Comparative Legal Guide
to: Securitisation.
This guide provides the international practitioner and in-house counsel with a
comprehensive worldwide legal analysis of the laws and regulations of
securitisation.
It is divided into two main sections:
Five general chapters. These are designed to provide readers with a
comprehensive overview of key securitisation issues, particularly from the
perspective of a multi-jurisdictional transaction.
Country question and answer chapters. These provide a broad overview of
common issues in securitisation laws and regulations in 36 jurisdictions.
All chapters are written by leading securitisation lawyers and industry
specialists and we are extremely grateful for their excellent contributions.
Special thanks are reserved for the contributing editor, Mark Nicolaides of
Latham & Watkins LLP, for his invaluable assistance.
Global Legal Group hopes that you find this guide practical and interesting.
The International Comparative Legal Guide series is also available online at
www.iclg.co.uk.
Alan Falach LL.M.
Group Consulting Editor
Global Legal Group
[email protected]
Chapter 1
Documenting Securitisations
in Leveraged Finance
Dan Maze
Transactions
Latham & Watkins LLP
James Burnett
Introduction receivables. ABL transactions, although popular, have the
drawback of exposing ABL lenders to all of the risks of the
Including a receivables securitisation tranche when financing (and borrowing company’s business – risks which may lead to the
refinancing) highly leveraged businesses that generate trade company’s insolvency and (at least) delays in repayment of the
receivables has become popular for several reasons. First and ABL lenders.
foremost, securitisation financings can generally be obtained at a
An alternative form of receivables financing, discussed below, is a
much lower overall cost to the corporate group. Second,
“securitisation” of the receivables. A securitisation involves the
securitisation financings typically do not impose as extensive a
outright sale of receivables by a company to a special purpose
package of operational restrictions on the group compared with
vehicle (SPV), usually a company but also possibly a partnership or
those found in leveraged finance facility agreements. Finally, many
other legal entity. The purchase price of receivables will generally
companies engaged in securitisation transactions claim that it helps
equal the face amount of the receivables minus, in most cases, a
them improve the efficiency of their underlying business by
small discount to cover expected losses on the purchased
focussing management attention on the actual performance of
receivables and financing and other costs of the SPV. The purchase
customer relationships (e.g. invoice payment speed and volume of
price will typically be paid in two parts: a non-refundable cash
post-sale adjustments).
component paid at the time of purchase with financing provided to
In leveraged finance facility agreements and high yield bond the SPV by senior lenders or commercial paper investors, and a
indentures, affirmative and negative covenants restrict the deferred component payable out of collections on the receivables.
operations of the borrower/issuer and all or certain of its significant In some jurisdictions the deferred component may need to be paid
(i.e. “restricted”) subsidiaries in a complex and wide-ranging up front (e.g. to accomplish a “true sale” under local law), in which
manner. This chapter discusses the manner in which such case the SPV must incur subordinated financing, usually from a
covenants would need to be modified in order for a borrower/issuer member of the selling company’s group, to finance that portion of
to be able to enter into a receivables securitisation without needing the purchase price. The SPV will grant security over the
to obtain specific lender or bondholder consent (which is often a receivables it acquires and all of its other assets to secure repayment
costly and challenging process). Although this chapter describes of the financing incurred by it to fund receivables purchases.
one set of modifications, there are, of course, various means of
The SPV will be structured to have no activities and no liabilities other
achieving the same objectives and the transaction documentation
than what is incidental to owning and distributing the proceeds of
must be analysed carefully in each case to determine what exactly
collections of the receivables. The SPV will have no employees or
is required. This chapter also discusses some of the key negotiating
offices of its own; instead, the SPV will outsource all of its activities to
issues involved in negotiating and documenting such covenant
third parties pursuant to contracts in which the third parties agree not
modifications.
to make claims against the SPV. While the SPV purchaser will often
Once appropriate covenant carve-outs permitting a trade be established as an “orphan company”, with the shares in the
receivables securitisation have been agreed, the securitisation itself company held in a charitable trust, rather than by a member of the
can then be structured and documented. Each of the country target group, in certain jurisdictions and depending on the particular
chapters in the latter part of this guide provides a summary of the deal structure, it may be necessary to establish an initial purchaser of
issues involved in executing a securitisation in that country. receivables that is incorporated as a member of the group (which may
then on-sell the receivables to an “orphan” SPV).
Typical Transaction Structure Collection of the receivables will generally be handled by the
selling company or another member of the group pursuant to an
Trade receivables are non-interest bearing corporate obligations outsourcing contract until agreed trigger events occur, at which
typically payable up to 90 days following invoicing. They arise point a third party servicer can be activated. By these and other
following the delivery of goods or the rendering of services by a contractual provisions the SPV is rendered “bankruptcy remote”
company to its customers. As long as a receivable is legally and investors in the securitisation are, as a result, less likely to
enforceable and not subject to set-off, and satisfies certain other suffer the risks of the insolvency of the borrower of the
eligibility criteria specific to each transaction, the company to securitisation debt.
which the receivable is owing can raise financing against it. From collections, the SPV will pay various commitment fees,
One popular form of receivables financing, asset-based lending administration fees and interest to its third party suppliers and finance
(ABL), is structured as a loan to a company secured by the providers. All payments are made pursuant to payment priority
1
ICLG TO: SECURITISATION 2013 WWW.ICLG.CO.UK
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Latham & Watkins LLP Securitisations in Leveraged Finance
“waterfalls” that govern the order in which parties are paid. Typically, good faith by the Issuer’s Board of Directors) at the time such
there are separate waterfalls for distributions made prior to financing is entered into and (c) such financing shall be non-
enforcement and for distributions made after enforcement commences. recourse to the Issuer or any of its Restricted Subsidiaries except to
The structure of a typical trade receivables securitisation transaction a limited extent customary for such transactions.
is as follows: “Receivable” means a right to receive payment arising from a sale
or lease of goods or services by a Person pursuant to an
arrangement with another Person pursuant to which such other
Person is obligated to pay for goods or services under terms that
permit the purchase of such goods and services on credit, as
determined on the basis of applicable generally accepted
accounting principles.
“Receivables Assets” means any assets that are or will be the
subject of a Qualified Receivables Financing.
“Receivables Fees” means distributions or payments made directly
or by means of discounts with respect to any participation interest
issued or sold in connection with, and other fees paid to a Person
that is not a Restricted Subsidiary in connection with, any Qualified
Documentation Provisions Receivables Financing.
“Receivables Repurchase Obligation” means:
In light of the foregoing, we describe below the provisions
(a) any obligation of a seller of receivables in a Qualified
necessary to permit a trade receivables securitisation under typical
Receivables Financing to repurchase receivables arising as
leveraged finance documentation. In summary, the relevant
a result of a breach of a representation, warranty or
documentation will need to include several framework definitions
covenant or otherwise, including as a result of a receivable
describing the general terms of the anticipated securitisation or portion thereof becoming subject to any asserted defense,
transaction and several carve-outs from the restrictive covenants to dispute, off-set or counterclaim of any kind as a result of any
which the relevant borrower/issuer would otherwise be subject. We action taken by, any failure to take action by or any other
address each in turn below. event relating to the seller; and
(b) any right of a seller of receivables in a Qualified Receivables
Finance to repurchase defaulted receivables in order to
Descriptive Definitions
obtain any VAT bad debt relief or similar benefit.
The following descriptive definitions will need to be added to the “Receivables Subsidiary” means a Subsidiary of the Issuer that
relevant transaction documents to describe what is permitted and engages in no activities other than in connection with a Qualified
thus to provide reference points for the covenant carve-outs which Receivables Financing and that is designated by the Board of
follow. These definitions contain various limitations designed to Directors of the Issuer as a Receivables Subsidiary:
strike a balance between the interests of the owners of the (a) no portion of the Indebtedness or any other obligations
borrower/issuer, on the one hand, who desire to secure the (contingent or otherwise) of which (i) is guaranteed by the
receivables financing on the best possible terms, and the interests of Issuer or any other Restricted Subsidiary of the Issuer
(excluding guarantees of obligations (other than the
the senior lenders/bondholders, on the other hand, who do not want
principal of, and interest on, Indebtedness) pursuant to
the terms of the securitisation financing to disrupt the borrower’s
Standard Securitisation Undertakings), (ii) is recourse to or
ability to repay their (usually much larger) loans or bonds in
obligates the Issuer or any other Restricted Subsidiary of the
accordance with their terms. The definitions below are of course
Issuer in any way other than pursuant to Standard
negotiable, and the exact scope of the definitions and related Securitisation Undertakings, or (iii) subjects any property or
provisions will depend on the circumstances of the particular asset of the Issuer or any other Restricted Subsidiary of the
transaction and the needs of the particular group. In particular, Issuer, directly or indirectly, contingently or otherwise, to the
where a business is contemplating alternate structures to a trade satisfaction thereof, (other than accounts receivable and
receivables securitisation, such as a factoring transaction, certain related assets as provided in the definition of Qualified
slight modifications may be necessary to one or more of the Receivables Financing) other than pursuant to Standard
Securitisation Undertakings;
definitions and related provisions described below.
(b) with which neither the Issuer nor any other Restricted
The definitions below are tailored for a high yield indenture, but
Subsidiary of the Issuer has any contract, agreement,
they can easily be modified for a senior facility agreement if
arrangement or understanding other than on terms which the
desired.
Issuer reasonably believes to be no less favorable to the
“Qualified Receivables Financing” means any financing pursuant Issuer or such Restricted Subsidiary than those that might be
to which the Issuer or any of its Restricted Subsidiaries may sell, obtained at the time from Persons that are not Affiliates of
convey or otherwise transfer to any other Person or grant a security the Issuer; and
interest in, any accounts receivable (and related assets) in an (c) to which neither the Issuer nor any other Restricted
aggregate principal amount equivalent to the Fair Market Value of Subsidiary of the Issuer has any obligation to maintain or
such accounts receivable (and related assets) of the Issuer or any of preserve such Subsidiary’s financial condition or cause such
Subsidiary to achieve certain levels of operating results.
its Restricted Subsidiaries; provided that (a) the covenants, events
of default and other provisions applicable to such financing shall be Any such designation by the Board of Directors of the Issuer shall
customary for such transactions and shall be on market terms (as be evidenced to the Trustee by filing with the Trustee a copy of the
determined in good faith by the Issuer’s Board of Directors) at the resolution of the Board of Directors of the Issuer giving effect to
time such financing is entered into, (b) the interest rate applicable such designation and an Officer’s Certificate certifying that such
to such financing shall be a market interest rate (as determined in designation complied with the foregoing conditions.
2
WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2013
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Latham & Watkins LLP Securitisations in Leveraged Finance
“Standard Securitisation Undertakings” means representations, the relevant documentation should contain an explicit carve-out,
warranties, covenants, indemnities and guarantees of performance typically in the case of a high yield indenture from the definition of
entered into by the Issuer or any Subsidiary of the Issuer which the “Asset Disposition”, along the following lines:
Issuer has determined in good faith to be customary in a (--) sales or dispositions of receivables in connection with any
Receivables Financing, including those relating to the servicing of Qualified Receivables Financing;
the assets of a Receivables Subsidiary, it being understood that any
A similar carve-out can be included in the restrictive covenant
Receivables Repurchase Obligation shall be deemed to be a
relating to disposals in a loan facility agreement, or in the definition
Standard Securitisation Undertaking.
of “Permitted Disposal” or “Permitted Transaction”, where
applicable.
Qualified Receivables Financing Criteria
Limitation on indebtedness
In a leveraged facility agreement the relevant borrower group is
In addition to the descriptive definitions above, the documentation
often greatly restricted in its ability to incur third-party financial
may also set out certain criteria which the Qualified Receivables
indebtedness other than in the ordinary course of its trade (again,
Financing would have to meet in order to be permitted. These
often subject to a permitted debt basket and certain other limited
criteria will often be transaction specific or relate to certain
exceptions). In a high yield indenture, the issuer and its restricted
commercial terms, in which case they may not be needed in
subsidiaries are normally restricted from incurring indebtedness
addition to the requirements for market or customary provisions
other than “ratio debt” (e.g. when the fixed charge or leverage ratio
already incorporated into the descriptive definitions above (see
of the group is at or below a specified level), subject to limited
“Key Issues” below). However, if required, these may include:
exceptions. In a high yield indenture, the term “Indebtedness”
minimum credit ratings (for underlying debt or the securities
typically covers a wide variety of obligations.
issued pursuant to the securitisation);
A receivables subsidiary in connection with a qualified receivables
conditions as to who may arrange the securitisation;
transaction will incur various payment obligations that would
notification obligations in respect of the main commercial
otherwise be caught by such a restriction, particularly if the
terms;
financing is raised in the form of a secured loan made to the
requirement to ensure representations, warranties,
receivables subsidiary. Thus, if a borrower/issuer desires to retain
undertakings and events of defaults/early amortisation events
the ability to continue to obtain funding under a receivables
are no more onerous than the senior financing; and/or
securitisation even if the leverage of the group is too high to permit
other economic terms (e.g. a cap on the weighted average
the incurrence of third-party financings (or if the permitted debt
cost of interest and third party credit enhancement payable).
basket is insufficient), the relevant documentation should contain
an explicit carve-out from the indebtedness restrictive covenant
Covenant Carve-outs along the following lines:
(--) indebtedness incurred by a Receivables Subsidiary in a
In a typical senior facility agreement or high yield indenture, the Qualified Receivables Financing;
securitisation transaction must be carved out of several covenants,
Alternatively, one could exclude the securitisation transaction from
described in further detail below. In summary, carve-outs will need
the definition of “Indebtedness” directly:
to be created for the following restrictive covenants:
The term “Indebtedness” shall not include . . . (--) obligations and
Asset sales/disposals.
contingent obligations under or in respect of Qualified Receivables
Indebtedness.
Financings.
Liens/negative pledge.
It should be noted that an exclusion from “Indebtedness” may have
Restricted payments.
an impact on other provisions such as the cross default or financial
Limitations on restrictions on distributions from restricted covenants so it should therefore be considered carefully in each of
subsidiaries. the different contexts in which it would apply (see also “Financial
Affiliate transactions/arm’s length terms. Covenants” below).
Financial covenants (in the case of facility debt only). Subject to the same considerations, a similar carve-out can be
Limitation on asset sales/disposals included in the restrictive covenant relating to the incurrence of
Financial Indebtedness in a loan facility agreement, or in the
Typically in a leveraged facility agreement, the relevant borrower
definition of “Permitted Financial Indebtedness” or “Permitted
may not, and may not permit any of its subsidiaries to, sell, lease,
Transaction”, where applicable.
transfer or otherwise dispose of assets (other than up to a certain
permitted value), except in the ordinary of course of trading or Mandatory prepayment of other debt from the proceeds of
subject to certain other limited exceptions. Similarly, in a typical securitisations
high yield indenture, the issuer may not, and may not permit any of In a leveraged facility agreement, the carve-outs from disposals and
its “restricted subsidiaries” to make any direct or indirect sale, lease “Indebtedness” described above may be subject to a cap, above
(other than an operating lease entered into in the ordinary course of which any such amounts are either prohibited absolutely or subject
business), transfer, issuance or other disposition, of shares of capital to mandatory prepayment of other debt. Whether, and to what
stock of a subsidiary (other than directors’ qualifying shares), extent, the proceeds of securitisations should be used to prepay debt
property or other assets (referred to collectively as an “Asset can often be heavily negotiated. The business may wish to use such
Disposition”), unless the proceeds of such disposition are applied in proceeds for general working capital purposes while lenders would
accordance with the indenture (which will regulate how the net be concerned at the additional indebtedness incurred by a borrower
disposal proceeds must be invested). group which may already be highly leveraged.
In connection with a Qualified Receivables Transaction the relevant If some form of mandatory prepayment is agreed, this will often be
borrower and its restricted subsidiaries will sell receivables and limited to the initial proceeds of the securitisation so that the
those sales would otherwise be caught by such a restriction. Thus, borrower is not required to keep prepaying as new receivables
3
ICLG TO: SECURITISATION 2013 WWW.ICLG.CO.UK
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Latham & Watkins LLP Securitisations in Leveraged Finance
replace existing receivables. A simple way to incorporate this into dividends or distributions on or in respect of capital stock, or
the loan documentation would be to carve out ongoing proceeds purchases, redemptions, retirements or other acquisitions for value
from the proceeds which are required to be prepaid: of any capital stock, or principal payments on, or purchases,
“Excluded Qualified Receivables Financing Proceeds” means any repurchases, redemptions, defeasances or other acquisitions or
proceeds of a Qualified Receivables Financing to the extent such retirements for value of, prior to scheduled maturity, scheduled
proceeds arise in relation to receivables which replace maturing repayments or scheduled sinking fund payments, any subordinated
receivables under that or another Qualified Receivables Financing; indebtedness (as such term may be defined).
“Qualified Receivables Financing Proceeds” means the proceeds A receivables subsidiary in connection with a qualified receivables
of any Qualified Receivables Financing received by any member of financing will need to pay various fees that may be caught by this
the Group except for Excluded Qualified Receivables Financing restriction. Thus, the relevant documentation should contain an
Proceeds and after deducting: explicit carve-out from the restricted payment covenant, along the
following lines:
(a) fees, costs and expenses in relation to such Qualified
Receivables Financing which are incurred by any member of (--) payment of any Receivables Fees and purchases of Receivables
the Group to persons who are not members of the Group; and Assets pursuant to a Receivables Repurchase Obligation in
(b) any Tax incurred or required to be paid by any member of the connection with a Qualified Receivables Financing;
Group in connection with such Qualified Receivables A similar carve-out can be included in the restrictive covenants
Financing (as reasonably determined by the relevant
relating to dividends and restricted payments in a loan facility
member of the Group, on the basis of existing rates and
agreement, or in the definition of “Permitted Distribution” or
taking into account of available credit, deduction or
“Permitted Transaction”, where applicable.
allowance) or the transfer thereof intra-Group,
Limitation on restrictions on distributions from restricted
to the extent they exceed, in aggregate for the Group, [--] in any
subsidiaries
financial year.
In a typical high yield indenture, issuer may not permit any of its
Limitation on liens/negative pledge
restricted subsidiaries to create or otherwise cause or permit to exist
In a leveraged facility agreement, the borrower and other members
or to become effective any consensual encumbrance or consensual
of the group will be restricted from creating or permitting to subsist
restriction on the ability of any restricted subsidiary to make various
any security interest over any of their assets, other than as arising
restricted payments, make loans, and otherwise make transfers of
by operation of law or in the ordinary course of trade (again often
assets or property to such borrower/issuer.
subject to a permitted security basket and certain other limited
A receivables subsidiary in connection with a qualified receivables
exceptions). Similarly, in a typical high yield indenture, an issuer
financing will have restrictions placed on its ability to distribute
may not, and may not permit any of its restricted subsidiaries to,
cash to parties in the form of payment priority “waterfalls” that
incur or suffer to exist, directly or indirectly, any mortgage, pledge,
would otherwise usually be caught by such a restriction. Thus, the
security interest, encumbrance, lien or charge of any kind
relevant document should contain an explicit carve-out from the
(including any conditional sale or other title retention agreement or
limitation on restrictions on distributions, etc., along the following
lease in the nature thereof) upon any of its property or assets,
lines:
whenever acquired, or any interest therein or any income or profits
therefrom (referred to collectively as “Liens”), unless such Liens (--) restrictions effected in connection with a Qualified Receivables
also secure the high yield debt (either on a senior or equal basis, Financing that, in the good faith determination of an Officer or the
depending on the nature of the other secured debt). As with Board of Directors of the Issuer, are necessary or advisable to effect
leveraged loan facilities, typically, there is a carve-out for such Qualified Receivables Financing;
“Permitted Liens” that provide certain limited exceptions. Limitation on affiliate transactions/arm’s length terms
A receivables subsidiary in connection with a qualified receivables Typically, in a leveraged facility agreement, the borrower and its
transaction will grant or incur various Liens in favour of the subsidiaries will not be allowed to enter into transactions other than
providers of the securitisation financing that would otherwise be on an arm’s length basis. Similarly, in a typical high yield
caught by the restriction, particularly if the financing is raised in the indenture, an issuer may not, and may not permit any of its
form of a secured loan made to the receivables subsidiary. Thus, the restricted subsidiaries to, enter into or conduct any transaction or
relevant documentation should contain an explicit carve-out from series of related transactions (including the purchase, sale, lease or
the Lien restriction, along the lines of one or more paragraphs added exchange of any property or the rendering of any service) with any
to the definition of “Permitted Lien”: affiliate unless such transaction is on arm’s length terms.
(--) Liens on Receivables Assets Incurred in connection with a Depending on the value of such transaction, an issuer may be
Qualified Receivables Financing; and required to get a “fairness opinion” from an independent financial
adviser or similar evidencing that the terms are not materially less
(--) Liens securing Indebtedness or other obligations of a
favorable to the issuer (or to the relevant restricted subsidiary) as
Receivables Subsidiary;
would be achieved on an arm’s length transaction with a third party.
A similar carve-out can be included in the negative pledge in a loan
A receivables subsidiary in connection with a qualified receivables
facility agreement, or in the definition of “Permitted Security” or
transaction will need to engage in multiple affiliate transactions
“Permitted Transaction”, where applicable.
because it will purchase Receivables from other members of the
Limitation on restricted payments
Group on an on-going basis and a variety of contractual obligations
Typically, in a leveraged facility agreement, the borrower and its will arise in connection with such purchases. While the terms of
subsidiaries may not make payments and distributions out of the such financing may be structured to qualify as a true sale, and be on
restricted group to the equity holders or in respect of subordinated arm’s length terms, the potential requirement to obtain a “fairness
shareholder debt. Similarly, in a typical high yield indenture, an opinion” from an independent financial adviser in connection with
issuer may not, and may not permit any of its restricted subsidiaries each such transaction is an additional burden that the business will
to, make various payments to its equity holders, including any want to avoid, and the indenture will therefore need to contain an
4
WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2013
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Latham & Watkins LLP Securitisations in Leveraged Finance
explicit carve-out from the restriction on affiliate transactions, amortisation pursuant to which the receivables collections that
along the following lines: would normally have been paid to the borrower’s group to acquire
(--) any transaction between or among the Issuer and any new receivables is paid instead to the provider of the receivables
Restricted Subsidiary (or entity that becomes a Restricted financing.
Subsidiary as a result of such transaction), or between or among The commercial risk to lenders and bondholders should an early
Restricted Subsidiaries or any Receivables Subsidiary, effected as amortisation event occur is that the cut-off of funds could cause a
part of a Qualified Receivables Financing; sudden and severe liquidity crisis at the borrower’s group. Thus,
A similar carve-out can be included in the restrictive covenant subject to a materiality threshold below which the parties agree that
relating to arm’s length transactions in a loan facility agreement, or the sudden loss of liquidity is not material, cross-default and cross-
in the definition of “Permitted Transaction”, where applicable. acceleration triggers in leveraged finance facilities and high yield
bond indentures should be tripped if an early amortisation event
Financial Covenants
occurs under a receivables financing facility.
In addition to the carve-outs described above, the parties will also
How might the non-renewal of the securitisation program affect the
need to consider carefully whether the activities of the borrower and
leveraged loans and the high yield bonds?
its subsidiaries in connection with Qualified Receivables
Financings may impact the testing of financial covenants in a For historical reasons, most securitisation facilities must be
leveraged facility agreement. Although high yield indentures will renewed every year by the receivables funding providers. The
typically not contain maintenance covenant, the testing of financial leveraged loans and high yield bonds, on the other hand, have far
ratios is still important for the purposes of determining whether a longer maturities. The non-renewal of a securitisation facility prior
particular action may be taken by an issuer or a restricted subsidiary to the maturity of the leveraged loans and high yield bonds can
under the high yield indenture at a particular time, or indeed to cause a liquidity crisis at the borrower’s group in the same manner
determine whether a subsidiary must be designated as a “restricted as any early amortisation event, and should be picked up in the
subsidiary” in the first place. leveraged finance and high yield documentation in a comparable
manner.
In a high yield indenture, important carve-outs can be accomplished
by excluding the effects of the securitisation financing from two Should there be any limits to the size of the securitisation facility?
key definitions (to the extent not already excluded): If so, how should those limits be defined?
“Consolidated EBITDA” for any period means, without By its nature, a securitisation financing removes the most liquid
duplication, the Consolidated Net Income for such period, plus the assets of a borrower group – the short term cash payments owing to
following to the extent deducted in calculating such Consolidated the group from its customers – from the reach of the leveraged
Net Income (1) Consolidated Interest Expense and Receivables lenders and high yield bondholders. Moreover, the amount of new
Fees; (--) . . . receivables financing raised will never equal the full face value of
the receivables sold, because the receivables financing providers
“Consolidated Interest Expense” means, for any period (in each
will advance funds on the basis of some “advance rate” or subject
case, determined on the basis of UK GAAP), the consolidated net
to certain “reserves” which result in the new funding equalling 75
interest income/expense of the Issuer and its Restricted
per cent to 80 per cent of the full face value of the receivables at
Subsidiaries, whether paid or accrued, plus or including (without
best. On the other hand, a receivables financing delivers to the
duplication) . . . Notwithstanding any of the foregoing,
borrower group, the lenders and bondholders alike the benefits of
Consolidated Interest Expense shall not include (i) . . . (--) any
lower-cost funding and liquidity. Where the balance between these
commissions, discounts, yield and other fees and charges related to
two competing factors should be struck is for negotiation among the
a Qualified Receivables Financing.
parties, but some balance in the form of a limit to the overall size of
The treatment of financial covenant definitions in a leveraged the receivables facility seems appropriate.
facility agreement is complex, and care should be taken to ensure
Should a limit be agreed, the residual question is how that limit
that the treatment of receivables securitisations in the various
should be defined. There are two main options. The limit can be
related definitions is consistent with the base case model used to set
defined by reference to the total outstanding value at any point in
the financial covenant levels and with the applicable accounting
time of receivables sold, or it can be defined by reference to the
treatments. Examples of definitions which should take into account
total receivables financing raised. The disadvantage of the latter
receivables securitisations include, the definitions of “Borrowings”,
approach is that it rewards receivables financings with poor
“Finance Charges” and “Debt Service”.
advance rates. If a receivables financing has an advance rate of 80
per cent, £500 million face value of receivables is needed to raise
Key Issues £400 million of financing. On the other hand, if a receivables
financing has an advance rate of only 50 per cent, £800 million face
Should an early amortisation of the securitisation facility constitute value of receivables is needed to raise the same £400 million of
a cross-acceleration or cross-default to the leveraged finance financing. In the latter example, the leverage lenders and high yield
facility or high yield bonds? bondholders lose more receivables for little or no additional cost or
Leveraged finance facility agreements typically contain a clause liquidity benefit.
providing that the loans can be declared to be repayable Should “ineligible” receivables be sold?
immediately should an event of default occur with respect to some
This issue functions commercially in much the same manner as the
third party debt or should such third party debt become payable
advance rate issue discussed immediately above. As summarised at
before its scheduled maturity. High yield bond indentures contain
the beginning of this chapter, receivables funding providers only
a similar provision, but only triggered upon a payment default
advance funds against receivables that satisfy certain specified
under or acceleration of the third-party debt. A receivables
eligibility standards. That requirement, however, does not mean
securitisation financing can be structured so that there is no debt,
that the “ineligible” receivables are any less likely to be paid or that
and therefore no events of default or acceleration can occur.
they have actual payment rates that are any less sound compared
Instead, receivables financings enter into so-called early
with eligible receivables. However, the advance rate against an
5
ICLG TO: SECURITISATION 2013 WWW.ICLG.CO.UK
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Latham & Watkins LLP Securitisations in Leveraged Finance
ineligible receivable is 0 per cent and, as a result, including them in Should the lenders/bondholders regulate the specific terms of the
the pool of sold receivables will reduce the effective overall securitisation?
advance rate against the pool, with the adverse impact for lenders Sponsors prefer that the receivables financing carve-outs permit any
and bondholders described above. Accordingly, if ineligible programme which a responsible officer of the borrower determines
receivables constitute any meaningful percentage of a group’s total in good faith is “on market terms” which is “in the aggregate
receivables, it makes sense to require that ineligible receivables be economically fair and reasonable” to the borrower/issuer and the
excluded from the receivables financing. group. This approach is, in general, the correct one. As indicated
Should proceeds raised under the securitisation facility be used to above, however, certain issues are sufficiently important for the
repay debt? parties to agree upon in advance. Beyond these and possibly a
The required and permitted use of proceeds of a securitisation handful of additional issues, neither lenders nor bondholders should
financing is always a key point of negotiation. The outcome of those have the right specifically to approve the documentation of the
negotiations will depend upon many diverse factors, including receivables financing facility.
whether the group’s liquidity needs are met by one of the leveraged
loan facilities and whether the borrower’s group can bear the higher Conclusion
overall debt burden should no debt repayment be required.
In summary, with very little modification to the standard leveraged
loan or high yield documentation, a trade receivables securitisation
financing can easily be added as part of a leveraged buy-out
financing or refinancing, thereby providing financing directly to the
relevant corporate group on comparatively favourable terms.
Dan Maze James Burnett
Latham & Watkins LLP Latham & Watkins LLP
99 Bishopsgate 99 Bishopsgate
London EC2M 3XF London EC2M 3XF
United Kingdom United Kingdom
Tel: [phone] Tel: [phone]
Fax: [phone] Fax: [phone]
Email: [email protected] Email: [email protected]
URL: www.lw.com URL: www.lw.com
Dan Maze is a Finance partner in the London office of Latham & James Burnett is a capital markets associate in the London office
Watkins. He has a wide range of experience in leveraged finance of Latham & Watkins. His practice includes representing
transactions, investment-grade acquisition facilities, restructurings investment banking firms, private equity firms, and companies in
and workouts and emerging markets financings. public and private debt and equity offerings, bridge loans,
acquisition financing and liability management transactions, with
a particular emphasis on issuances of high yield debt securities
and leveraged transactions.
Latham & Watkins is a global law firm with approximately 2,000 attorneys in 31 offices, including Abu Dhabi, Barcelona, Beijing,
Boston, Brussels, Chicago, Doha, Dubai, Frankfurt, Hamburg, Hong Kong, Houston, London, Los Angeles, Madrid, Milan,
Moscow, Munich, New Jersey, New York, Orange County, Paris, Riyadh, Rome, San Diego, San Francisco, Shanghai, Silicon
Valley, Singapore, Tokyo and Washington, D.C. For more information on Latham & Watkins, please visit the Web site at
www.lw.com.
6
WWW.ICLG.CO.UK ICLG TO: SECURITISATION 2013
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Chapter 2
CLOs: An Expanding
Platform
Craig Stein
Schulte Roth & Zabel LLP
Paul N. Watterson, Jr.
At the beginning of 2011, the collateralised loan obligation impossible burden for less-well-capitalised managers. The first
(“CLO”) market was poised to make a comeback. In The European CLO to price in 2013 is reported to have complied with
International Comparative Legal Guide to: Securitisation 2011 this risk retention requirement by arranging for a structured credit
chapter we authored entitled “On the CLO Horizon – Regulations fund to hold the equity.
Expected to Impact CLOs” (the “CLO Regulations Chapter”) we Unlike in the U.S. market, where 2013 CLOs have employed
discussed the new or proposed regulations that might affect the leverage equal to as much as ten times the equity tranche, the new
growth of the CLO market. Moreover in 2011, we did, in fact, see wave of European CLOs are expected to be significantly less
a modest revival of CLOs. New issuance for the year totaled leveraged. Concentration limitations and portfolio criteria are
approximately $12.3 billion. In The International Comparative expected to be broadly in line with current CLO 2.0 standards in the
Legal Guide to: Securitisation 2012we authored a chapter entitled United States, except that collateral obligations must be Euro-
“New Structural Features for Collateralised Loan Obligations” denominated.
which discussed the structural changes being made to the governing
documents for a post-financial crisis CLO, which has become
known as CLO 2.0. Those changes helped foster the growth in the Emerging Market CLOs
CLO market last year, when new issuance reached approximately
Issuance of CLOs that invest in emerging market (“EM”) leveraged
$55 billion. Industry participants are predicting that new issuance
loans and debt securities came to a halt in 2008. 2012 saw the
in 2013 will exceed that level and reach $65 billion to $75 billion
successful offering of the first post-credit crisis CLO that invests
and, in fact, issuance so far in 2013 is on a pace that would exceed
primarily in leveraged loans and debt issued by EM borrowers. The
that amount. 2013 will also see an expansion of the CLO market
notes issued by this CLO generally had higher spreads than
into new asset classes and new markets, and a return of the
comparable CLOs issued to invest in U.S. leveraged loans, and the
European CLO. However, there continue to be regulatory and
leverage was lower.
market challenges for CLOs.
The portfolio requirements for this new EM CLO and for others that
are following in its wake are similar to the current CLO 2.0 criteria
Return of the European CLO
for U.S. CLOs as a result of rating agency methodology and
investor preferences. Obligations are U.S. Dollar-denominated, and
Unlike the United States, where the recovery in the leveraged loan
most of the portfolio is required to be first-priority senior secured
market continues and the pace of new CLO issuances continues to
loans. Unlike in earlier EM CLOs, the amount of EM sovereign
increase, Europe has seen no significant CLO activity since the
obligations that new EM CLOs can buy is more limited (ten per
credit crisis. However, the European market appears to be slowly
cent in a recent CLO) and hedging is limited to interest rate hedges
picking up, with one transaction successfully pricing in February
and short credit default swaps on obligations owned by the CLO.
2013 and others in the pipeline. If these offerings are successful,
The concentration limitations are structured to provide significant
industry participants estimate that in 2013 we could see from €3
flexibility to invest in most of the major EM markets. There are
billion to €5 billion of new CLO issuance, increasing to €5 billion
also substantial non-EM buckets to permit the CLO to acquire
to €7 billion in 2014.
collateral if suitable EM collateral is not available.
The European CLO market faces significant hurdles on the way to
Other CLOs focused on EM debt markets are appearing in the market,
recovery. The relative scarcity of leveraged loans in the European
but there remain significant obstacles. Bloombergrecently reported
primary market has made it more difficult for prospective CLO
that prices for non-investment-grade EM debt are at their highest level
managers to assemble marketable portfolios of loans. The
in seven years. The demand for quality EM debt may make
European institutional loan market has fallen from pre-credit crisis
assembling CLO portfolios more challenging. If these CLOs will
levels to a 2012 low of €150 billion in new issuances, and pre-credit
make extensive investments in loans and debt securities that are not
crisis European CLOs are reaching the end of their reinvestment denominated in U.S. Dollars, it will be necessary to issue liabilities in
periods. As these CLOs begin to unwind, and pre-credit crisis loans other currencies or confront the hedging issues discussed below.
begin to come due (between now and 2015), the conditions are in
place for strong demand for new financing.
High-Yield CBOs
A second hurdle is Article 122a of the European Union’s Capital
Requirements Directive (“Article 122a”). Article 122a’s five per
One of the early structured credit products, known as a
cent risk retention requirement (discussed below) is a potentially
collateralised bond obligation (“CBO”), invested primarily in high-
7
ICLG TO: SECURITISATION 2013 WWW.ICLG.CO.UK
© Published and reproduced with kind permission by Global Legal Group Ltd, London