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Securitisation sector to grow further in 2003 Back  
2003 should see the use of Irish special purpose vehicles continue to increase writes Patrick Molloy.
It is possible that the number of European deals done in 2002 will turn out to be somewhat lower than the number of deals done in 2001. It is difficult to ascertain what percentage of the transactions completed involve Ireland. It is likely that only a tiny percentage involved Irish assets (e.g. loans made to Irish consumers or trade receivables owed by Irish debtors). This is understandable given that the size of the Irish population is just over one per cent of the population of the European Union and we account for less than 1.5 per cent of European GDP. At the same time, it is clear that Ireland is being used more and more frequently as the location for the entity that will issue the securities (i.e the special purpose vehicle (SPV)) in these transactions.

Securitisations involving Irish assets are commonly referred to as ‘domestic transactions’. These were few and far between in 2002. Amongst the more noteworthy of these was the •250 million securitisation of motor and consumer loans launched by Friends First in July. This transaction was an unusual one for the Irish market insofar as it did not involve home loans. Also Anglo Irish Bank closed a second UK mortgage-backed securitisation in May. This transaction (like the one Anglo Irish Bank closed in 2000) involved commercial property loans.

Over the last few years (since the introduction of and subsequent amendments to the current securitisation regime) the use of Irish securitisation SPVs has increased greatly, and I suspect that more transactions involving Irish SPVs closed in 2002 than in any other year to date. There are, in my view, a number of reasons for the increase in popularity of the Irish SPV. These may be summarised as follows:
• The current securitisation regime, although not perfect, works for many of the deals that come to market. It is worth remembering that the current regime is less than four years old; understandably it has taken some time for market participants to become accustomed to using it.
• The quality of the service offered by the Irish Stock Exchange with regard to the listing of securitisations has helped to attract the arrangers of securitisations to the Irish market.
• The fact that Ireland is a common law jurisdiction sometimes makes it more attractive to arrangers than The Netherlands or Luxembourg.
• Increasingly arrangers and originators are reluctant to set up securitisations with off-shore SPVs. On-shore SPV locations such as Ireland, The Netherlands and Luxembourg are seeing an increase in their market share as a result of this.

As I mentioned above, the current regime is not perfect. Not every transaction can come within its terms. For example, Section 110 of the Taxes Consolidation Act, 1997 envisages an SPV ‘acquiring’ assets. This has been interpreted as meaning that an SPV must acquire an existing asset and cannot acquire an asset ‘on issue’. For example, an SPV could acquire shares that have been issued previously but could not subscribe for shares directly. Also under Section 110 it is necessary to identify the seller of assets to an Irish SPV; as the seller must be a body corporate or government entity. Furthermore, each seller must sell assets worth at least •12.69 million to the SPV.

These and other limitations will hopefully be removed by the provisions of the Finance Bill 2003. Once these limitations are removed, one can foresee the use of Irish SPVs increasing greatly. Securitisations often now don’t involve a straightforward acquisition of a pool of assets by the SPV.

In 2002 the volume of repackaging transactions involving Irish issuers increased significantly. A number of leading international financial institutions now use Irish issuers as part of their repackaging programmes. Hopefully other players in this market will follow their example.

A number of countries such as Italy, Portugal and France have established their own securitisation regimes. In France it is now possible to securitise a wide variety of French assets using a French special purpose vehicle known as a ‘Funds Commun de Cr?ances’. In theory this could result in less deals coming to Ireland.
However, in the case of France and Portugal we have seen deals done recently where a French/Portuguese SPV has been used to acquire the assets and issue units. These units are then acquired by an Irish SPV, which funds the acquisition through an issue of notes to investors. In other words, Irish SPVs are being used to repackage the units issued by the domestic SPVs. Why interpose an Irish SPV into a transaction such as this? Sometimes certain European investors are unable to buy units issued by a fund but can invest in notes issued by an Irish issuer.

Hopefully 2003 will see more transactions coming to the market which involve Irish assets. We may see other financial institutions follow the example of Friends First and look to securitise assets other than home loans. The first issuances of covered bonds under the Asset Covered Securities Act, 2001 are also likely to occur in 2003.
I would hope to see Ireland’s share (as an SPV location) of the European cross-border securitisation market continuing to grow during 2003. At this stage arrangers of securitisations and other market commentators are understandably reluctant to predict what the overall securitisation market will be like in 2003. Most of the market participants I have spoken to are hoping for a reasonably busy 2003.

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