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The A-Z of whole business securitisation Back  
Initially, securitisation, as a financing technique, was developed as a means of funding the acquisition of residential properties in the United States in the 1970s. Today, companies of all types, revenue size, and debt rating routinely raise capital by using financial assets to back securities issued in the capital markets, writes Noman Ali.
In brief, securitisation converts assets into securities by transferring them as a true sale to an SPV which raises the purchase price by issuing different rated bonds to investors.

A major attraction for noteholders is that their investment is secured against the assets owned by the SPV and, as a result, isolated from the originator’s risk of insolvency. The SPV is structured to be ‘bankruptcy remote’, which means that it has no creditors other than the noteholders, the aim being that the only circumstances in which the vehicle could be forced into bankruptcy would be the non - performance of the assets securitised.

In a traditional debt or equity offering, the investor relies on the cash flow of the company to achieve the required debt service or equity return. Therefore investors must evaluate the likelihood that the company will be able to repay its debt and build residual value over the course of the financing. In a securitisation transaction, because the company isolates the financed assets through a sale to an SPV the investor’s required return in an asset securitisation is the risk associated with the cash flows on the assets securitised rather than the general credit risk of the company. For this reason an analysis of the balance sheet of the issuer is irrelevant.

As the volume of issuances and the number of issuers in the market continue to grow, the increasing benefits of securitisation have fostered more creative applications of this technique as a corporate finance tool. The development of whole business securitisation has been one of the structured markets most innovative and far reaching creations.

In contrast to traditional securitisation which securitises a particular class of assets of a business, whole business securitisation raises funds through an SPV, based on the income generated from an entire business unit. The SPV will make the money available to the borrower in the form of a secured loan. The security provided consists of fixed and floating charges over all the borrowers assets which is granted in favour of a security trustee.

The originator agrees to repay the loan in fixed instalments of interest and principal which correspond to the instalments used by the SPV to pay off the bonds. Objectively this is similar to secured borrowing as the borrower pays the lender from the cashflows from his assets and grants security in his favour while being able to retain operational control of the assets.

However, with whole business securitisation if the borrowing company were to become insolvent the business securitised would continue to be managed by a receiver manager for the term of the bonds. This is the same as the concept of a back-up servicer in a traditional securitisation, under which the originator continues to service the cashflows from the transferred assets but if the originator ceases business or becomes insolvent the SPV or the security trustee has the power to replace it.

Whole business securitisation has primarily remained an English phenomenon, this is because floating charge holders had the right to veto the appointment of an administrator under section 10 (2) of the Insolvency Act 1986. Effectively this permitted a secured creditor to control the insolvency process and make whole business securitisation possible.

The UK’s Enterprise Act 2002 has abolished the right of floating charge holders to appoint an administrative receiver. However, recognising the importance of maintaining the competitiveness of the securitisation market in England the government has developed exclusions to safeguard these arrangements under section 7B. To qualify there must be a capital markets issue of at least stg?50 million.

Stora Ensos’s whole business securitisation/b>
Stora Enso has a market capitalisation of €1.5 billion and owns over six hundred thousand hectares of forests. The trees are the third largest private forest in Finland and the most densely forested country in Europe. Stora Enso forests are not the most likely candidate for a whole business securitisation. It faces aggressive pricing from foreign exporters and price volatility for its wood. It does though have over 100 years of trading history and trees are a highly durable, low-technology asset.

Finland does not have the creditor friendly legal regime which allows secured creditors to control the insolvency process. Unsecured creditors have the right to approve a reorganisation plan for a financially troubled corporation. This risk was overcome by placing covenant which limited the amount of creditors the business could have at any one time. Thus the bondholder would control a large amount of the group’s debt and be able to control any reorganisation plan in case of insolvency. To overcome wood price volatility the deal was structured with a €10 million reserve fund which was enough to cover forty months’ minimum principal repayments.

This particular deal shows that with the right covenant and security package, a creditor friendly regime, and a history of predictable cashflows, most businesses can be securitied.

The secured creditor regime in Ireland
The private law contractual remedy of receivership is available in Ireland and allows receiver managers to carry on or manage the business of a company for the purpose of generating profits from which secured debts can be discharged. The power of security holders to control their investment is limited by the courts ability to order a receiver to cease to act where at the date of a presentation for a petition to appoint an examiner a receiver stands appointed over a company.
Our receivership process does not allow secured creditors the right to veto the appointment of an examiner (administrator), which is pivotal to whole business securitisation. Part II of the Companies (Amendment) (No 2) Act 1999 has increased the threshold for the appointment of an examiner. The specific measures introduced will require the court to apply a more rigorous test and in every case embark on a careful examination of the survival prospects of a company. The effect of the amendments have made it more difficult for companies to be put into examinership, as it will be necessary to satisfy the court that there is ‘a reasonable prospect’ of a company’s survival - not merely, as was the case under the 1990 Act, ‘some prospect’.

Under section 7 a detailed report containing the extent and source of the funding required to enable a company to continue trading during a period of protection will have to be prepared by an independent accountant before a court will consider a petition. In relation to a highly complex and document intense whole business securitisation an outside petitioner will find it practically impossible to supply the court with sufficient financial information and evidence as to the survival prospects of a company.

Furthermore the types of businesses that have been securitied have been single activity corporations which enjoy a dominant position and which are not affected by a general recession. Nor dependent on their management or capital expenditure to generate stable profits. Given these characteristics it can be argued that for such an organisation to face imminent insolvency would be due to deep-rooted microeconomic problems. In this situation it will be impossible for a petitioner to satisfy a court that such a business simply needs an injection of working capital and flexibility, so that he can implement a turn-around plan. This would mean that the business would not have a reasonable prospect of survival.

From a market standpoint, certainty is critical. Traditional securitisation transactions were initially developed by offering certainty to investors and any inconsistency that deprives investors of this certainty will adversely affect the marketplace for these offerings. In Ireland the uncertainty of examinership may deter investors until we have standardised and controlling legal rules for these structures.

However, given the tightening in capital lending, companies will be eager to find ways of utilising this technique as a cheaper source of raising corporate finance. What is possible is that existing risks could be accounted for and appropriately discounted when assessing potential investments. If it remains economically attractive for companies and investors to structure these transactions, it must be remembered that securitisation represents a significant form of financing. The ingenuity of this process allows investors to invest money at lower costs, which in turn leads to more efficient operations and hence, general economic good. Its effects on, and importance to, the economy as a whole should not be underestimated. As such, in the absence of compelling considerations, the judiciary should avoid rendering decisions that have an adverse economic impact on these transactions.

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