Securitisation 2022

• Published date: 02 February 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Services, Securitization & Structured Finance, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: Shearman & Sterling LLP
• Author: Mr Bjorn Bjerke

1.STRUCTURALLY EMBEDDED LAWS OF GENERAL APPLICATION

1.1 Insolvency Laws
If a debtor becomes subject to bankruptcy proceedings, creditors will, with some exceptions, be automatically stayed from collecting and enforcing against the debtor and any posted collateral. Lifting the stay may be time consuming and costly, and subject to the broad statutory and equitable powers of the bankruptcy court. The court also has the power to:

• release the creditors' rights to excess collateral;
• allow additional debt to be secured by the collateral;
• substitute collateral; and
• reject executory contracts.

Creditors may also be restricted from exercising rights that trigger off a debtor's bankruptcy or financial condition (so-called ipso facto clauses). Unlike many other jurisdictions where bankruptcy effectively amounts to liquidation proceedings, bankruptcy proceedings in the USA also encompass a workout regime (Chapter 11 bankruptcy). Workouts are highly variable and facts and circumstance specific, which makes it difficult to predict the duration of the stay and the impact on a particular creditor.

Consequently, a key aspect of securitisations is to isolate the issuer and its assets from such bankruptcy risks by:

• transferring the securitised assets to the issuer in a perfected true sale;
• reducing the risk of the issuer becoming subject to involuntary or voluntary bankruptcy proceedings; and
• reducing the risk of the issuer becoming substantively consolidated with any affiliates should they become subject to bankruptcy proceedings.

As an alternative to a true sale structure, it is also possible to transfer exposure to the securitised assets using contracts that are protected against the most troublesome bankruptcy powers.

1.2 Special-Purpose Entities (SPEs)
Establishing a bankruptcy-remote special-purpose entity (SPE) is a key aspect of a typical securitisation transaction.

The transaction documents typically include non-petition clauses that restrict involuntary bankruptcy filings against the issuer.

However, an outright prohibition against the SPE itself voluntarily filing for bankruptcy is unenforceable as against public policy and such risk must therefore be mitigated by more indirect means. Limiting the SPE's unrelated activities and restricting the SPE from having employees and unrelated property reduces the risk of unrelated liabilities. Appointing an independent director whose fiduciary duty runs to the SPE and not to its shareholders, and employing an entity...