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Securitisation: The Resurrection

5 January 2017

As interest rates in the developed world slide into negative territory investors' search for income has presented the securitisation industry with a welcome opportunity to overcome the stigma surrounding the industry resulting from the role mortgage-backed securities played in the 2008 financial crisis.

The recent dramatization of the securitisation industry in the film The Big Short has done little to improve the public's perception of the industry although those who defend securitisation believe the issues encountered were US specific and not a fair representation of the more regulated industry in Europe [1].

Securitisation occurs when an asset or pool of assets is transferred to an entity that is separate from the originator and is created for or serves the purpose of the securitisation and the credit risk of the assets is transferred to the investors in the form of securities or other debt instruments issued by the entity. The value or yield of the securities being issued is dependant on the risks linked to the underlying assets held by the entity. Typically a securitisation vehicle brings together a group of assets that produce a predictable cash flow or grant the right to a future cash flow transforming these assets into securities (shares bonds or other securities) and selling these securities to investors.

In a world of negative interest rates securitisation opens doors for investors seeking yield whilst offering corporates the ability to source financing from outside traditional banking channels. Malta has been a beneficiary of the trend back towards securitisation with the popularity of Maltese special purpose vehicles for structured finance transactions growing dramatically [2].

All types of assets or receivables may be securitised including any asset; existing or future movable or immovable tangible or intangible. The flexible framework in Malta provides that virtually any legal structure can be used as a Securitisation Vehicle although to date most have been structured as private limited companies. In addition unique in the EEA to Malta is the Securitisation Cell Company (SCC) regime established in 2014. This allows for the establishment of a single special purpose vehicle structured with two bodies the core and an unlimited number of cells (the core is owned by founder shareholders and the cell(s) by the investors). Under the SCC one legal entity may establish one or more cells for the purposes of securitisation transactions. SCCs can be utilised where there are multiple originators transacting through separate cells. Securitisation assets in each cell are protected by the provisions for ring-fencing of assets and liabilities contained in the SCC Regulations.

One of the most important elements of a Maltese securitisation vehicle is that in terms of the Securitisation Act of 2006 (the Act) it remains bankruptcy remote from the originator by operation of law. Furthermore investor protection is covered by the Act which contains rules giving priority to securitisation creditors by holding them outside insolvency proceedings in relation to the originator the securitisation assets or the securitisation vehicle itself.

Of particular interest to the investment management industry is that in terms of Art 6 of the Act a securitisation vehicle shall not be considered to be a collective investment scheme [3]. Whilst the above is subject to a proviso that the discretion of the MFSA applies and domestic laws of the investors should be considered it provides clarity that such structures are not in terms of Maltese Law subject to the onerous regulatory and reporting obligations of the AIFMD.

In Malta a securitisation vehicle enjoys tax neutrality status thereby optimising the investors' return and the Originator's cost of funding. Specifically enacted tax rules clarify that the cost of acquisition finance expenses and operating expenses are all deductible. Furthermore uniquely to an onshore jurisdiction there is an optional further deduction for all remaining income in the vehicle that would otherwise be taxable provided that the originator gives its irrevocable written consent. Accordingly overseas originator sponsors in favourable home jurisdictions can defer their liability to income tax on profits or gains on the securitisation assets.



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