Securitisation in its classic form enables the undertaking (Originator) that wishes to divest its interests in a pool of assets, to transfer such assets to a conduit especially created for raising funds to purchase such assets. The income generated by the assets is then used by the conduit (SPV) to service its obligations to the holders of the securities. In Ireland, the SPV is the ‘orphan’ entity, which, once it has been specifically constituted by the Originator in compliance with the relevant insolvency, tax, accounting and legal requirements, will receive the asset, the pool of assets or exposure to risk. Thus, a securitisation typically entails the establishment and management of a stand-alone “bankruptcy remote” special purpose company whose share capital is typically held on charitable trust. This vehicle is established specifically for the transaction by or for a “structuring principal,” usually a financial institution arranging the transaction. The SPV is used as a mechanism for gathering of a pool of receivables; it either buys the assets, acquires a financial interest in them through the use of derivatives or enters into a loan with the Originator secured on the assets. The oldest and most common types of assets to be securitised are residential mortgages; however, as a result of more efficient financial analysis, “one can expect virtually anything that has cash flow to be a candidate for securitisation.” The SPV will only be able to acquire the receivables once it has secured the necessary financing. It will do so by offering securities (Notes) to Noteholders, mostly in the U.S. or European capital markets.
Despite its importance to the economy, the considerable market share that Ireland has achieved in the European market, scarce attention has been paid to the microstructure of the securitisation market. In particular, there seems to be limited academic analysis in respect of the key risk to a securitisation structure: insolvency.
The Irish securitisation model revolves around one key assumption: the SPV holding a bankruptcy remote status. The aim of bankruptcy remoteness “is to prevent the issuer from being susceptible to insolvent winding up proceedings by ensuring so far as possible that, if its assets prove to be insufficient to meet its liabilities, a director of the issuer will not instigate bankruptcy proceedings in respect of it. Bankruptcy remoteness is one of the criteria used by the rating agencies which issuers of notes seek to satisfy so that their instruments will achieve the highest possible credit rating. That criterion is satisfied in other jurisdictions by provisions which limit the rights of noteholders against the issuer to the value of the issuer’s assets.”
The remit of this article is limited to a number of issues which will be relevant to a securitisation transaction. It will focus on the aspects of insolvency law, which are the most significant or problematic in the context of a securitisation transaction, while it considers only incidentally the position of other parties involved in a securitisation transaction. Therefore, while the relationship between security and insolvency will be addressed, this article does not contain an analysis on the relationship between corporate governance and insolvency nor on the debate on conflict of law issues in insolvency.