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Securitisation - Orphan Entity - Special Purpose Vehicle

Orphan entities in Securitisation Transactions & Special Purpose Vehicle

A Securitisation transaction implies that a securitisation undertaking is setup in Luxembourg to acquire the risk linked with future cash flows linked to receivables, assets, or activities realised by third parties called the Underlying Assets by issuing at the same time some securities (usually Notes) which yield and value are linked with those Underlying Assets and are sold to (professional) investors on the financial markets.

 

Such transactions are attractive to regulated lending institutions such as banks which are subject to regulatory limits on levels of the amount of their assets they can lend to third parties.

 

To lower those amounts are remain in the limits, such institutions may transfer all or part of their receivables or lending portfolio to third parties to effectively liquidate these assets, remove them from their balance sheet and create liquidity available to invest in new receivables or simply for new businesses.

 

The types of assets which can be subject to securitisation is broad :

Securitisation Structure

Under the classic securitisation structure, the Underlying assets to be securitised are sold by the original owner (called the Originator), usually a bank in the case of a mortgage or loan portfolios, to a newly formed orphan owner structure comprising an SPV based in Luxembourg wholly owned through a purpose trust or charitable trust (the Trust).

 

The SPV will acquire the Underlying Assets pursuant to an acquisition agreement the terms of which are specifically designed to ensure that the transaction results in a “true sale” of the Underlying Assets from the Originator to the SPV. A True Sale happens when the ownership of the assets are legally transferred to the SPV. This differs from a synthetic securitisation when the legal ownership of the assets remains with the Originator and only the risk linked to these assets are transferred (synthetically) to the SPV (like a swap).

 

The SPV raises money by issuing Notes, the proceed of which serves to acquire the Underlying Assets from the Originator. The Notes are usually secured by the SPV’s assets or other title of ownership, which are secured for the benefit of the investors (the Investors).

The Notes may obtain a ISIN code, they can receive a credit rating, they can be clearable with Clearstream Euroclear and they may also be listed on an exchange for technical purpose or for trading purpose to ensure ease of transfer and promote liquidity once the Notes are in the hands of the Investors.

 

Special Purpose Vehicle and Orphan Status

The SPV issuer of the Note is part of an “orphan structure” when its ownership is structured in such a way that the SPV is not affiliated with the Originator or any of its group anymore. This is to ensure “true sale” treatment and independence

 

The orphan structure for the SPV is achieved by utilizing the Trust as the ultimate beneficial owner of the SPV. This protect the Investors in case of the Originator’s insolvency enhancing the “bankruptcy remote” status of such securitisation structure.

 

Securitisation of Underlying Assets that do not meet such criteria may be deemed being re-characterised just as a simple secured loans and therefore vulnerable to attack or avoidance in any subsequent insolvency of the Originator.

 

To achieve orphan status, the shareholder of the Luxembourg SPV is a Trust controlled by a independent corporate trustee for and on behalf of a charity or a person which is not linked to anyone in the transaction.

 

The directors of the SPV are often independent from the Originator. Such board of director has very few decision to take as the parameters of the transaction are set out from the origin in the contractual arrangements .

 

Once the transaction is terminated, the Notes are paid out and the SPV is wound-up and the remaining assets (usually a very little nominal amount) are distributed to the Trust as the sole shareholder. Those assets are then distributed in turn to a designated charity under terms of the deed governing the Trust. Any surplus is generally distributed to charity whether the Trust is established specifically as charitable trust or just a purpose trust.

 

 

Please find more information about our Securitisation services on our dedicated website: luxembourg-securitisation.com

 

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