CLASS A NOTES OF THE FENNICA SECURITISATION PROGRAMME WERE PLACED ON THE ECB’S TIER 1 LIST IN 2002

Contributed by Castrén & Snellman
10 February, 2003

The Housing Fund of Finland and the Fennica Securitisation Program

The Housing Fund of Finland ("ARA") is a governmental agency of the Republic of Finland operating under the supervision of the Ministry of the Environment and for which securitisation has been an important source of funding since 1995 and an alternative to the direct borrowing in the capital market. To date, ARA has raised a sum equivalent to EUR 2.7 billion via six Fennica transactions through its Fennica Securitisation Programme.

As part of the procedure in the Fennica Programme, housing loans granted by ARA were transferred to a special purpose vehicle being established in Ireland for the limited purposes. A special purpose vehicle fi-nances the purchase by issuing promissory bearer notes to the amount of the transferred loans. The total out-standing amount of the issued notes is currently approximately EUR 2.3 billion.

The issued notes are secured by the housing loan receivables effectively assigned and transferred to a special purpose vehicle under the laws of Finland and the respective collateral in connection with the transferred and assigned housing loans. Consequently, the issued notes are the sole obligations of the special purpose vehicle only and are not obligations of, guaranteed by, or the responsibility of, any other entities or individuals. In particular, the issued notes are not obligations of the Republic of Finland or of any of its departments or agencies (including ARA, which has no liability for the notes).

The European Central Bank (ECB) list of eligible Tier 1 assets

Pursuant to Article 18.1 of the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (Statute of the ESCB)(1), the European Central Bank (ECB) and the national central banks may transact in financial markets by buying and selling underlying assets outright or under repurchase agreements and requires all Eurosystem credit operations to be based on adequate collateral. With the aim of protecting the Eurosystem from incurring losses in its monetary policy operations, ensuring the equal treatment of counter-parties and enhancing operational efficiency, underlying assets have to fulfill certain criteria in order to be eligible for Eurosystem monetary policy operations. Relating to this, a distinction has been made be-tween two categories into which the assets may fall and which are eligible for Eurosystem monetary policy operations and intra-day credit, i.e. Tier 1 and Tier 2 respectively.
Last year, the Central Bank of Ireland was requested to assess the outstanding Class A Notes issued by the special purpose vehicles within the executed transactions of the Fennica Programme, i.e. the Fennica compa-nies, for the purpose whether the assessed Class A Notes could be deemed eligible as Tier 1 assets and whether these notes could be placed on the European Central Bank list of eligible Tier 1 assets. The applying eligibility criteria to Tier 1 assets, other than to debt certificates issued by the ECB and to debt certificates issued by the national central banks prior to the adoption of the euro in their respective Member State, i.e. a Member State which has adopted the single currency in accordance with the Treaty establishing the Euro-pean Community, are outlined in Chapter 6 of the ECB General Documentation on Eurosystem Monetary Policy Instruments and Procedures, November 2000 (see pp. 38-40) and are as follows:
• Assets are debt instruments (type of assets);
• High credit standards must be met (credit standard);
• Assets are located in the euro area (location of assets);
• Assets are transferable in book-entry form and deposited with a national central bank or with a central securities depository which fulfils the minimum standards established by the ECB (settlement procedures);
• Assets must be denominated in euro (currency);
• Assets must be issued (or guaranteed) by entities established in the EEA (place of estab-lishment of the issuer [or the guarantor]); and
• Assets are listed or quoted in the regulated market (and in addition to this, market liquid-ity may be taken into account by ECB when determining the eligibility criteria fulfil-ment).
In 2002, the ECB gave its approval for that the Class A Notes of the Fennica Program became eligible to be included in the ECB’s list of eligible Tier 1 assets. For the Fennica Programme, this was a significant issue since there are not many corresponding structured finance products which have been deemed eligible as Tier 1 assets and which have been placed on the said list.

Comment

When the securitisation transaction and the notes in connection thereto are structured in a way that the notes to be issued may be deemed eligible as Tier 1 assets this may attract more such investors to whom such an eligibility is vital. Despite the fact that Tier 1 eligibility is not the most crucial issue when planning to use securitisation as a funding tool or structuring it, this may provide for a repeat issuer, however, a way to broaden its investor base further on one hand and a way to tighten spreads and save funding costs by a few basis points at its best on the other hand. Therefore, especially for a repeat issuer using securitisation on a regular basis Tier 1 might be an issue worth taking into account.

For further information on this topic please contact Tero Tuomisto at Castrén & Snellman by telephone (+358 9 228 581) or by fax (+358 9 2285 8458) or by email tero.tuomisto@castren.fi

ENDNOTE
(1) Protocol on the Statute of the European System of Central Banks and of the European Central Bank being annexed to the Treaty establishing the European Community. See also OJ C 191, 29.7.1992, p. 78.