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Norton Rose acts in innovative agricultural receivables securitisation

24 September 2003 - Norton Rose, the international law firm, has acted in relation to one of the first securitisations involving agricultural receivables in Europe. An Anglo-German Norton Rose team has advised Rabobank International, the Dutch co-operative bank, on the securitisation of a €65 million portfolio of agricultural receivables of Raiffeisen Hauptgenossenschaft Nord Group.

Agricultural receivables are a class of asset that to date have not been a focus of securitisation. Rabobank International's innovative transaction will open securitisation as a new form of financing to the German co-operative sector.

The transaction has been structured in line with the guidelines on true sale set out in the 2002 paper from IDW, the German accounting standards review association. The deal also involves the use of credit insurance as part of the credit enhancement.

Norton Rose partner Rüdiger Litten said:

"We were very happy to assist Rabobank International on this unusual deal. Agricultural receivables are an interesting asset for securitisation and pose some particular challenges because collateral is required from the public sector."

The Norton Rose team was led by Frankfurt-based partner Rüdiger Litten assisted by Sever Cristea in relation to German capital markets. English securitisation advice was provided by London-based securitisation partner Jonathan G.F. Walsh assisted by Mawgan Harris. Frankfurt partner Uwe Hartmann and associate Andreas Müller advised on tax, Cologne partner Winfried Schnepp and associate Yvonne Maczkiewitz on insurance law and Rolf Leithaus on insolvency law.

The transaction was structured through the Erasmus conduit, which is sponsored by Rabobank International. RHG was advised by Shearman & Sterling.

Norton Rose has a strong track record in securitisations. The firm has acted for Rabobank on other securitisations and has also advised on a number of innovative transactions including the first ever residential mortgage-backed transaction in Portugal, a groundbreaking securitisation involving student accommodation and the synthetic securitisation of a £300,000,000 mortgage portfolio originated by Bristol & West.

ACCOUNTING FOR SECURITISATION TRANSACTIONS UNDER IAS 39

In December 2003, the International Accounting Standards Board (IASB) published revised versions of International Accounting Standards 32 (IAS 32) and 39 (IAS 39) together with an implementation guidance paper. Since the IASB does not intend to issue any further consultation papers and is not inviting any further comment, the new standards will barring unforeseen developments become effective from 1 January 2005 (the ‘Effective Date’). UK companies familiar with Financial Reporting Standard 5 (FRS 5) will need to take note of the difference in approach proposed by IAS 39. In particular, as from the Effective Date, linked presentation treatment provided for pursuant to FRS 5 will no longer be available for securitisation transactions and will be replaced with the new derecognition/continuing involvement regime set out in IAS 39.

In addition, save in relation to certain specified exceptions (see paragraphs 105-108 of IAS 39), it is not proposed to ‘grandfather’ existing transactions previously reported in accordance with FRS 5. Rather, IAS 39 will apply retrospectively. In other words, UK originators that have entered into transactions which remain current/outstanding after the Effective Date will, as from that date, be required to report the transactions in their accounts in accordance with the rules set out in IAS 39.

This article examines the proposed accounting treatment of securitisation transactions under IAS 39 that are likely to be of interest to arrangers and originators (especially UK companies) alike. What follows is a very brief summary of the main provisions and is not an exhaustive analysis of the new standards contained in IAS 32 and IAS 39. In dealing with all types of financial instrument, together with the disclosure and presentation requirements and principles for recognition and measurement of all such instruments, including new rules for hedge accounting, the standards go beyond the scope of this article.

The news is not all bad. In 2002, the IASB published an exposure draft of proposed amendments to IAS 32 and IAS 39 which introduced some extraordinary new recognition and disclosure concepts based on the newly defined accounting reference term of ‘continuing involvement’. Under that proposal, companies would have had to separate out numerous component elements of a complex financial transaction and account for each of them, including requirements to value and report items such as ‘servicing assets’ and ‘servicing liabilities’. The welcome news is that this approach has largely been abandoned by the IASB, although the ‘continuing involvement’ concept is still of some relevance, in particular to securitisation transactions which are likely to fall into the category of reporting proposed for entities transferring assets whilst retaining some control or interest in such assets.

The new standards have been issued as three papers: IAS 32 deals with the disclosure and presentation treatment for financial instruments and also sets out the important definitions which are necessary for applying the standards, the most relevant definition for present purposes being what constitutes a ‘financial asset’. Each of the standards contains Application Guidance paragraphs (AG) as well as Basis for Conclusions (BC) paragraphs, which illustrate the methods used by the standards and also set them in context. Given the list of examples provided (in IAS 32, AG4), it is likely that most, if not all, assets the subject of a proposed securitisation transaction will fall within this definition. The implementation guidance paper to IAS 39 offers an extensive list of detailed definitions/examples of each type of financial instrument and their treatment and measurement, but the main principles of application are set out in IAS 39 itself. Amongst other new accounting rules, IAS 39 deals comprehensively with the principles underlying recognition and derecognition of asset transfers, specific rules for hedge accounting and rules relating to the way in which assets are measured/valued. Of primary relevance for present purposes, paragraphs 17-23 of IAS 39 contain the primary rules as to when transfers of financial assets by a reporting entity should be derecognised.

The first important point to note is that the new standards retain the requirement for consolidation which was the subject of a significant amount of comment when it was first proposed. Thus a reporting entity will first need to consolidate all its ‘subsidiaries’ in accordance with IAS 27 and SIC 12 (the statement of interpretation which deals with special purpose entities) before applying the principles summarised below.

Whilst the new standard makes specific allowance for so called ‘pass through schemes’, so that contractual participation arrangements should be able to achieve derecognition treatment (provided certain specific rules set out in paragraph 19 of IAS 39 are complied with), it is recognised by the IASB that most securitisations will fail to qualify for derecognition (see BC63 of IAS 39). It is thought that most reporting originators in a securitisation transaction will not be able to derecognise asset transfers in their accounts under IAS 39 because, in a typically structured securitisation transaction, originators will normally retain some of the risks/rewards of the ownership of the asset (for example by virtue of some or more types of credit enhancement overcollateralisation/subordinated liability and a right to excess spread/profit).

Accordingly, most securitisations are likely to fall under paragraph 20 (c) of IAS 39, which essentially provides for two different treatments depending upon whether the reporting entity (e.g. the originator) has retained control of the financial asset following transfer. If control over the asset is not retained, then in effect each of the assets and liabilities is derecognised/recognised as a separate item. Where control is retained (as will be the case in most securitisation transactions since the originator will also be appointed servicer of the assets and may also retain some rights to profit, excess spread or asset return on a subordinated basis), the financial asset must be recognised to the extent of the reporting entity’s ‘continuing involvement’.

IAS 39 helpfully lists a number of (non-exhaustive) illustrative examples of the application of the derecognition principles (see IAS 39, AG51). Of particular relevance to securitisation practitioners are examples (m) and (n), namely ‘clean up calls’ and ‘subordinated retained interests and credit guarantees’ respectively. IAS 39, AG52 gives a specific example of a loan portfolio sale at less than par value where the transferring entity retains a subordinated interest and has also retained control, and accordingly must therefore apply the continuing involvement approach prescribed by the new standard. It is likely that most currently accepted forms of overcollateralisation (such as provision of a subordinated loan or a deferred purchase price) will fall to be determined as ‘subordinated retained interest’ for the purposes of IAS 39.

Working through the example of a sale/transfer by a reporting entity of a portfolio of loan assets at a discounted price with a deferred purchase element (set out in greater detail in IAS 39, AG52) highlights a number of key differences from current accounting standards (especially FRS 5).

First, applying the rules of IAS 39, the consideration for a transaction (i.e. ‘value’ received by the reporting entity for sale of loans) will have to be allocated in accordance with the fair value approach. Thus consideration for the purchase of the loans (in accordance with the example) is allocated according to the estimated fair value of the transferred portfolio and the continuing rights of the reporting entity to excess spread. The gain or loss on sale of the transferred portfolio is also calculated.

In addition, the reporting entity must also recognise the continuing involvement that results from the retention of the subordinated interest (i.e. the deferred purchase price / overcollateralisation) which is used as the first loss enhancement. Interestingly, this item has to be entered both in the debit and credit columns.

The resulting account entry requires a recording of the component elements of the transaction within the relevant debit/credit column, such that:

- the fair value of the original asset;

- the asset recognised as the retained subordinated interest as well as a new liability, representing the amount that may need to be paid out in respect of the subordinated interest;

- the asset representing the consideration for excess spread;

- the profit (or loss) representing gain (or loss) on transfer; and

- cash received

all appear on the face of the balance sheet.

There is then an on-going requirement to update the balance sheet to take account of, for example, losses allocated to the subordinated retained interest (which reduces both debt and credit columns equally).

IAS 39 (AG36) provides a useful flow chart illustrating the critical path for determining appropriate derecognition/recognition treatment under the new standards, which for copyright reasons is not reproduced here.

Whatever the reaction of the securitisation industry to the new accounting standards may be, there is no longer an option to wait and see what happens. Since the new accounting standards will be effective as from the beginning of 2005, most of the companies for whom they are relevant will need to collate relevant data in relation to existing securitisations now. For arrangers and originators currently planning securitisation financing transactions, the new rules will need to be borne in mind.

Jonathan GF Walsh, Partner, Head of International Securities, Norton Rose

Norton Rose announces 4 partnership promotions in Banking

22 April 2004 Norton Rose is promoting 12 associates to the partnership. The new promotions, which take effect from 1 May 2004, will bring the global partnership to 221.

Norton Rose’s chief executive Peter Martyr said: “I am delighted that we shall have 12 new partners across our main practice areas and in key financial centres in Europe and Asia.”

There will be four new partners in banking, three in corporate finance, one in dispute resolution, one in employment, one in IP and technology and two in real estate. The promotions will create three new partners in Germany, six in London, one in Amsterdam and two in Hong Kong.

Details of the 4 newbanking partners are as follows:

Banking
Richard Howley (London); Richard specialises in shipping finance. He has wide experience in bilateral and syndicated debt facilities and structured financings (including project and lease financing of LNG carriers) and in relation to shipping contracts generally.

Dirk Trautmann (Munich); Dirk specialises in the financing and leasing of big ticket assets such as aircraft and ships and in the financing of infrastructure and real estate development projects. He regularly acts on domestic and international transactions.

Alexandra Triptree (London); Alexandra specialises in structured finance with particular emphasis on media and telecommunications financing. Alexandra has represented both lenders and borrowers on domestic and multi-jurisdictional project finance transactions.

Cecilia van der Weijden (Amsterdam); Cecilia advises national and international clients within the energy sector. She has recently advised on major transactions relating to the liberalisation and privatisation of the Dutch energy market.

Norton Rose closes twentieth securitisation under Portuguese Securitisation Law

12 July 2004 Norton Rose, the international law firm, has completed its twentieth securitisation in Portugal confirming its market-leading position in Portuguese securitisations. In the landmark deal for the firm, Norton Rose advised joint lead managers, HSBC Bank plc and Banco Finantia, S.A., in a €205 million securitisation of auto and equipment loans and leases.

This transaction, which closed on 1 July, was also significant as it involved the establishment of a Portuguese securitisation fund and, for the first time in a Portuguese transaction, a Spanish securitisation fund through which both Portuguese and Spanish assets originated by companies in the Banco Finantia group were securitised. The securitisation bonds were issued by an Irish special purpose company, LTR Finance No. 5 plc, and listed on the Luxembourg Stock Exchange.

All of these securitisations have been structured under the legal regime established by the Portuguese Securitisation Law which was finalised in December 2001. Norton Rose acted on the first securitisation under the Law and has now completed its twentieth.

Norton Rose securitisation partner Vincent Keaveny, based in London, said:

“It is fantastic to have reached this very significant landmark which confirms Norton Rose’s pre-eminence in the Portuguese securitisation market. It has been a great pleasure and a privilege to work on so many important transactions and to have played a leading role in the development of securitisation as a financing tool in Portugal. Many of these transactions were ‘firsts’ as new asset classes were securitised and new challenges had to be overcome.”

The transaction team was led by Vincent Keaveny, assisted by Raj Singh, Ben Tan, Darryl Tidman and Ffion Griffiths.

Portuguese law advice was provided by Simmons & Simmons Rebelo de Sousa - Rebelo de Sousa & Associados; Spanish law advice was provided by Gomez-Acebo & Pombo Abogados; and Irish law advice was provided by Matheson Ormbsy Prentice.

Norton Rose’s impressive track record on asset backed transactions undertaken in Portugal under the Securitisation Law, includes within the last 12 months advising:

Deutsche Bank and Caixa-Banco de Investimento, S.A. as arrangers of the first ever securitisation of trade receivables in Portugal valued at €210 million
BNP Paribas and Espírito Santo Investment as arrangers and joint lead managers of a €100 million securitisation of loans and leases (including real estate leases), the first ever real estate lease securitisation in Portugal
CSFB as lead manager of a €175 million securitisation of Portuguese consumer loans, auto loans and leases
Santander Central Hispano as arranger of a €1.1 billion securitisation of Portuguese residential mortgages (HippoTotta No.1 plc) followed by HippoTotta No.2 plc, valued at €3 billion and the largest ever Portuguese residential mortgage securitisation
Crédit Agricole Indosuez, Espírito Santo Investimento, Merrill Lynch International and Morgan Stanley & Co. International Ltd, in a €1 billion Portuguese residential mortgages backed securitisation.