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Country Writer: Mr. Dimitrios
Himonas
dimitrios.himonas@roschier.com
Roschier Holmberg,
Attorneys Ltd
Tel: +358 20 506 6233
www.roschier.com
SECURITIZATION LAWYERS AT THIS FIRM
FIRM
PROFILE
Roschier Holmberg, as a leading law firm in Finland, operates in
the international marketplace. The firm’s clients include
large domestic and global corporations, often listed on one or more
stock exchanges, and growth and other private companies with international
operations. We also advise financial institutions, insurance companies,
governments and municipalities. Roschier Holmberg’s some 100
lawyers render legal services in the Finnish, Swedish (and other
Scandinavian), English, French and German languages. The firm is
divided into three practice groups:
- Corporate Advisory and Disputes
- Transactions and Finance
- Technology, Media and Communications
The Roschier Holmberg Securitization Team has advised both domestic
and multinational originators, arrangers and other parties on securitizations
involving, inter alia, trade receivables, credit card receivables,
leasing receivables and housing loans.
Roschier Holmberg advised Morgan Stanley as the Lead Manager in
Stora Enso Oyj’s Tornator whole-business securitisation of
forestry business, including forest land. The transaction was the
IFLR “European Securitisation
Deal of the Year” for 2002.
SECURITIZATION MARKET STATEMENT
Updated
July 23, 2003
Securitisation in Finland
Gunnar Westerlund, Dimitrios Himonas and Samu Palkonen
Roschier Holmberg, Attorneys Ltd
Over the recent years, the use of securitisation
has become increasingly common in Finland. Despite this the transaction
volume has, however, remained low compared to many other European
jurisdictions. Not surprisingly, the market has been dominated by
trade receivables securitisations. Typically, the Finnish leg of
a securitisation transaction is part of a multi-jurisdictional exercise
with group companies domiciled in different jurisdictions participating
as originators. In addition to trade receivables, lease receivables
and credit card receivables have also been securitised. Until 2002
the landmark public transaction in Finland was, however, the so-called
‘Fennica’ securitisation of housing loans by the Finnish
Housing Fund first launched in 1995. To date, there have been six
issuances under the Fennica programme.
In late 2002 the Finnish paper company Stora Enso
Oyj closed a forest securitisation transaction involving the transfer
of approximately 600,000 hectares of its Finnish forest land to
a newly created special purpose vehicle (‘SPV ’), Tornator
Group. The transaction is among the few whole business securitisations
implemented to date in Europe outside the UK and brings a whole
new asset class to such transactions. The transaction has in many
instances been regarded as the most innovative securitisation in
Europe in 2002 and was awarded the IFLR ‘European Securitisation
Deal of the Year ’.
STRUCTURING A SECURITISATION TRANSACTION IN FINLAND
General legal framework
The Finnish legal and regulatory framework, as that in the other
Nordic jurisdictions, can be regarded as fairly securitisation-friendly.
In respect of most asset classes, there are no onerous legal formalities
required to effect a transfer of ownership over a particular asset.
In order to achieve bankruptcy remoteness from the originator, certain
formalities must be complied with, such as, in the case of receivables,
notifying the debtors of the receivables about the transfer.
The fact that there is virtually no case law addressing
securitisation specific questions does sometimes, however, give
rise to difficult legal considerations. Most importantly, there
is no absolute certainty whether a Finnish court would, for civil
law purposes, uphold a conventional securitisation transaction as
having been entered into with the intent to transfer ownership,
or whether instead the transaction would be considered to constitute
secured financing. Consequently in most securitisation transactions
there remains a degree of uncertainty in this respect, although
a sufficient level of comfort is normally ultimately achieved. In
view of the possible re-characterisation of the transaction and
to mitigate the resulting adverse consequences, certain safeguards
can normally be built into the transaction documents.
Finnish accounting rules do not specifically address
securitisation transactions. Accordingly, there are no detailed
criteria to follow when assessing whether the transaction achieves
off-balance sheet treatment. In general, Finnish accounting rules
rely to a significant extent on the substance-over-form principle,
as does the International Accounting Standards (‘IAS ’).
In practise, when Finnish accounting statutes are silent on a particular
issue, the practioners often rely on the rules and principles established
within the IAS regulation. As a result, the accounting treatment
under Finnish law would likely in most cases not significantly deviate
from that under the IAS. Going forward, due to the EU-wide regulation,
Finnish listed companies will have to apply IAS from 2005 onwards
when preparing their consolidated accounts.
Structural considerations
To date there have been no publicly placed purely domestic securitisation
transactions in Finland. This is the result of an international
investor base and the concerns and expectations prevailing among
such investors concerning the domicile of the SPV and the structuring
of the transaction. Consequently, the parties almost invariably
prefer to rely on internationally established structures and documentation
previously used in similar securitisation transactions.
As within most other jurisdictions, the main legal
challenge under Finnish law is to ensure that the securitised assets
are bankruptcy remote from the originator ’s estate, ie to
achieve a true sale. In whole business transactions and other secured
loan types of transactions, on the other hand, the key issue is
to create a security package that meets the investors ’requirements.
As noted above, true sale, as between the parties
to the transaction, is normally achieved by conclusion of the origination
agreement without the requirement for further action on the part
of the parties. As towards third parties, such as the creditors
and the bankruptcy estate of the originator, the effectiveness of
the transfer is subject to the perfection of the transfer in accordance
with the rules applicable to the relevant category of asset. In
the case of ordinary receivables, such as trade receivables, perfection
takes place by means of serving the debtors a notice of assignment
and revised payment instructions. Typically, the notice of assignment
is printed on the invoices sent to the customer-debtors. Due to
commercial considerations, the parties sometimes agree that the
customer-debtors are not notified at the outset, but instead only
upon the occurrence of a specific trigger event.
In secured loan transactions involving securitisation
of a particular business, the security package is of key importance.
As explained below in more detail, due to Finnish insolvency laws,
a whole business securitisation normally involves, as a preliminary
step, incorporation of the target business in a separate legal entity.
The security would then take the form of a pledge over the shares
in the target company and, to the greatest extent permissible, security
over the assets of the target company. The security from the target
business would normally consist of an enterprise mortgage (close
equivalent to the UK floating charge) covering most categories of
movable assets of the company and, additionally, fixed charges over
individual assets, to the extent possible.
A whole business transaction may involve the SPV
purchasing the shares in the (incorporated) target company from
the originator. Such acquisition would be financed in part by contributions
made by outside equity investors and, more importantly, with the
proceeds from the issuance of notes by the SPV.
In receivables securitisations, the Finnish originator
normally continues to service the receivables after the securitisation.
In such a collection agency set-up, the customer-debtors normally
continue to make payments for the receivables to a bank account
held by the originator. In case of the Finnish originator’s
insolvency, the collection agency may be challenged and this could
give rise to the question regarding the due separation of funds
and whether the securitisation constitutes a true sale. For this
reason, due attention should be given to the structuring of the
collection agency.
Although, in a receivables securitisation, security
arrangements do not play as significant a role as in a whole business
transaction, the structures used in Finland have normally featured
some type of security. The most common example is a pledge over
the collection bank account held by the originator.
Regulatory issues
As briefly mentioned above, the regulatory framework in Finland
rarely poses any significant challenges to a conventional securitisation
transaction.
The operations of the SPV in a securitisation transaction
are normally not subject to the financial supervision applicable
to credit institutions. The SPV, therefore, does not normally require
any banking or similar licenses in Finland. If the originator is
a Finnish bank or other credit institution, then inter alia the
guidelines of the Finnish Financial Supervision Authority concerning
capital adequacy reliefs and banking secrecy need to be addressed.
When dealing with receivables where the debtors
are individuals, data protection is an issue to address if the transaction
entails transfer of personal data from the originator to the SPV.
Even if the transaction would entail some transfer of customer-related
data, it is normally possible to structure the transaction so that
no filings or approvals with the data protection authorities are
required. Prior discussions with the authorities may, however, be
recommendable.
INSOLVENCY-RELATED ISSUES
Perfection of the transfer and true sale
As in most other jurisdictions, the main legal challenge under Finnish
law in a securitisation transaction is to structure the transaction
so that it is binding on third parties, most importantly, on the
originator ’s bankruptcy estate and its creditors.
As to the effectiveness of the transfer of ownership,
the most important prerequisite is that the perfection of the transfer
has taken place in accordance with the general rules applicable
to a transfer of ownership over the relevant category of asset.
The transfer of a receivable is perfected by means of serving the
debtors a notice of assignment. Typically, the notice of assignment
is served by way of a legend printed on the invoices. A one-off
notification given to a particular debtor at the outset of the programme
would not suffice. Instead, each individual assignment needs to
be separately notified to the debtors. Due to commercial considerations,
the parties may sometimes feel comfortable with not notifying the
customers of the transfer until the occurrence of a trigger event.
The critical question then is when the trigger event occurs so as
to enable timely perfection prior to insolvency. Further, such delayed
notification could result in certain complications in light of Finnish
regulations concerning voidable preferences.
Even if the perfection of the transfer took place
prior to the originator ’s insolvency, a securitisation could
nevertheless be challenged on the grounds that the legal form of
the transaction did not correctly reflect the substance underlying
the transaction and the intent of the parties to the transaction.
Although Finnish civil law in general can be characterised as fairly
legalistic, the substance-over-form doctrine is well established
when assessing whether a sale of an asset should be considered as
having been entered into for the purposes of creating security interest
over the asset in question. In a receivables securitisation, the
insolvency estate of the originator could argue that the parties
did not intend to transfer ownership of the receivables but rather
created a pledge type of a security over the receivables in order
to secure the construed loan advanced by the purchaser to the originator.
Unfortunately, Finnish case law does not clearly specify the grounds
for re-characterising a particular transaction. As a matter of principle,
the key question is whether the economic risks and rewards associated
with ownership have, to a sufficient extent, been transferred to
the purchaser. Various re-purchase obligations, excessive reserve
requirements and other similar features often encountered in securitisation
transactions all serve as an indication that the originator has
retained economic interest in the receivables –thus, they
may endanger the true sale analysis.
In the event that a receivables securitisation is
re-characterised by a Finnish court upon insolvency of the originator,
the transaction would most likely be treated as a loan secured by
the receivables. The originator would consequently be considered
the owner of the receivables. The critical question then is whether
the construed security interest over the receivables would be binding
on the insolvency estate or whether instead the SPV would end up
being an unsecured creditor. As perfection of a pledge over a receivable
is under Finnish law achieved in the same manner as perfection of
a transfer –ie by way of serving a notice of assignment to
the debtor –then, assuming that the transfer notice has been
served prior to insolvency, the security interest would, as a rule,
be binding. Accordingly, the SPV would enjoy priority ahead of the
other creditors over the proceeds accruing from the receivables.
As an additional hurdle, the creation of the security would be scrutinised
and could possibly be challenged by virtue of the Finnish rules
concerning voidable preferences.
Future receivables
When exploring various securitisation structures, a distinct feature
of Finnish law that needs to be addressed is the fact that a transfer
of ‘future ’or ‘unearned ’receivables is
generally not binding upon the insolvency of the Finnish originator.
Consequently, such receivables would, even after the transfer, be
considered the originator ’s property. In determining whether
a receivable is in existence or whether it is unearned, the decisive
factor normally is whether the originator has fulfilled the contractual
obligation that gives rise to the receivable. In the case of a trade
receivable for instance, the assessment is made based on whether
the originator has delivered the goods to the purchaser-debtor thus
earning the receivable. The fact that future receivables cannot
be assigned considerably reduces the potential, as an example, for
using lease receivable securitisation techniques in Finland. In
this type of securitisation transactions, additional security from
the originator would typically be required –normally in the
form of a security over the lease object.
Collection agency
Various collection agency arrangements often encountered in receivables
transactions may cause difficulties if the originator becomes insolvent.
First, the continued receipt of collections by the originator could
effectively be construed as evidence that the originator has not
been deprived of its control over the receivables. This could be
argued to adversely affect the true sale. Second, if collections
have been commingled with the originator ’s other funds, then
the collection funds would be considered part of the assets of the
originator ’s insolvency estate. To overcome these challenges,
it is important that a separate collection account is established
and collections accruing from the securitised receivables are channelled
to this separate bank account. Furthermore, effective controls should
be put in place to prevent the originator from dealing with the
money held in the collection account. Apart from contractual undertakings
to such effect, there should be a cash sweep, preferably on a daily
basis, from the collection account to an originator remote transaction
bank account. As an alternative, a pledge could be created over
the collection account. As in the case of the customer-debtor transfer
notifications, the use of a collection agency would normally involve
a trigger event mechanism, whereby after a trigger event collections
are directly channelled to a transaction bank account remote from
the originator.
Perfection and enforcement of the security
As with the transfer of ownership, any security granted in connection
with a securitisation must have been perfected prior to the commencement
of the originator ’s insolvency. In the case of a receivables
transaction, the security package rarely plays a significant role.
The opposite is true in a whole business securitisation, where the
robustness of the security package is of critical importance. Depending
on the type of security concerned, the perfection may take the form
of registration with the relevant official register (security over
IP rights), registration together with the physical delivery of
the registered security instruments (floating charge, real estate
mortgage, charge over items that can be registered, such as vessels
and aircraft), notification to the debtors (receivables), or possessory
pledge of the asset in question (movable property other than items
that can be registered).
In a whole business transaction, apart from the
right, upon the insolvency of the originator and/or the target company,
to enforce the security, the main goal of the SPV, as the secured
creditor, normally is to have effective means of taking control
of the target business operations upon default of the loan. This
would comprise taking decisions as to whether or not the business
is continued and, if continued, taking operative decisions concerning
the business. To such end, in certain jurisdictions the holders
of a floating charge may appoint their own administrator and such
administrator would then primarily act as directed by and in the
interest of the relevant secured creditor. Under Finnish law, this
is not possible as the administrator is appointed by a court and,
once appointed, is obliged to act in the interest of all creditors.
Having said this, the difference between the two systems should
not be exaggerated. This is because the meeting of the creditors,
which represents all the creditors, has the capacity to take decisions
concerning the affairs of the company (along with the administrator).
As the SPV would normally be the most significant individual creditor,
it could exercise significant influence through the creditors ’meeting.
Nevertheless, the position of a floating charge holder under Finnish
law is not as strong in this respect as in some other jurisdictions.
Incorporation of the target business into a separate
legal entity and subsequent creation of a share pledge over the
shares in the target company could provide a viable structural solution
in aiming to ensure that the SPV can, as an alternative to realising
the target assets, continue the operations of the target business
on its own account. This could be accomplished by way of the SPV
taking ownership of the target shares and then continuing the target
operations as the owner. The fair value of the target shares would
be credited towards satisfaction of the secured debt.
CONCLUSIONS
Experiences from the securitisation transactions so far completed
in Finland have demonstrated that the Finnish legal and regulatory
framework provides a sound environment for securitisation. It may
be that the fairly low transaction activity in Finland is a reflection
of the fact that only a limited number of Finnish companies have
sufficiently extensive pools of securitisable assets, such that
the transaction costs associated with various securitisation structures
would be justified. It remains to be seen whether the completed
Tornator transaction will pave the way for more widespread use of
whole business securitisation techniques in Finland
This article first appeared
in
Global Securitisation and Structured Finance 2003
Published by Globe White Page in association with Deutsche Bank
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