MARKET STATEMENT

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In the past five years, the United States ABS market has witnessed an increasing number of so-called operating asset securitizations, which finance the cash flows from repeated short term leases of long-lived assets, during a time period covering a reasonable portion of the remaining useful life of the assets.  Because operating asset deals involve leases which are not full payout contracts, the financings require ongoing re-leasing and other management by an operating company experienced with that kind of equipment (most of these deals have involved mobile equipment).  Because of the obvious uncertainty of how much cash flow will be derived each month from short term leases, notes issued in an operating asset transaction have scheduled amortization ending several years before their legal maturity.  In the event that the outstanding principal balance of the notes exceeds a predetermined percentage of the aggregate fair market value of the equipment, then rapid amortization of the notes will occur until an acceptable loan to value ratio has been restored. 

Two international treaties adopted in late 2001 are expected to have an impact on operating asset securitizations: the Unidroit Convention on International Interests in Mobile Equipment and the United Nations Convention on the Assignment of Receivables in International Trade.

The Unidroit Convention covers interests arising under a security agreement, conditional sale agreement, true lease or finance lease.  Specifically covered are ñairframes, aircraft engines and helicopters; railway rolling stock; and space assetsî.  The Convention contemplates that it can be extended to other types of ñhigh-value mobile equipmentî. 

In addition to ratifying the Convention, a nation must adopt a Protocol with respect to each particular equipment type.  A working group largely drawn from the aircraft industry has prepared a Protocol for aircraft.  One for railway rolling stock is expected to be released by the end of this year.  The Convention will ñenter into forceî three months after the third nation (a ñContracting Stateî) has ratified the Convention, and will apply whenever the debtor is situated in a Contracting State which also has ratified a Protocol with respect to the particular equipment type.

The Unidroit Convention provides for an International Registry to give public notice of international leasehold or security interests.  The Protocol for each equipment type will create a Supervisory Authority to operate the International Registry for that equipment.  As a result, for assets covered by the Convention and a related Protocol, lessors and secured parties will have a place similar to a UCC Article 9 filing office where they can file public notice of their interests and search for any previously recorded interests.

BELOW WAS UPDATED: January 22, 2003

In addition to the Unidroit Convention of 2001, the United Nations Convention on the Assignment of Receivables in International Trade (the “U.N. Convention”) is also expected to have a significant impact on securitization transactions. The U.N. Convention was adopted by the United Nations General Assembly in December 2001, with the primary purpose of facilitating the financing of international receivables. The adoption of the concepts and laws provided by the Convention could result in the availability of capital and credit at lower costs and could encourage the movement of good and services across national borders. With this purpose in mind, the Convention attempts to remove obstacles to the financing of international receivables, and to increase confidence in international laws relating to securitized transactions.

The United Nations Convention on the Assignment of Receivables contains a uniform body of rules (mostly governing choice of law) concerning (1) the assignment of international receivables (a receivable owed to an assignor located in one nation by a debtor located in another nation) and (2) international assignments of receivables (a receivable assigned by an assignor located in one nation to an assignee located in another nation). The U.N. Convention is broad enough to cover equipment rentals, trade or export receivables, credit card payments, construction contracts, the sale or lease of real property, and intellectual property. The U.N. Convention will “enter into force” six months after the fifth nation (a “Ratifying State”) has ratified it.
The U.N. Convention covers both sales and security assignments of receivables, provided that the assignor (under an international assignment) is located in a Ratifying State or (for an international receivable) either the account debtor is located in a Ratifying State or the receivables contract is governed by the law of a Ratifying State. By requiring the assignor’s location to be in a Contracting State for international assignments, the Convention centralizes all priority issues to the law of the assignor’s location. Since the location of the assignor can be crucial in determining whether the Convention applies, location is defined as the place in which the assignor has its central administration. The Convention does not affect the rights of the Debtor unless the location of the debtor or the law governing the original contract is in a Ratifying State.

Once the receivable is subject to the U.N. Convention, further assignments (even if the current assignor and assignee are not located in a Ratifying State) will also be governed by the U.N. Convention rules. The assignor and assignee can also elect to have a State’s law selected by them govern their mutual rights and obligations. The U.N. Convention does permit party autonomy in that it allows the assignor and assignee to structure their transaction as they wish in order to meet particular goals, as long as this does not affect the rights of third parties. The convention also recognizes agreed upon trade usages and trade practices established between the parties.

The U.N. Convention addresses numerous statutory and contractual limitations to international securitization, such as those relating to the rights and obligations of the debtor. In approaching the relationship between assignee and debtor, the Convention introduces a high standard of debtor protection. The Convention addresses topics such as debtor discharge, notification, set-off rights and waivers of defenses.

At the same time, the U.N. Convention contains several features that facilitate the financing of receivables: it invalidates any provision in an underlying agreement restricting an assignor's ability to assign any amounts payable under that agreement; and facilitates securitizations by recognizing assignments of future receivables, or parts of or undivided interests in receivables or bulk assignments of receivables. An optional annex (similar to the Protocol under the Unidroit Convention) to the U.N. Convention establishes an international registry and contains priority rules based on three different approaches: (a) registration of data about assignments, (b) the time of assignment and (c) the time of notification of the assignment.
Understandably, there is great interest surrounding these Conventions, and the international community is awaiting ratification by the United States as a signal that these advances in international commercial law are for real. State Department sources are hopeful that ratification by the U.S. Senate can occur before Congress adjourns for the midterm elections this autumn. Because these Conventions will facilitate financing of several depressed areas of the economy, such as aircraft leasing, airlines and aircraft manufacturers, public expectations are high that Senate action will be positive and timely.

We will update Securitizability.com as things progress....