Decree-Law 453/99 of 5 November 1999 (the "Securitisation Law") allowed the sale of receivables to be transformed into securities, with the purpose of being publicly or privately placed in the domestic and international markets. Although until the approval of this bill, securitisation of Portuguese receivables could be achieved, it was generally understood that the Securities Commission (Comissão de Mercado de Valores Mobiliários – "CMVM") would not allow the issue and public placement in Portugal of the securities issued by the purchaser of the Portuguese receivables.
However, the new bill has not increased the market’s interest in the securitisation of Portuguese receivables as it had been expected, as a result of stringent requirements for the incorporation of securitisation vehicles. In response to this, the Government has recently enacted Decree-Law 82/2002 of 5 April 2002, amending the Securitisation Law in order to create the necessary conditions for a competitive securitisation market.
This paper aims to describe the conditions under which it is now possible to securitise Portuguese receivables under Portuguese Law. However, the information and expressions of opinion this document contains are not intended to be a comprehensive study and should not be treated as a substitute for specific advice concerning individual situations.
For the purposes of our analysis, we shall assume that the parties incorporate a one-tier structure, whereby the Portuguese originator sells his receivables to an offshore or inshore vehicle, without the intermediation of a vehicle that acquires the receivables in order to sell them to the issuer of the securities.
Transfer of Receivables
In general, Portuguese law allows the transfer of debts under four possible forms:
- the assignment of contracts (cessão da posição contratual);
- the assignment of debts/credits (cessão de créditos);
- the subrogation (subrogação); and
- the novation (novação).
An assignment of contract (cessão de posição contratual) is a contract whereby the assignor (cedente) transfers his rights and obligations under a contract to the assignee (cessionário), which assumes the same position under the contract as the assignor. Such assignment requires the prior consent of the counterparty to the original contract (cedido). When the contract, which is the object of the assignment, provides that no consent is required for a future assignment, notification to the cedido will be required to perfect the assignment, who otherwise will continue to perform his obligations towards the assignor instead of the assignee.
The assignment of contracts would not work in common securitisation structures, as it requires the notification or the approval of the debtor in order to be effective. This would render very difficult the assignment procedure and would not ensure that certain debtors might not oppose to the transfer of his debt to a third party.
Another disadvantage of using this form of assignment is that, by taking the position of the originator in the contract, the purchaser will be subject to the same set of rules as the originator. Therefore, if the originator is a regulated entity, such as a bank or an insurance company, the purchaser will have to hold a license to conduct the same business in Portugal.
However, it may be advisable when the contracts that are being assigned involve large sums and the parties are in position to obtain the required consent or notification. For instance, in the refinancing of large projects, which involve a government concession, such as a bridge or highways, the assignment of the concession contract would allow the transfer of the future receivables, in the form of tolls or shadow tolls, to the purchaser.
The assignment of debts (cessão de créditos) involves a bilateral agreement between the originator and the purchaser (i.e. the securitisation vehicle), whereby only the assignor’s debts (cedente) arising under certain contracts are transferred to the assignee (cessionário). The obligations of the assignor under the contract are not transferred and the validity of the assignment does not require consent or notification of the debtor (cedido). Usually the originator will remain as collecting agent, so that the purchaser will not need to notify the debtor unless he chooses to, i.e. to ensure that the debtor pays directly to himself.
The importance of the notification is that it prevents the debtor from discharging the debt by paying the originator. Following the notification, the debtor may only validly discharge his debt by paying the purchaser. Such notification may be made once insolvency proceedings have been initiated against the originator.
Under the Securitisation Law, the assignment will only be perfected upon notification of the debtor. However, when the originator is a bank, a financial company, an insurance company, a pension fund or a pension fund manager, the assignment of debts to the securitisation vehicle does not require any acknowledgement, acceptance or notification to the debtors, provided that such debts are maintained under the management of the originator.
In any event, the debtor may oppose to the purchaser any exceptions regarding the enforceability of the obligation, such as the invalidity of the contract, that debt was settled prior to the notification or that the assignor was in breach of the contract.
The subrogation of debts (subrogação) involves an agreement whereby the purchaser will be "subrogated" (subrogado) in the rights of the originator against the debtor by paying a purchase price. The originator will consider the debtor discharged from his payment obligation, who will be obligated to pay directly to the purchaser.
In order to be effective, the subrogation must be made expressly in writing and must take place before or on maturity of the debt. This means that the subrogation can only take place with respect to existing debts, including not matured debts. Matured obligations and future receivables, such as highway tolls, cannot be transferred by way of subrogation.
An advantage of the subrogation over the ordinary assignment of debts is that no notification is required for the purchaser to act directly against the debtor. However, this is of little or no practical consequence as the notification is not required to perfect the assignment but will be necessary in both situations to make the debtor know that he is obliged to pay the purchaser and not the originator.
Unlike the French subrogation, Portuguese law allows the subrogation in case of unmatured debts, which makes this structure almost identical to an assignment of debts.
Novation (novação) is the act whereby the debtor is discharged of his obligations under a specific agreement by entering into a new contract that replaces the first contract. Effectively the novation of contracts will operate as an assignment of the contract, although it presents the advantage that the debtor will not be able to use any of the exceptions he had under the initial agreement.
However, the novation is not an attractive structure when compared with the assignment of debts, as it requires the notification of the counterparty where the assignment of debts is perfected upon the closing of the assignment contract.
The Securitisation Legal Framework
The Securitisation Law is applicable to the sale of Portuguese debts to the inshore or offshore vehicles that will issue and sell the securities in Portugal or in the international markets. The Securitisation law governs the incorporation and management of the credit securitisation funds (Fundos de Titularização – "Securitisation Funds") and of the credit securitisation companies (Sociedades de Titularização – "Securitisation Companies"), which are the only legal entities that can purchase the receivables and issue the securities under Securitisation Law.
It must be noted that the Securitisation law does not prevent the securitisation of Portuguese receivables by foreign entities nor does it prohibit the private placement of the securities issued by a foreign purchaser with Portuguese investors.
The law also does not present an obstacle to the acquisition of receivables by a Portuguese purchaser and issuer of securities. However, such inshore or offshore issuer will not fall under the Securitisation Law, which is more attractive in many respects. The scope of the Securitisation Law is to govern the domestic issuance of securities by a Portuguese special purpose vehicle (Securitisation Fund or Securitisation Company) as well as the public placement in Portugal of securities issued by a foreign purchaser where the receivables have been originated in Portugal. With this in view, the Securitisation Law defines:
- the nature and type of receivables eligible for securitisation;
- the form of sale necessary to operate as a true sale securitisation; and
- the main requirements governing the incorporation and management of Portuguese special purpose vehicles.
The law also establishes certain exceptions to the insolvency regime that will be applicable to the insolvency of the purchaser, the custodian and the originator.
One matter of particular importance is the definition of securitisable receivables. Portuguese law does not accept the common law principle that any predictable cash flow can be securitised. As most civil law countries, Portuguese securitisations are made under the assignment of credit rules, described above. The legal concept of "credit" is essential to the definition of the securitisable assets.
In order to be securitisable, debts must be of a pecuniary nature, freely assignable, not matured and unconditional, and cannot be encumbered, pledged, seized or under litigation.
For the purposes of the Securitisation Law, certain future receivables may be sold for the purposes of securitisation when arising from an existing or predictable legal or contractual relationship. This means that electricity or telecommunications receivables can be securitised as they will be generated by an existing contract between the public utility and the consumer, but football receivables would not be eligible. Likewise, a shadow toll can be securitised but normal tolls would only be assignable under the assignment of contracts rules.
The recent amendment to the Securitisation Law has determined that low interest mortgage payments are also eligible for securitisation.
As explained in the previous section, only future or present debts can be sold to a securitisation vehicle. The sale is made under the assignment of credit rules. As a general rule, the transfer will only be perfected upon notification of the debtor.
However, the Securitisation Law allows the assignment of debts by banks, financial companies, insurance companies, pension funds, and pension fund managers, without the need to notify the debtor, provided that such debts are maintained under the management of the originator.
Another advantage of this regime is that it only requires a written contract for the sale of mortgages, whereas the general provisions of the Portuguese Civil Code require a public deed to be executed.
Securitisation Funds are a form of collective investment funds and can be closed or open ended.
The following is a summary of the rules governing the incorporation and management of the securitisation funds:
- Capacity to enter into certain transactions. The Fund can acquire securities listed in a regulated stock market and short-term debentures, provided that such acquisition does not change the rating of securitisation units. The managing company may also use financial instruments, such as interest rate and currency swaps and other derivatives instruments provided that such instruments are used with hedging purposes.
- The fund manager. Fund managers are financial companies incorporated with the sole purpose of acting as managers of securitisation funds. Fund managers must adopt the form of sociedade anónima (limited liability company) and have registered offices and effective place of management in Portugal.
- Share capital. Fund managers must be incorporated with a minimum share capital of € 250.000, of which at least a third must be deposited in a Portuguese bank. The share capital must be represented by nominative shares.
- Minimum capitalisation. The law also sets a minimum a capitalisation rule, which may burden certain transactions with an additional cost. As a rule, the fund manager’s own funds must represent at least 0,5% of the total net global value of the securitisation funds under management up to the amount of EUR. 75 million, plus 0,1‰ of the amount in excess of EUR. 75 million.
Securitisation Companies are incorporated to serve as vehicles to acquire the receivables for the purpose of securitisation and must adopt the form of sociedades anónimas (limited liability companies).
Before the 2002 amendments to the Securitisation Law, Securitisation Companies had to be incorporated as financial companies. However, this requirement has been eliminated and Securitisation Companies are now subject to authorization and registration before CMVM.
The following are the main rules governing the incorporation and management of the Securitisation Companies:
- Corporate purpose and capacity. The Securitisation Companies have as exclusive purpose the securitisation of debts, which includes the purchase, management and transfer of debts. Moreover, securitisation companies may enter into funding agreements with any third party for liquidity purposes and acquire low risk and high liquidity securities to be determined by CMVM.
- Share capital. A securitisation company must be incorporated with a minimum share capital of € 250.000, of which at least 1/3 must be deposited in a Portuguese bank. The share capital must be represented by nominative shares. This means that the company will not be allowed to list its shares to finance the acquisition of the receivables. In order to finance the purchase, securitisation companies have to issue ordinary or preferred bonds.
- Minimum capitalisation. Securitisation companies’ own funds must represent at least 0,5% of the total net global value of the issued and circulating bonds until the amount of EUR. 75 million, plus 0,1‰ of the amount in excess of EUR. 75 million.
Under Portuguese insolvency laws, some obligations of the insolvent entity are suspended upon the institution of insolvency proceedings. The consequences of the proceedings leading to a judgement of insolvency or bankruptcy are set out in the Portuguese Insolvency Law, approved by Decree-Law 123/93 of 23 April 1993, as amended from time (Código de Processos Especiais de Recuperação de Empresas e da Falência – "Insolvency Law").
The initiation of insolvency proceedings does not prevent the insolvent party from making payments or fulfilling his contractual obligations. Therefore, the performance of the assignor’s duties as collecting agent would still be permitted during the proceedings that might lead to a judgement in bankruptcy. The law would also recognise the validity of the assignment made before the originator becomes insolvent if no voidable preference applies.
The Insolvency Law provides for transactions entered into on preferential terms to be set aside in certain circumstances, for instance when the insolvent party’s obligations are manifestly greater than those of the other party to the contract (impugnação pauliana) during the two years before the initiation of the insolvency proceedings. Under the impugnação pauliana all acts executed that purport to reduce the insolvent entity’s assets, otherwise normally liable for general debts, shall be voided by the court.
The effect of these provisions is that the assignment of the receivables could be annulled in case of the insolvency of the originator if the assignment occurs in the two years period prior to the insolvency proceedings. However, it is highly unlikely that the risk of the sale be voided if the assignments are made at arms’ length for full value. When there is overcollateralisation the provisions protecting the bankruptcy estate would not apply if there was no prejudicial intent and they are not grossly disproportionate.
Notwithstanding, when insolvency proceedings against the originator commence, the purchaser should notify the debtor of the assignment and request that payments be made directly to him or a representative in Portugal, thus avoiding that payments might be considered part of the bankruptcy estate.
It must also be noted that in case of assignment of future receivables, such as rental payments, tolls or electricity receivables, the court will consider payments by the debtors as part of the bankruptcy estate. Therefore, the purchaser will rank pari passu with other common creditors.
For securitisations under the Securitisation Law, the impugnação pauliana voidable preference will only apply if the creditors of the originator provide evidence of the facts described in articles 610 and 612 of the Portuguese Civil Code. This means that the legal presumptions of bad faith, set out by the Insolvency Law, shall not apply in case of insolvency of the originator.
Portuguese insolvency law applicable to debtors, whether they are business or individual, provides for the rescheduling of debts and may involve the acquitance of interest payments.
It is not possible to contract out of these provisions in the sale agreements. The purchaser of the debts will rank in case of insolvency as the originator. If his credit is unsecured, he will rank as a common creditor after the State, the social security and the employees of the debtor.
In general, Portuguese law allows the transfer of debts. Under the assignment of debts (cessão de créditos), the obligations of the assignor under the contract are not transferred and the validity of the assignment does not require consent or notification of the debtor (cedido).
Under the Securitisation Law, the sale of receivables for the purposes of securitisation (titularização de créditos) will only be perfected upon notification of the debtor. Furthermore, in order to be securitisable, debts must be of a pecuniary nature, freely assignable, unmatured and unconditional, and cannot be encumbered, pledged, seized or under litigation
The Securitisation Law allows the assignment of debts by banks, financial companies, insurance companies, pension funds, and pension fund managers to a special purpose vehicle, without the need to notify the debtor, provided that such debts are maintained under the management of the originator.
The sale of receivables to be transformed into securities can be made to a special purpose vehicle only. This law governs the incorporation and operation of Securitisation Funds, a form of collective investment funds managed by a Securitisation Fund Manager, and Securitisation Companies, a form of companies having as their exclusive purpose the securitisation of debts.
In case of insolvency of the originator, the Securitisation Law requires that the creditors prove that the sale of the debt was made in bad faith, which implies the prejudicial intent of the transaction with the purpose of reducing originator’s assets liable in case of insolvency.
© Macedo Vitorino e Associados - September 2002
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.