Cross-border Trade Receivables Securitisation – Opportunity Awaits - Securitization & Structured Finance

Trade receivables securitisation is one of the primary means through which middle market and investment grade companies alike are able to obtain more efficient and cost-effective financing, manage their balance sheets and diversify their financing sources. While it may not be as simple or straightforward as a trade receivables secu¬ritisation in a single jurisdiction, the opportunity and potential for growth for a cross-border trade receivables securitisation can often outweigh the time and cost of structuring it. While the inclusion of each jurisdiction will mean that the parties will have to take addi¬tional considerations into account, by partnering with experienced deal counsel and local counsel, the parties can be flexible and crea¬tive in order to achieve their operational and financial goals.

This article presents an overview of key considerations when structuring a cross-border trade receivables securitisation, including insight from some of our leading partners in England, France, Germany, Mexico and the United States.

Structural Considerations

Choice of law

A typical trade receivables securitisation involves the sale by an originator or originators (each, an "Originator") of trade receivables (the "Receivables") owed by certain account debtors (each, an "Obligor") to a newly-formed, insolvency-re¬mote, special purpose entity (the "SPV"), with the purchase of the Receivables by the SPV being financed by one or more banks or conduits (the "Financing Parties").

A cross-border trade receivables transaction will require an in-depth review of all relevant jurisdictions, including (a) the location of the SPV, (b) the location of the Originators and the governing law of the sale agreement between each Originator and the SPV (each, a "Sale Agreement"), (c) the location of the Obligors, (d) the governing law of the Receivables, and (e) the loca¬tion of any bank accounts, particularly where a security interest will be granted in favour of the SPV or the Financing Parties in those bank accounts. Each additional jurisdiction will raise local law and choice of law questions, which will need to be analysed and considered in light of the objectives which the Originators and the Financing Parties wish to achieve in structuring the securitisation.

Key questions include:

which law will apply to determine:
1. whether there has been a "true sale" of the Receivables between each Originator and the SPV; and
2. whether a Receivable is permitted to be assigned by the applicable Originator to the SPV in the event of a restriction on, or prohibition of, assignment in the underlying contract between such Originator and the Obligor (the "Underlying Contract");
whether payment by an Obligor to the applicable Originator (rather than the SPV) will discharge such Obligor's payment obligation;
whether the Financing Parties or the SPV can enforce against and sue an Obligor directly for its failure to pay the applicable Receivable; and
whether a third-party creditor or insolvency trustee may assert its interest in or rights over the applicable Receivables.

Determining the answers to these questions and the impact those answers have on the structure and implementation of a trade receivables securitisation are critical both for protecting the Financing Parties' rights in the Receivables and for achieving the Originators' balance sheet and liquidity management objec¬tives. Once all applicable local laws have been determined, further analysis should be performed in each relevant jurisdic¬tion, with the assistance of local counsel, to ensure that all juris-diction-specific legal formalities are satisfied.

The Rome I Regulation

In securitisation transactions with Originators and/or Obligors located in European Union ("EU") countries (other than Denmark) and/or the United Kingdom (the "UK"), the Rome I Regulation (Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations) ("Rome I") will be relevant. Rome I provides that the relationship between the assignor (i.e., the applicable Originator) and the assignee (i.e., the SPV) is governed by the law of the contract between them (i.e., the Sale Agreement) (Article 14(1)). For matters concerning the assignability of any Receivable, the relationship between the SPV and the Financing Parties, as assignees, and the Obligor, enforceability against the Obligor and whether the Obligor's payment obligations have been discharged, it is necessary to look at the governing law of the applicable Receivable (i.e., the law of the Underlying Contract).

In addition, there is a draft regulation (Proposal for a regu¬lation of the European Parliament and of the Council on the law applicable to the third-party effects of assignments of claims) aimed at addressing the effectiveness of the transfer of Receivables as against third parties. This regulation is yet to be finalised but the effect of it could make this legal analysis more complicated. This is because, while the parties are gener¬ally free under Rome I to choose the law of a contract, such as a Sale Agreement, the new regulation could make it necessary to comply with the law where the Originator has its habitual resi-dence in assessing whether a valid transfer has been achieved as against third parties (including a liquidator or other insolvency official).

The Securitisation Regulation

In transactions where the relevant entities are located in the EU or the UK, it will also be important to consider the require-ments of Regulation (EU) 2017/2402 (the "Securitisation Regulation") and the related technical standards and guidance. The Securitisation Regulation sets out certain obligations with respect to originators, sponsors, securitisation special purpose entities and institutional investors (each as defined therein) with respect to securitisations (as defined therein) entered into from 1 January 2019 or which are no longer grandfathered. These obli¬gations include the following:

due diligence and ongoing monitoring obligations for institutional investors;
risk retention requirements; and
transparency requirements including the requirement to provide certain information using specified reporting templates.

The Securitisation Regulation also includes a set of require¬ments which will need to be met in order for a securitisation to be considered "simple, transparent and standardised" or "STS", which among other things, and provided any other rele¬vant regulatory requirements are met, will allow the Financing Parties to benefit from favourable regulatory capital treatment.

During the Brexit "transition period" (which is expected to end on 31 December 2020, unless it is extended), UK entities will be treated as if they are located in an EU Member State and will therefore be subject to the applicable requirements under the Securitisation Regulation. Following the end of that period, UK entities are expected to be subject to a parallel regime under which a modified version of the Securitisation Regulation will apply as adopted in the UK.

SPV location

In the case of multi-jurisdictional securitisations that include EU and/or UK Originators, the SPV is typically located in a European jurisdiction, such as Ireland, Luxembourg or the Netherlands. The choice of jurisdiction for the SPV is often driven by the availability of preferential tax treatment, such as double taxation treaties and/or beneficial tax regimes, as well as other factors such as the rele¬vant legal system, the cost of establishing and maintaining the SPV and the location of the parties and the Receivables. For securitisa¬tions with EU and/or UK Originators and no US Originators, the SPV is usually an orphan company, in order to enhance its insol¬vency remoteness and as a matter of market practice. For transac¬tions with US Originators only, it is typical to establish the SPV as a Delaware limited liability company that is a wholly-owned subsid¬iary of one or more of the Originators. This enables the over¬collateralisation in the transaction to be achieved through equity capital rather than a subordinated loan, which is preferable for US bankruptcy remoteness principles. Also, the tax issues that apply to cross-border distributions are generally not an issue for distri¬butions by US SPVs to US parent entities. Regardless of where the SPV is organised, its liabilities are typically limited by way of certain provisions in its organisational documents and/or under the securitisation documents, such as restrictions on its activi¬ties to those required under or ancillary to the securitisation and requirements to keep separate books, records and accounts and to have no employees, as well as the inclusion of limited recourse and non-petition clauses by which the other parties agree to be bound. In some cases, such as in Luxembourg, the SPV may be deemed to be insolvency remote by virtue of compliance with a specific stat¬utory securitisation regime.

Diligence in relation to the Receivables and restrictions on assignment

It is common for the Financing Parties or the Originator (in consultation with the relevant legal counsel) to review and perform diligence with respect to the Underlying Contracts. One important purpose of such diligence is to determine the extent to which there are any restrictions or prohibitions on assignment in the Underlying Contracts.

In our experience, most jurisdictions outside the US will enforce a restriction or prohibition on assignment which is included in the Underlying Contract. If there is such a restriction with respect to certain Receivables and the Originator desires to sell those Receivables to the SPV, in most cases the Obligor's consent will be required. However, the Originator typically does not want to request that Obligors consent to the sale of the Originator's Receivables for fear of disruption of the business relationship (or providing leverage to Obligors for other concessions). The Originators and the Financing Parties will need to determine whether certain Obligors should be excluded from the securitisa¬tion and consider whether their economic and commercial goals in entering into the transaction will still be achieved in the event of such exclusions, taking into account the aggregate amount of Obligors and Receivables that will be excluded.

In some cases, it may be possible to benefit from some struc¬tural alternatives (such as trusts in England, depending on the wording of the Underlying Contract and whether this is accept¬able to the parties) or exceptions such as in Germany under 354a(1) of the German Commercial Code (Handelsgesetzbuch) that, as long as the requirements are met in order for such exception to apply, provides for the assignability of commercial receivables even if the parties to the underlying contract have agreed on a ban on assignment, but still leaving the Obligor certain defences or the possibility to pay the assignor with discharging effect. In Germany, assignability as an eligibility criterion usually includes assignability by way of 354a(1) of the German Commercial Code (Handelsgesetzbuch). However, banks are closely considering the potentially increased dilution risk because of the above-men¬tioned defences and the payment choice of the Obligor.

In transactions that are done in the US, the parties typi¬cally ignore any contractual restrictions on assignment in the Underlying Contracts. That is because the Uniform Commercial Code (the "UCC") renders such provisions unenforceable gener-ally. However, as per Section 9-406(a) of the UCC, obligors may continue to discharge their Receivables by payment to the assignor until notified of the assignment. Obligors also will enjoy greater offset rights as to their assigned Receivables until such notice of assignment is received. Consequently, Financing Parties normally will require notice of assignment following certain performance triggers in the transaction.

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Originally published by ICLG on June 3, 2020.

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