Interview: The basics of securitisation
The www.sclalawreview.org has interviewed two experts in the field of securitisation. Alexander Lindemann and Martin Schweikhart from Lindemann Law in Zurich have structured numerous securitisations over the course of their careers and gave us answers to some of the most common questions on this topic.
Securitisation is a strong trend in asset management that cannot be denied, according to Schweikhart and Lindemann. Securitisations have increased in demand over the recent years. Many asset managers have explored and are considering securitisations to address specific needs in handling with certain assets. In Switzerland in particular a number of small, new and innovative providers have begun offering such services.
Swiss China Law Review: Alexander, Martin, thanks for taking the time to talk to us. Our first question is: what is a securitisation?
Alexander Lindemann: A securitisation vehicle is simply a company with the purpose of holding valuable asset and issue debt securities against these assets that represent their performance. The idea of a securitisation is simple. It is a way to hold assets that may be cumbersome to hold directly, such as non securitised loans and other debt, or difficult to transfer, like property or non-listed equity, in a transferable, bankable security.
SCLR: Thanks, that sounds simple. But what are the risks to investors?
Martin Schweikhart: By creating a company solely for such purpose there is no credit risk on the issuer. However, fraud and operational risks remain. A careful selection of service providers and a diligent legal set up is key to minimise these risks. Pledge arrangements on the assets are also possible. Many securitisation vehicles are umbrella structures and may face the risk of cross contamination. Some jurisdictions provide vehicles which offer segregation by law. However, a residual risk remains as some courts outside the jurisdiction of the securitisation vehicle may not accept such segregation. And the reputational risk remains in any case. Cash returns from the securitised assets, such as rent, interest, royalties or capital repayment, will usually be passed on to the holders of the Notes.
SCLR: What can I securitise?
MS: In principle any asset. The most common are property, receivables, loans and equity. Less common and more difficult to structure are art or physical assets such as machinery, warehouse goods, cars and, in some instances, also immaterial assets like intellectual property rights or trademarks. However securitisation vehicles have limits, so some “exotic” assets may only make sense in very specific setups.
SCLR: What are the advantages of securitisation?
AL: Assets that are difficult to invest in, like loans, receivables or non-listed equity, can be acquired by the securitisation vehicle. Investment paperwork needs to be done only once the end investors, who acquire the Notes issued by the securitisation vehicle, receive bankable, transferable securities which can be subscribed and settled via a clearing system by any bank. Hence the end investor can hold the Note (and indirectly the acquired asset) via its bank and receives account statements and usual reporting. It also allows the pooling of several investors who alone would not be able to participate in the securitised asset.
MS: I would add that in the case of investments that are cumbersome to transfer such as property, the Notes issued by a securitisation vehicle offer a simple transfer bank to bank via the clearing system. An asset or wealth manager can also include potential fees for services provided in the vehicle, where such fees are deducted directly from the securitisation vehicle and no contract with the end client is required.
SCLR: What about costs compared to a fund?
AL: Securitisation vehicles are cheaper than funds. Since they stand outside fund regulations they can also hold a wider range of assets. This also allows an efficient way of white-labelling for asset managers who prefer their own brand.
SCLR: And can such Notes be listed?
MS: Notes can be listed on a reputable Stock Exchange, quite common here in Vienna, but other also exchanges offer that service.
SCLR: And what about the distribution framework?
AL: Notes have a special sales regime. In the EU Notes worth above €125,000 can be sold relatively freely. In Switzerland Notes, provided that they are structured carefully, do not qualify as collective investments schemes and can be distributed under different rules.
SCLR: Many market participants are currently considering alternative, innovative settlement solutions outside the traditional clearing systems. Could you tell us about that?
AL: A very innovative add-on is the option to “tokenise” the Note and prepare for future alternative settlement options.
SCLR: And is there a tax consideration that drives clients to consider securitisations?
MS: Generally the purpose of a securitisation vehicle is to be tax neutral. However, in a wealth management context, securitisation may allow for tax-efficient asset transfers while still maintaining the control or income streams over them or the efficient split of assets between different persons.
SCLR: Where are securitisation vehicles located?
AL: The choice of location is key as clients will depend on a suitable service provider infrastructure and tax regime. Offshore jurisdictions such Cayman Island or Channel Island (Guernsey in particular) are common. But recently onshore jurisdictions such as Liechtenstein or Malta have gained more and more popularity. The best choice from our point of view is currently Luxembourg as it offers an excellent reputation, service providers and a solid legal and tax framework within the EU.
MS: At the end the choice of jurisdiction is also driven by the investor’s location. An investor in Asia may choose different jurisdictions than a European one. At the end it is a question of the assets to be securitised and the individual goal of an investor.
SCLR: Are there other key factors to consider?
AL: The key question from our point of view is to carefully analyse the requirements and goals that need to be achieved. Securitised assets and the reason why a securitisation is chosen are very diverse. A one-fits-all approach like some providers claim will not deliver the optimal result. In some cases securitisations may not even be the right format. A private fund format or a holding company may be more suitable in some instances.
MS: I would add that securitisation is not a standard product. It is a very tailor-made setup that requires careful consideration and experience. Depending on the goal and target market, the choice of jurisdictions is key too. Not all jurisdictions offer the same benefits. This is due to the fact that each asset is different as well as the client’s goals. We see providers in the market that claim “individual” solutions that however always use structure and set of documents. We at Lindemann Law do not believe this can offer the optimal solution for the goal set.
AL: We also believe that risks and suitability of underlying assets need to be carefully benchmarked versus the target investors. A securitisation can and is often misused to sell assets to investors for whom such assets are not suitable. By no means should securitisation be used to “retailise” assets that are not suited for retail investors.
SCLR: Thanks a lot for the interview. We will pass your contacts to our readers to get in touch if they want to find out more.