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KARACHI, Nov 15: The State Bank has allowed all the banks and development financial institutions (DFIs) to participate in securitization of assets through special purpose vehicles (SPV).
Securitization of assets refers to issuing securities against receivables and assets.
In a circular issued on Friday the SBP has laid out a set of guidelines for the banks and DFIs that they must follow if they want to play any role in asset securitization.
The guidelines say that the banks and DFIs participating in securitization deals shall ensure that:
(i) they do not own any share capital in SPV
(ii) the SPV and ABS (assets backed securities) issued by it do not carry the same or similar name as that of the bank/DFI.
(iii) all reasonable steps are taken to ensure that investors are informed in writing that their obligations to the SPV and investors in the ABS of the SPV are limited to the extent expressed in their written agreement with SPV.
(iv) all transactions between them and SPV are conducted at arms length and are market based.
The guidelines say that the financial institution playing the role of arranger or structuring agent shall ensure that:
(i) their legal advisers are satisfied that the terms of the asset securitization issue protect them from any liability to investors in the scheme or the vehicle.
(ii) any offering circular contains a highly visible, unequivocal statement that the banks/DFIs serving in this capacity, do not stand behind the issue or the vehicle.
(iii) a fee at least at market terms and conditions is charged for the services performed.
According to the guidelines the banks/DFIs playing the role of administrator/trustee/serving agent will be responsible for collection of the assigned/purchased receivables, defraying them to investors and taking appropriate enforcement action when necessary to ensure their payment. The banks/DFIs performing this role shall comply with the following guidelines:
(i) The bank/DFI should have clearly defined process flow and roles and responsibilities of personnel needed to carry out these activities.
(ii) there should be a written contract/agreement between the bank/DFI, originator and SPV specifying the services to be provided.
(iii) the written contract/agreement shall specifically state that the bank/DFI is under no obliga-tion to remit funds to the SPV or the investors in the ABS unless and until they are received.
(iv) the bank/DFIs shall ensure that any offering circular precisely mentions a highly visible, prominent and unequivocal statement that serving in this capacity, they do not stand behind the issue or the SPV.
(v) the bank/DFI shall place in record the written opinions from its legal advisers that the terms of agreement protect it from any liability to investors in the securitization transaction or the SPV.
(vi) the bank/DFI may receive a performance-related payment, or benefit from any surplus income generated, in addition to its base fee.
INVESTORS: The banks/DFIs acting as investors will have to comply with the following guidelines:
(i) the banks/DFIs holding asset backed securities (ABS) have risk exposure to these underlying ABS assets.
(ii) the banks/DFIs shall invest in only those ABS which are listed on the stock exchange and have a minimum credit rating of A or equivalent.
(iii) total exposure of a bank/DFI towards ABS issued by a SPV shall not exceed 5 per cent of its own paid-up capital or 15 per cent of the total value of the ABS issued by a SPV — whichever is less. Further, the aggregate exposure on account of ABS shall not exceed 20pc of the total paid-up capital of the bank/DF I.
(iv) for capital adequacy purposes, the banks holding ABS shall treat them at par with investment in TFCs.
(v) the banks/DFIs will not invest in ABS in cases where originator/the company setting up the SPV is defaulter of any financial institution.
ORIGINATOR: The banks/ DFIs under this role would act as supplier of the assets/ receivables that are securitized. In this respect they shall comply with the following guidelines:
(i) the banks/DFIs can securitize their assets relating to lease financing, mortgage financing and toll financing. Other assets may be securitized by banks with prior approval of the State Bank.
(ii) the securitizing bank/DFI shall ensure that there are no impediments that prevent the transfer of the assets or the rights in relation to such assets to an SPV.
(iii) the securitizing bank/DFI must have legal and accounting opinions on record to the effect that it has retained no liability for the loans so securitized.
(iv) the securitizing bank/DFI must ensure that it is not obliged to support any losses suffered by investors in the ABS issued by the SPV.
(v) the assets should be transferred at fair value. A fixed amount of consideration for the securitized assets must be received not later than the time of the transfer of the assets.
(vi) the securitizing bank/DFI shall have no obligation to purchase any securitized assets at any time.
(vii) the transfer of assets must comply with the true sale criteria.
UNDERWRITER: Banks/DFIs can underwrite the ABS issued by an SPV. However, its share should not exceed 5 per cent of its own paid-up capital or 15 per cent of total value of the ABS — whichever is less.
The guidelines say that banks/ DFIs are not allowed to extend any fund based facility (for instance temporary liquidity support) to the SPV or provide non-fund based facility (like credit enhancement support) to the ABS. However, in the following circumstances, banks/DFIs may allow fund based facility to the SPV or non-fund facility to the ABS:
(i) where the facilities are fully secured against the guarantee of an international first class bank rated at least A or equivalent.
(ii) where facilities are fully secured against cash or near cash collateral.
