Legal framework for secutitisations in Norway
In 2004, the legal framework for securitisations in Norway came into effect. To date, no transaction has been carried out based on this framework. However, in 2007 the author of this article advised on a transaction based on the legislation. The transaction was meant to launch in August 2007, but is currently on hold due to the credit crisis that emerged over the summer of 2007. When this transaction eventually launches, it will most probably be the first to utilise the Norwegian securitisation legislation. One of the main advantages of the Norwegian securitisation legislation is that it allows assets to be transferred off the balance sheet of the transferor in a very simple and cost efficient manner, and there is little uncertainty as to what constitutes a true sale.
General
Historically, Norwegian law has inhibited the use of special purpose vehicles (“SPV”) for the purpose of securitising loan portfolios (or single loans) relating to Norwegian debtors, as the special purpose vehicle would be deemed a financial institution under the Norwegian Financial Institutions Act of 1988 (the “Act”), and as such would need to be licensed and supervised by the Financial Supervisory Authority of Norway (the “FSA”) and would be subject to capital adequacy requirements.
Amendments made to the Act in January 2004 put in place a new regulatory framework allowing the establishment of traditional securitisation structures (the “Amendments”).
The Amendments allow removal of the loans in the portfolio from the balance sheet of the transferring financial institution, making the institution eligible for full relief in respect of capital adequacy requirements. However, in order to qualify for full capital adequacy relief pursuant to the Amendments, the sale of the institution’s loan portfolio must constitute a complete and irrevocable transfer of the legal and economic risk pertaining to the loans in question (the true sale requirement).
The Amendments apply to financial institutions only, as defined in the Act, i.e. banks, insurance companies and credit institutions.
The Amendments only relate to cash transactions (“physical securitisation”). They do not apply to synthetic securitisation.
Below, the central characteristics of the Amendments will be outlined.
The special purpose vehicle (SPV)
The objective of the SPV must be defined in its organisational documents as acquiring the loan portfolio(s), financing such portfolio(s) by the issuance of debt, and repaying such instruments.
The financial institution selling its portfolio of loans may, for market making purposes, own up to 5% of the debt issued by the SPV.
The financial institution selling the loan portfolio cannot hold ownership interests in the SPV, except where the articles
of association of the SPV link such ownership to individual bonds and the bonds have been acquired as part of ordinary market
making activities in such bonds.
The transferring financial institution cannot be represented on the board of directors of the SPV or in its management.
As a general rule, the SPV must be a Norwegian limited liability company (AS/ASA). However, on application, FSA is empowered to grant an exemption from this requirement and, for example, to allow the SPV to be a foreign trust or some other foreign/domestic legal entity. In determining whether or not to grant an exemption, BISC considers whether the “true sale” has occurred, and whether the SPV has been organised in such a way as to make this determination easy.
The relationship between the transferring financial institution and the SPV
The financial institution transferring the loan portfolio may act as credit enhancer in respect of the loan portfolio. The Amendments make specific mention of making loans and issuing guarantees as a means to enhance the credit of the loan portfolio. However, such credit enhancement arrangement must be explicitly set forth in the agreement under which the loan portfolio is transferred. Credit enhancement provided by the financial institution will be deducted from its tier one capital.
The administration and servicing of the securitised loan portfolio must be carried out by a financial institution; for example, the financial institution transferring the loan portfolio or an unrelated financial institution. The SPV may not use a name or trademark which is likely to be confused with the name or trademark of the financial institution transferring the loan portfolio.
The SPV is not allowed to transfer any surplus or profits from its operations back to the transferring financial institution (i.e. so-called margin account arrangements are not permitted).
Loan portfolio buy-back
If less than 10% of the original principal of the debt issuance remains outstanding, the transferring financial institution is allowed to buy back the all of the remaining outstanding debt issued by the SPV.
Multiple debt issuances by the SPV
The SPV may initiate and carry out multiple debt issuances, provided that it is not deemed to be issuing debt on a “continuous basis”, as defined in the consolidated EU bank directive (2000/12/EF). This requirement exists in order to avoid having the SPV classified as a credit institution under EU 2000/12/EF, which would subject the SPV to capital adequacy requirements and other regulations.
Notification to BISC
The SPV is not required to obtain a license to operate from FSA (or any other public institution) and it is not subject to supervision by FSA, including any capital adequacy requirements.
However, prior to carrying out the securitisation process, a notification must be submitted to FSA which must include the by-laws of the SPV, a list of the owners of the SPV (or in the event it is a trust, the names of its founders and a description of how the trust is administered), the service agreement of the transferred loan portfolio, and any other agreements between the transferring financial institution and the SPV.
The debtors under the loans
Significantly, the debtors under the transferred loans must be notified of the contemplated transfer. If these debtors do not wish their loan to be transferred, they must notify the transferring financial institution of their opinion within a reasonable deadline (not less than 3 weeks). A failure to act on the part of the debtor will make the financial institution legally entitled to transfer the loan to the SPV.
Non-consumer debtors may in advance waive their right to object to the transfer of their loan by the transferring financial institution.
Establishing security for lending
A security interest is established by an agreement to that effect and perfected through, depending on the type of asset, different
steps which prefers and perfects the security interest.
The priority of a security interest is ranked according to the date of which it was established. The priority of perfected
security interests are protected against displacement by a subsequent bona fide acquirer of rights in the same asset or a
subsequent security interests created by distress and must be respected by the bankrupt estate of the grantor.
There is no registration tax in relation to the establishment or perfection of a security interest, nor is there any upper
limit on the secured amount under any security interest.
Payments to the guarantee funds
In order to secure their deposits, Norwegian banks are required to make payments to “guarantee funds” in amounts required to provide capital adequacy. Because the securitisation process provides relief to the transferring financial institution of capital adequacy requirements related to the transferred loan portfolio, payments to the guarantee funds are reduced correspondingly.
Legal documentation
The documentation required in connection with a securitisation transaction pursuant to the Amendments includes, though is not limited to, the following:
A. organisational documents of the SPV;
B. transfer agreement between the SPV and the transferring financial institution;
C. loan servicing agreement;
D. credit enhancement agreement;
E. notification to BISC;
F. notification to the debtors;
G. agreement between trustee and the SPV;
H. agreements between debt holders and the SPV;
I. prospectus for the newly issued debt.
Synthetic securitisation by financial institutions
Historically, the lack of regulation has inhibited Norwegian institutions using synthetic securitisation techniques as a risk transferring instrument. First, it has been unclear what would be required in order for a credit derivative to effectively transfer credit risk from the balance sheet of an institution. Second, a credit derivative was previously not considered a financial instrument under Norwegian law, which in itself created certain difficulties.
However, Norway has now implemented into local law EU Directives 2006/48/EC and 2006/49/EC (Basel II). Thus, Norwegian institutions may now use credit derivatives in order to transfer risk for capital adequacy purposes, knowing that provided they meet the requirements set forth in said EU directives, the regulator will grant capital relief.
Tax, VAT and other duties
The transfer of a loan portfolio in a “true sale” is a taxable event in Norway and triggers a capital gains tax of 28% on profits from the sale (and a corresponding deduction in the event of a loss). There are no other taxes, duties or charges on the transfer of loan portfolios. Going forward, the SPV is taxed on income at the rate of 28% and administrative services provided to the SPV will probably be subject to Norwegian VAT. In the event the SPV is domiciled abroad, no Norwegian VAT will be levied on administrative services because they are deemed to be an export.