Securitisation: the Malta Solution - July 2021
Securitisation remains a popular course of action for many asset owners worldwide. This note provides an insight on a popular jurisdiction for securitisation structures.
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Our Malta team is well-versed in the establishment and administration of securitisation vehicles. If you would like to learn more about using Malta as the base for a securitisation structure, please contact Albert.
A Brief Recap: What is a securitisation?
Simply put, “securitization” is a process that takes an asset of some kind and turns it into a tradable security. It is usually a pool of assets which generate a relatively predictable cashflow, such as:
- Loans of various nature, home loans, car loans, student loans;
- Energy projects, more fashionably recently solar energy projects, who securitised the income generated from selling the energy to power companies;
- Legal claims portfolios of a similar nature;
- IP payments.
The Basic Securitisation Model
Assets are merged or pooled into one group and transferred to a special purpose vehicle. Tradeable securities based on these underlying assets are then sold to investors for a specified rate of return.
The main advantages of securitization are:
- The creation of liquidity in the marketplace for the assets being securitized – an obvious advantage to the originator;
- It allows the originator to remove the debts/receivables, and related risks, from its balance sheet, leading to an improvement of capital requirements applicable to the originator, as well as helping to raise the originator’s credit rating, thus allowing it to raise funds more cheaply than if the debts had remained on its balance sheet;
- These debts can be layered into different tranches with different risks, thus offering a range of attractive options to different categories of investors with different risk appetites;
- The possibility to create liquidity through securitization incentivizes lenders to continue to provide financing to borrowers (in the form of cheaper borrowing) and sustains this source of alternative financing.
Are Securitisation Structures Comparable in Various Jurisdictions?
Ireland and Luxembourg have been the historical jurisdictions among the most used for securitisation. Whilst Ireland doesn’t actually have a Securitisation law, but specific tax rules dealing with these types of structures, Luxembourg does have its Securitisation Law of 22 March 2004. The process to update this law recently began, with submission of the draft law No. 7825 on 21 May 2021 (the "Draft Law"). Contrary to the European Securitisation Regulation 2017/2402, the Draft Law remains an opt-in law, meaning a vehicle can choose to be subject to the benefits and obligations of the Luxembourg Securitisation Law.
In essence there aren’t major differences between the securitisation solutions of these two jurisdictions and other EU jurisdictions, like Malta.
However, compared to Luxembourg, which contemplates “compartments” having different assets/investors, Maltese legislation provides for a “cell” solution which is more legally robust when dealing with asset segregation and has specific legislation dealing with the “cell” concept.
Malta’s Securitisation Law
Malta has a dedicated Securitisation Act (“the Act”) creating a legal framework for domestic and cross-border securitisation transactions, to determine the applicability of existing legislation affecting securitisation and to lay down special rules for securitisation vehicles. The law has contributed to a steady growth in securitisation structures domiciled in Malta, increasing from 34 at the end of 2016 to 163 at the end of 2019.
The Act applies to securitisations or securitisation transactions where:
- the value of the securitisation transaction or of the financial instruments issued by the SV exceeds €1,000,000; or
- a specific securitisation transaction has been otherwise approved in writing by the Malta Financial Services Authority (“MFSA”).
The law permits three categories of securitisation:
- Asset securitisation
A fairly straightforward form of securitisation which involves a ‘true sale’ of a portfolio of securitisation assets (typically a portfolio of debts) by the originator to a securitisation vehicle, with the vehicle issuing financial instruments (typically in the form of debt instruments) to raise funds to pay for the purchase of the portfolio.
- Synthetic securitisation
Synthetic securitisation is intended to replicate much of the economic effect of a true sale securitisation through the use of derivatives, such as credit default swaps.
- Whole business securitizationRather than a transfer of risk from the originator to a securitisation vehicle this is a form of secured financing received by the originator. However, it uses many of the techniques of a securitisation involving a sale of a portfolio.