How can specialised lending schemes used to finance physical assets (such as e.g. ships, aircrafts, projects or real estate) and involving direct payment obliga-tions of different seniority owed by an SPV, be distinguished from securitisations?
The definition of a “securitisation” in Art. 4(61) CRR, if taken in isolation seems to catch not only transactions which are viewed by the market as securitisations but possibly also specialised lending transactions involving payment obligations of different seniority owed by an SPV. Pursuant to Art. 242(10) and (11) of the CRR any securitisation is either a “tradi-tional securitisation” or a “synthetic securitisation”. Given that both of these types of securitisation involve the transfer of risk, which is typically not the case in spe-cialised lending transactions, it seems to be clear that the latter cannot be classi-fied as “securitisations” within the meaning of the CRR. That interpretation is sup-ported by Recital 50 of the CRR pursuant to which “an exposure that creates a di-rect payment obligation for a transaction or scheme used to finance or operate physical assets should not be considered an exposure to a securitisation, even if the transaction or scheme has payment obligations of different seniority”. In light of the far-reaching consequences which may be associated with the potential classification of specialised lending transactions as “securitisations”, we would be grateful for EBA confirming that result. (1) Industry and infrastructure projects, commercial real estate, aircrafts, ships and other types of assets (collectively, Object Assets) are often financed through specialised lending structures which potentially meet certain criteria of the securitisation definition set forth in Art. 4(61) of the CRR. Typically, these structures involve the use of an Special Purpose Company (SPC) which, unlike the SSPE according to Art. 4 (66) CRR used in a securitisation, will enter into financing agreements (traditionally loans but also bonds) resulting in payment obligations of the SPC towards the financial institutions in order to achieve the financing needs not covered by the equity contribution of the shareholders of the SPC. Theses payment obligations might be tranched, i.e. based on the type of loan or structured on a rule of subordination which (even before an event of default occurs) determines the distribution of payments or losses. The funds provided through the financing agreements are used (usually directly by the SPC but also indirectly by using further borrower companies holding Object Assets) for financing a specific Object Asset, to repaying existing debt or, for general corporate purposes in relation to the specified purposes of the SPC. The SPC will meet its obligations under the financing agreements using the revenues and profits it generates as a corporate entity from the operations of the Object Assets. In simplified form, and without showing any further borrowing companies which may be involved, such a structure could look as shown in Annex (No. 1). Specialised Lending Structure (no transfer of credit risk/risk remains with initial fund providers) (2) The definition of a “securitisation” in Art 4(61) of the CRR, if taken in isola-tion, prima facie might be read to catch many of the specialised lending structures described in the forgoing, as (i) the relevant debt obligations are tranched, (ii) the payments in the transaction are dependent upon the performance of the exposure or pool of exposures and (iii) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction. They do, however, not fall within any one of the two categories of securitisation structures which are recognised by the CRR, as they are neither “traditional securitisations” (as defined in Art. 242(10) of the CRR) nor “synthetic securitisations” (as defined in Art. 242(11) of the CRR). Whereas in the former credit risk is transferred (away from an originator of that risk) by a “true sale”, in the latter the risk transfer is achieved by the use of credit derivatives or guarantees. Hence, as opposed to traditional or synthetic securitisations the specialised lend-ing transactions do typically not involve the transfer of credit risk which is essential for any type of securitisation. Accordingly, they cannot be classified as securitisations. That view is supported by Recital 50 of the CRR pursuant to which “an exposure that creates a direct payment obligation for a transaction or scheme used to finance or operate physical assets should not be considered an exposure to a securitisation, even if the transaction or scheme has payment obligations of different seniority”. Securitisation Structure (original credit risk transferred form initial providers to SSPE and then tranched for investors) (please have a look at Annex (No. 2)) The fact that transfer of credit risk should be the distinguishing feature between securitisation on the one hand and specialised lending on the other has already been recognised by CEBS in its “Guidelines on the implementation, validation and assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches” (of 4 April 2006, Annex III, section (4)). A summary of structural differences between securitisations and specialized lending exposures can be found in the Annex (No. 3). (3) Rating systems for specialised lending transactions have obtained approval from the supervisory authority for being treated as corporate exposures. This reflects the current risk management practices employed in banks. Institutions have developed tailor-made highly sophisticated rating systems for the diverse kinds of specialised lending exposures. By obtaining supervisory approval these rating systems have demonstrated that they can produce statistically proven accurate estimates for probabilities of default and losses given default, which are used as a basis for the calculation of capital requirements for those transactions. To treat specialised lending structures as “securitisations” for regulatory purposes, and accordingly, make them subject to the regime of capital requirements set forth in Chapter 5 of the CRR is not justified from a risk perspective. As specialised lending transactions are typically not externally rated, institutions would be forced to use the Supervisory Formula Approach (SFA). This approach has been devel-oped in order to evaluate portfolios rather than single loans. Its appropriateness for the calculation of capital requirements for the latter has never been validated. Furthermore, calculating capital requirements on the basis of the SFA would lead to abrupt variations of capital requirements that cannot be justified in terms of variations in the underlying risk of the transactions. It is therefore not suitable for the calculation of capital requirements for specialised lending exposures. Rather, adequate treatment can be achieved by treating them as corporate exposures. Furthermore, specialised lending transactions are characterised by a close contact between the bank and its customer, i.e. the sponsor or owner of the Object Assets. The bank, before it grants financing, would typically conduct an extensive due diligence of all relevant aspects of the Object Assets. By contrast, the investor in the context of an ABS transaction invests in a pool of assets that have been originated by a third party and as to which information will only be disclosed after the origination is completed. In addition, the lenders under a specialised lending transaction may typically exercise considerable control of the financed Object Assets and on the respective cash flows, and accordingly, are in a position to influence the risks associated with the financed object either directly or indirectly. In distressed situations the lender may negotiate with the sponsor a restructuring of the debt or a deferral of payment. Under a securitisation transaction these monitoring and control rights are typically much more limited and regularly lead to losses under the payment water fall of the securitisation. (4) If the specialised lending transactions described above, were considered to meet the definition of “securitisation”, they would trigger the application of Art. 405 of the CRR and accordingly, an institution could only invest in these structures if the originator, sponsor or original lender had disclosed to the institution that it will retain on an ongoing basis a material net economic interest, subject to the more detailed requirements of Art. 405 of the CRR. However, in specialised lending structures, as described above there is no entity that fits the definition of originator, sponsor or original lender. In particular, there is no transfer of credit risk away from an originator, who then, in turn, could retain a certain portion of that risk. Without a transfer of risk in the first place, retention of (transferred) risk cannot be a meaningful concept. If no credit risk is transferred, the underlying purpose of Art 405, the re-alignment of the interests of those who originate credit risk and those who invest in that credit risk is not at stake. This may be further demonstrated by looking at the above diagram. The only party that conceivably could act as “originator” is the SPV. If the SPV were to apply the requirements of Art. 405 subsection 1. (a) or (d) (“vertical” or “horizontal slicing”) it would be holding Debt Obligations against itself, i.e., obligations of which is would be the creditor and the borrower at the same time (leading to a set-off). The retention alternatives of Art. 405 subsection 1. (b), (c) or (e) on the other hand, relating to the asset side of the SPV, would not apply to the facts at hand, as there is no “securitised exposure”. Even if there were one, in light of the fact that the SPV is already holding 100% of the relevant assets, it would be difficult to apply the 5% retention requirement in any meaningful way. If one were to conclude that the specialised lending structures were to fall within the definition of securitisation and, accordingly, were to trigger the application of Art. 405 (which would be the inevitable consequence), it would be unclear how that provision could be applied. For a bank wishing to invest in these structures, it would be unclear by whom and how the required disclosure in relation to the retention would have to be made. As a practicable consequence, banks could no longer reliably invest in specialised lending structures. This may put at risk the bank financing for a vital part of the real economy. Last but not least, treating specialised lending transactions as securitisations would invoke difficulties for reporting the detailed information on securitisations in COREP (e.g.: code used for the legal registration of the securitisation or, if not available, the name by which the securitisation is known in the market (see column 020), securitisation type: traditional /synthetic (see column 040) or retention information (see column 080-100).
Please note that as part of adjustments to the Single Rulebook Q&A process, agreed by the EBA and the European Commission, it has been decided to reject outstanding questions submitted before 1 January 2020, when the Q&A process was updated as part of the last ESAs Review. In particular, the question that you have submitted has now regrettably been rejected and will not be addressed.
If you believe your question would still benefit from clarification, you are invited to resubmit your question, adapting it to reflect any legislative, regulatory or other relevant developments that may have occurred since the initial date of submission. The EBA will aim to address resubmitted questions as a matter of priority. When considering to resubmit, you are kindly requested to observe the updated admissibility criteria agreed in the context of the adjustment of the Q&A process, available in the Additional background and guidance for asking questions. We hope for your understanding.
For further information please refer to the press release and the updated Q&A page.