Confusion reigns in spain over securitisation rules

A three-pronged law change passed at the back end of 2005 was meant to open up Spain's securitisation market but new issuance has not been forthcoming. Hardeep Dhillon reports on what's blocking the pipeline

Three pieces of legislation passed last year were intended to set the wheels in motion to promote further growth, innovation and new asset classes in the Spanish securitisation market. Ministerial Order EHA/3536/2005, passed in November 2005, governs future flow transactions; Royal Decree 1309/2005, introduced the same month, gives investment firms greater flexibility to buy synthetic products; and Law 23/2005, also introduced in November 2005, exempts non-residents from withholding tax if they hold bonds issued by Spanish vehicles.

Yet in the 11 months since, no deal, whether synthetic or future flow, has been launched in Spain, a surprise to many market participants. Spanish investment banks Banco Santander and Caja Madrid have issued synthetic securitisations on corporate and consumer loans but these deals were offshore.

The prevailing reason for the absence of a market is the uncertainty over the capital treatment of synthetic transactions, says Fernando Bautista, lawyer at Freshfields Bruckhaus Deringer in Madrid. "The banks are concerned that there have been no guidelines for them to follow and do not have a clear idea how deals will impact their capital, but the Bank of Spain is expected to publish something in the short term," he says.

Despite the lack of framework for capital relief, there is good news on the horizon, according to Carlos Echave, London-based director within the European Securitisation Forum (ESF). The ESF and the Bank of Spain held a meeting in July to discuss the capital relief issue after which the Bank of Spain revealed its intentions to implement the Basel II Capital Requirements Directive. Part of this directive contains specific rules on capital relief. "Once the capital relief issue has been resolved and rules are in place, then the market will open up," says Echave. "We expect the draft regulation by the end of this year and we will be actively commenting on it."

Juan Garcia, director in the European structured finance team at Fitch Ratings in Madrid, anticipates that more mainstream Spanish investors such as insurance companies will start exploring opportunities within synthetic products. After regulators have sorted out the documentation and auditing issues, he believes that in time, investors may move towards more sophisticated structures such as portfolio CDS or synthetic collateralised debt obligations to manage their credit portfolios.

The ESF has also been petitioning for a broadening of the number of players in the Spanish securitisation market to include insurance companies, who have become active players elsewhere in European securitisation, using the synthetic market for risk mitigation purposes.

The rights stuff

The market for securitising future credit rights is also in an embryonic state, but again market participants are positive regarding its potential. Fitch's Garcia notes that banks have traditionally dominated the Spanish structured finance landscape by securitising assets on their balance sheets, predominantly mortgage-backed securities. But with the passing of the ministerial order governing future flow transactions, the range of asset types will now increase.

The ESF has been in discussions with the Spanish regulators since last year, filing comment letters on the draft ministerial order with the Spanish treasury and the securities market regulator Comision Nacional del Mercado de Valores (CNMV). "The ESF provided input to the draft regulation to ensure that the set of definitions was as broad as possible and the final product overall satisfies the industry. It is now just a matter of putting things into practice," says the ESF's Echave.

Under the previous legislation, says Freshfields' Bautista, prior approval from the government was a prerequisite for the securitisation of all future credit rights, bar toll road receivables. Now, the neww ministerial order provides a list of future flow assets that can be securitised without approval (see box).

Like synthetic securitisation, market participants are surprised that no future flow transactions have been launched. Bautista believes that one reason could relate to political issues within the corporate community. "This type of financing is complex and corporates may be reluctant to do this. When you are dealing with receivables, the finance team needs to work with a commercial team, which may create some internal battles. This may force a trend to a more unified financial management and cash pool arrangement within Spanish firms," he says.

Fitch's Garcia adds that interest is strong as corporates are looking to access a new investor base. "It remains to be seen whether the economics of this type of financing make sense, as spreads in the Spanish corporate arena are already very low," he says.

Market participants believe that the cost of financing via competing products is also hampering the market. "In the current environment of low interest rates it is not cost-effective to set up such deals when syndicated loans are at competitive rates and an easier form of financing to arrange," suggests one Madrid-based lawyer, who asked not to be named.

Nonetheless, ESF's Echave is pragmatic about the market's development. "It takes time for a product and market to develop. As there are no regulatory issues hampering the market, it is a matter of appetite for the product and market participants are working to get deals done. We are looking to the future and broadening the range of different types of products on offer," he says.

There are other areas that still need to be tightened up, notes Echave. For instance, the fondo - a Spanish asset securitisation fund or special-purpose vehicle (SPV) - was initially created as a single transaction vehicle. "This is not cost effective and there is an additional requirement that all the assets pooled into the SPV have to be homogeneous. Those requirements were included in the 1998 legislation but these are now outdated," he says.

In light of this, the ESF proposed changes to the Royal Decree 926/1998, such as transforming the fondo into a multi-transaction vehicle, promoting risk diversification by removing the homogeneity requirement, allowing active management of the assets and removing the obligation that all bonds must carry a rating.

What's more, under the current legislation setting up a deal is time consuming as every fondo must be registered with the CNMV before launch. To tackle this issue the CNMV has created an expert group - similar to the Securitisation Standing Group of the FSA - which includes all the management companies and the ESF. "We are working together to improve communication between the regulators and the market; things are progressing well," says Echave.


Another issue that might need modification is insolvency legislation, the ley concursal. Echave says there is nothing particularly wrong with current legislation: the law was just not drafted with these transactions in mind. "It is a typical mismatch between what the laws initially governed and how the market has developed in reality. We proposed changes in a letter to the regulator last October and are currently discussing a whole new framework with them," he says.

Any change will be a lengthy process, however, as parliamentary approval is required. "Things are moving, but very slowly and legislation will take time to draft and then be commented upon," says Echave.

One problem with Spanish securitisation laws is that they are very disparate. "The regulations need fine-tuning and to be pulled together," says Echave. In addition to the 1998 Royal Decree, there is a law on mortgage market securitisation dating back to 1992, and separate laws for synthetics and concession agreements. "As the market develops, there is a natural need to update regulations and legal frameworks. This is especially so in Spain. The regulator is open to suggestions to improve the market and is looking at new regulations following our comments and their own concerns. We would expect to see a whole new framework in the near future," he says.

The fact that the regulators have been flexible in interpreting the rules in a manner that allows innovation is fillip for the market. This bodes well for the future and further expansion of the second largest securitisation market in Europe.

Future credit rights allowed without government approval

- Amounts due under a lease agreement

- Author rights

- Proceeds derived from the exploitation of a brand or trademark

- Proceeds of sale/supply of products with recurrent cashflows

- Patent, utility model, industrial property rights

- Income from future loans, creditors or other financing instruments

- Usufructuary rights (income from property held in trust)

Source: Ministerial Order EHA/3536/2005/Fitch.

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