United Kingdom Securitization Audit Report

The procedure of securitisation is a company’s financial assets being amassed into a collection that is allotted to investors. The said investors acquire interest on these securities.

This process intensifies liquidity in the market, a useful tool. If a company has already supplied a large number of loans to its customers and wants to further add to the number, then the practice of securitization can come to its rescue.

The securitisation market in England and wales remains one of the biggest and most evolved markets in Europe. As at the end of H1 2019, sources evaluatedthe UK to be “the most operational jurisdiction for securitisation in Europe displaying an approximated EUR20.6 billion of EUR93.1 billion total new asset-backedsecurities (ABS) allocation in Europe over the first six months of the year”. The UK also has till now, “the biggest number ofexcellentsecuritised product with about EUR324 billion, representing about 26% of all European outstanding securitised product”.

The securitisation market in London is one of the largest in Europe but still, the UK and European issuance in 2019 declined – when compared both to recent (post-crisis) years as well as historic (pre-crisis) levels. In thenine months to the end of 2019 for example, it has been approximated that EUR133.6 billion of the securitised product was issued in Europe, the least over the first nine months of a year since 2013 (EUR124.4 billion) and an approximate 26% decrease compared to the same nine-month time-frame in 2018.

The drop in issuance of securitised product in 2019 can partially be blamed on the establishment by the EU jurisdiction of the new securitisation framework. This took effect from 1 January 2019 and introduced market participantsto transacting under the new authorities.In the UK particularly, uncertainty in the political environment and Brexit have also weighed on market sentiment for assets with a UK nexus (such as UK-based real estate) which has also had an effect on issuance levels. In addition, macro-economic factors have also affected levels of securitised issuance in 2019.

Against this scene,securitised issuances in the public market in 2019 resumed focusing on subsisting and well-established structures and asset classes, predominantly residential mortgage-backed securities and pan-European CLOs. Auto-securitisations, credit card securitisations, CMBS transactions and consumer finance loans have also seen considerable issuances. This practicerestored the securitisation system

English law has no legal clarity of securitisation per se. When examining the applicationof risk detainment  rules, the key legal meaning of securitisation is a transaction or plan of action, by which  the credit risk correlated with a subjection or pool of subjection  is tranched, having both of the following characteristics:

  • payments in the transaction or schemearedependingon the performance of the exposure or pool of exposures;
  • the subordination of tranches determines the placement of losses whilst  the continuing life of the transaction or scheme; and
  • the transaction or scheme does not make exposures which have all of the characteristics listed in article 147(8) of Regulation (EU) No. 575/2013 (CRR) (this provision carves out transactions such as project finance, asset finance or real estate finance transactions that involve limited recourse lending to special purpose vehicles (SPVs), but that create direct exposures to underlying assets that are not themselves debt obligations).

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The Securitisation Regulation forbids (with very limited exceptions) securitisations (that are; securitisations of exposures that are securitisation themselves ). Other than that, there is no legal limitation on the assets that can be securitised in the UK.However,securitisations will only be able to obtain the ‘simple, transparent and standardised’ label in good respect of certain kinds of underlying assets. Nonetheless, mostly only assets that have anexplained or sorted and established cash flow are securitised. Examples of assets that have been securitised in the UK include:

  • residential mortgage loans;
  • leases and rental receivables;
  • credit card receivables;
  • consumer loans;
  • auto loans;
  • corporate loans;
  • trade receivables; and
  • public utility revenues.

English securitisation SPVs mostly givesecurity as mortgages, charges or tasksby way of security. Charges can be predetermined or temporary in nature. A security interest is temporary if it openly states that it is floating, and is most likely to be continued to be floating if it grants permission to the debtor t get rid of assets subject to it without considering to obtain the agreement of the secured creditor. Yet, a floating charge will be behind a fixed charge in priority, so most of the securitisations will venture to take as much notionally fixed security (including assignments by way of security over lawful rights and invoices ) as possible and also a qualifying floating charge.

Such security will usually be granted to a security trustee toclench for the benefit of the securitisation investors and will be juridical only by such security trustee. While the securitisation investors will not have rights to actually enforce the security, they generally have the ability to direct (if anadequate amount of them provide the essential directions) the security trustee to enforce such security.

It has been reported that the UK is making new policies of securitisation due to the global pandemic of coronavirus occurrence.
In short, there is a which proposal includes individual loans (not more than  £200m) by UK lenders being a part in the scheme being sold to one or more securitisation special purpose vehicles (SPVs). The relevant SPV could fund the purchase price for the loans by giving debt as securities, the senior tranche of which would possiblybe guaranteed by the government, with the lenders retaining the smaller risk in the structure either by keeping a junior amount of the securitised loans or subscribing for the junior tranche of securities issued by the relevant SPV. We understand that the government expects, at least, that loans to firms with a turnover more than £500m that are not applicable for the COVID Corporate Financing Facility (CCFF) to be included, but that it is suggesting opinion as to whether that threshold should be reduced to achieve sufficient diversification and to mitigate concentration risk.

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