Securitisations in Norway - regulatory bureaucracy or unexplored opportunities?

Setting up securitisation structures in Norway has previously been considered challenging because of a restrictive regulatory regime. However, amendments to the Financial Institutions Act (in Norwegian: Lov om finansieringsvirksomhet og finansinstitusjoner) which came into force 1 January last year now permit traditional securitisation structures in Norway. This new option has so far mainly been used only for a limited number of project financings, and has not extended to mortgages or consumer credit. International market players have also been noticeably absent. This may change as knowledge of the new regulatory regime spreads among potential investors.

Setting up securitisation structures in Norway has previously been considered challenging because of a restrictive regulatory regime. However, amendments to the Financial Institutions Act (in Norwegian: Lov om finansieringsvirksomhet og finansinstitusjoner) which came into force 1 January last year now permit traditional securitisation structures in Norway. This new option has so far mainly been used only for a limited number of project financings, and has not extended to mortgages or consumer credit. International market players have also been noticeably absent. This may change as knowledge of the new regulatory regime spreads among potential investors.

Securitisation structures
Although there is a huge variety of structures, 'securitisation' (in Norwegian: verdipapirisering) is usually defined as the process where a company (the originator) sells a pool of cashflows or claims against third parties, to a single purpose vehicle (SPV) which finances the purchase price by a bond issue offered to investors. The financing is secured on the assets purchased, but may also be supported by "credit enhancements" provided by the originator or organised through external agencies. Needless to say, a securitisation has little purpose unless there is a market for the debt securities issued by the SPV.

A securitisation can be used as a means to consolidate and separate cashflows from a single asset, such as an office building, an oil platform or a vessel, but this is more regularly referred to as 'structured finance'. Such a structure will usually fall outside Norwegian licence requirements, both for the originator and the SPV, The term securitisation is most frequently used for structures where a portfolio of identifiable receivables are assigned to the SPV, typically by banks, credit card providers or leasing companies. A Norwegian-based originator who provides financing services on a professional basis will be considered a financial institution. Financial institutions are supervised by the Norwegian Financial Services Authority (FSA) and are subject to i.a. extensive licence and capital adequacy requirements. The FSA has on several occasions previously stated that also offshore-based SPVs can be deemed to be carrying out such financing services if they acquire portfolios of Norwegian receivables.

Since one of the main purposes for an originator to transfer one of its cashflows to a third party will usually be to reduce its portfolio of claims or receivables, and thereby also its regulatory capital, the paramount question is obviously whether the regulatory requirements will extend to the SPV as purchaser of the receivables. In Norway the legislator has taken the stand that portfolios of receivables can be assigned to an SPV without subjecting it to regulatory requirements, provided that the SPV in all aspects is independent of the originating financial institution. If a true sale (actual transfer) to the SPV is not deemed to have taken place, the originator is in practice still obligated to maintain regulatory capital for the claims or receivables that were intended to be transferred to the SPV.

Legal requirements when securitising portfolios of Norwegian receivables
In brief the requirements for a financial institution securitising portfolios of receivables by transfer to a non-regulated SPV can be summarised as follows:

• The SPV must be a Norwegian public or private limited company, although the FSA on an individual basis can consent to SPVs incorporated as trusts or other legal entities.
• Securities issued by the SPV for the purpose of acquiring the assets from the originator must be in the form of bonds.
• The business purpose of the SPV (as set out in the Articles of Association) must be limited to the securitisation transaction, i.e. to acquire a portfolio of receivables, to finance the acquisition by an issue of bonds and to collect the receivables in the portfolio and make payments to the bondholders.
• The originator cannot take on any risk or responsibility for due repayment of the receivables assigned to the SPV or the SPV's ability to service its obligations towards the bondholders. Nor can the consideration for the assigned receivables be made subject to the receivables being actually collected. As a credit enhancement the originator can however offer financing or guarantees to the SPV, provided that this is duly reflected in the assignment agreement. Such financing or guarantees will need to be reflected in the balance sheet of the originator, and will accordingly increase its required regulatory capital.
• The originator cannot own bonds issued by the SPV unless this is part of normal market making in a regulated market place, and under no circumstance can it own more than 5% of the bonds.
• The originator cannot have ownership interests in the SPV, except where the ownership interests are attached to bonds acquired as set out immediately above.
• The originator cannot take part in the management of the SPV by appointing directors to the board or other corporate bodies. This doesn't prevent the SPV from outsourcing the management and collection of its portfolio of receivables to the originator, insofar as the originator doesn't also take on any financial responsibility in this regard.
• Under no circumstance can the originator receive dividends or other payments from the SPV or its owners in connection with repayment of the bond loan, capital reduction or dissolution of the SPV.
• The SPV and bonds issued by it cannot be marketed under a name that may be confused with the name or trademarks of the originator.
• The SPV may issue bonds more than once (typically in connection with subsequent acquisitions of portfolios), but not on a continuous basis, according to the act. Unfortunately, the legal text gives little guidance as to how often issues can take place. The FSA has been empowered to give further directives on this point, but still hasn't done so to date.
• Receivables assigned to the SPV can only be reassigned to the originator if the outstanding bond loan at the time is less than 10% of the total notional value of the bonds issued in the first bond issue.
• The reassignment must be on market terms and shall be notified to (as apposed to consented to by) the FSA in advance.
  

Notification requirements
Before a financial institution assigns a portfolio of claims or receivables to an unregulated SPV, notice must be given to the FSA by the originator. No consent from the FSA is however required for the securitisation.

As for the debtors, the originator must notify them individually of the assignment prior to it taking place, and must also provide them with certain other information. The debtors shall be allowed a reasonable period, which cannot be less than 3 weeks, to oppose to the assignment. If they don’t, their debt is automatically assigned to the SPV. Non-consumer debtors can also waive the right to such notice beforehand, e.g. in the loan agreement. In this regard it should be added that a notice to the debtors is a necessary and sufficient way of legally perfecting the assignment under Norwegian law.

Tax issues
Also from a taxation point of view is it important to ensure the assignment is structured as a true sale to avoid unexpected tax treatment, and a tax advisor should therefore be consulted regarding any ties between the originator and the SPV. The other aspects of securitisation don't give rise to particular tax concerns. Except for a 2.5% stamp duty for transfer of real property, there are no taxes on transfers of Norwegian assets. It should however be added that there are variable fees for registrations in the movable properties register, the land register, the ship registers etc. which may add up to substantial amounts for a portfolio of secured claims. For example, a registration (or re-registration) of pledges, factoring or leasing over cars is currently charged with NOK 1,450 per car.

Required documentation
To carry out the securitisation the parties will typically need funding documentation for the bond issue, a transfer agreement between the SPV and the originator for the sale of the receivables, an administration agreement between the SPV and the originator for collection of receivables and administration of the SPV's cash receipts and payments, any credit enhancement documents, e.g. guarantee of part of the receivables or an insurance and finally any security documents creating security over the SPV's interest in the receivables.

Written by: Lars Gunnar Aas, 26.08.2005


For further information please contact:

Oslo
Lars Gunnar Aas, tel: +47 22 82 76 76 , e-mail: lga@wr.no

Bergen
Stein Pettersen, tel: +47 55 21 52 00, e-mail: spe@wr.no 

Singapore
Stephen Fordham, tel: +65 6438 4498, e-mail: swf@wr.com.sg


Please note that this article is not intended as legal advice, and should not be relied on as such. Advice should be obtained for specific circumstances.