{"id":10079,"date":"2022-07-04T16:46:55","date_gmt":"2022-07-04T16:46:55","guid":{"rendered":"http:\/\/legalblog.ie\/structured-finance\/"},"modified":"2024-03-03T08:51:00","modified_gmt":"2024-03-03T08:51:00","slug":"structured-finance","status":"publish","type":"post","link":"https:\/\/legalblog.ie\/structured-finance\/","title":{"rendered":"Structured Finance"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_63 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/legalblog.ie\/structured-finance\/#Structured_Finance\" title=\"Structured Finance\">Structured Finance<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/legalblog.ie\/structured-finance\/#Securitisation\" title=\"Securitisation\">Securitisation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/legalblog.ie\/structured-finance\/#S11o_Companies\" title=\"S.11o Companies\">S.11o Companies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/legalblog.ie\/structured-finance\/#SPV_Structure\" title=\"SPV Structure\">SPV Structure<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/legalblog.ie\/structured-finance\/#Theory_of_Securitisation\" title=\"Theory of Securitisation\">Theory of Securitisation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/legalblog.ie\/structured-finance\/#Securitised_Assets\" title=\"Securitised Assets\">Securitised Assets<\/a><\/li><\/ul><\/nav><\/div>\n<h3><span class=\"ez-toc-section\" id=\"Structured_Finance\"><\/span>Structured Finance<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Structured financing refers to various typical methods of raising money, in particular, standard loans, debentures, debt or equity. Some structures are based on exploiting taxation laws or tax differences between States so as to create deductions that might not otherwise be available or convert non-tax deductible expenses in the tax-deductible expenses or taxable income into non-taxable income.<\/p>\n<p>Structured finance has developed with the greater integration of financial markets and increasing complexity. Structured finance embraces a wide range of measures and techniques.\u00a0 It may include public, private finance, complex syndicated loans.\u00a0 It may involve the use of derivatives.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Securitisation\"><\/span>Securitisation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Securitisation involves the packaging of pools of loans and other receivables into securities.\u00a0 There may be an element of credit enhancement.\u00a0 The securities are then repackaged and sold to investors.<\/p>\n<p>Securitisation was criticised as a factor which aggravated the financial crisis.\u00a0 It was claimed to be complex and opaque.<\/p>\n<p>Although promoted on the basis of spreading the risk, its effect was to diffuse certain types of risks which were not readily apparent through the international financial system most notoriously by packaging very low quality subprime mortgages and distributing them through the financial system, causing widespread disruption at the outset of the financial crisis.\u00a0 The presence or suspected presence of such assets on the balance sheet of financial institutions was a significant factor in the drawing up of the interbank market in autumn 2008.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"S11o_Companies\"><\/span>S.11o Companies<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Section 110 of the Taxes Consolidation Act provides for a tax status, which allows enhanced deductibility of expenses in financial transactions.\u00a0 This status can be an efficient mechanism for securitisation.<\/p>\n<p>Special purpose vehicles are usually established by private companies. \u00a0They may be established as public companies if they offer securities to the public. The company may be an entity, to which assets are transferred, including for example, credit receivables such as residential mortgage loans, commercial loans, credit card receivables, car loans etc.<\/p>\n<p>The assets are originated by the original financial institution or public body e.g. a bank, governmental institution, insurance company etc.(the originator).\u00a0 They typically comprise a large class of the same type of loan receivables.\u00a0 Prior to the financial crisis, it was thought that statistical trends could show the likelihood of future performance and defaults.\u00a0 This was used as a basis of modelling the value of the receivables within the SPV.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"SPV_Structure\"><\/span>SPV Structure<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The SPV finances itself by issuing securities i.e. shares, notes, equities into the international capital market.\u00a0 Securities may range from short-term debt of one to two years, to bonds and other forms of longer term debt security.<\/p>\n<p>Legal title to the loans are not generally transferred to the SPVs, and they are usually maintained by the originator on its books.\u00a0 Accordingly, as regards the customer, the loans and mortgages etc. appear to be owned by it.<\/p>\n<p>A \u00a0challenge in the High Court to the ability of the originator to collect loans has been rejected on the basis that legal title to the loans, mortgages etc. were retained by the originator.\u00a0 The fact that the originator disposes of its beneficial interest in the loans by way of securitisation is irrelevant for this purpose.<\/p>\n<p>Generally, the originator services the loans on behalf of the SPV and uses the proceeds to pay the principal and interest on the notes and other securities and borrowings of the SPV.<\/p>\n<p>In order to improve the risk profile there may be so called credit enhancements.\u00a0 This improves the credit profile of the underlying assets.\u00a0 It may be in the form of a guarantee, bond or over collateralisation.<\/p>\n<p>The SPV may also enter facilities to ensure that it has sufficient liquidity to pay principal and interest when due.\u00a0 The loan notes are secured on the underlying receivables by way of a fixed and floating charge for the benefit of the note holder.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Theory_of_Securitisation\"><\/span>Theory of Securitisation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The effect of securitisation is to repackage credit into securities (interests in a corporate entity).\u00a0 This allows it to be transmitted through the financial systems.\u00a0 It frees up lenders to make further lending as they have effectively sold their loans and receivables.<\/p>\n<p>It was assumed that as securitisation was based on the underlying asset pool, perhaps and commonly enhanced, it may have a higher credit rating.\u00a0 It emerged however in the financial crisis that the effect of defaults in the underlying loan pool was far more than marginal and had a knock-on effect, collapsing the value of many such funds and securities entirely.<\/p>\n<p>The supposed value of the higher credit rating was that originators were able to acquire and sell off loans with higher credit ratings than the originator itself, who might be undertaking a wider range of activities. The originator was enabled to issue fresh loans with the funds received from the proceeds of securitisation. \u00a0It also allowed the originators to borrow at cheaper rates than they would otherwise have been able to do so on the basis of the perceived asset strength of the pool.<\/p>\n<p>Securitisation enabled the originators to improve its balance sheet by conversion of its loan portfolio into cash which in turn enabled them to expand its lending by improvement of its debt-equity ratio, while maintaining profitability and the customer relationship. The originator typically plays the role of administrator and obtains fee income.<\/p>\n<p>The effect of securitisation is to provide intermediation between the lender\u2019s own obligations, which are typically short, either by way of deposits, short-term bonds, other interbank loans or short-term lending and its assets which were in the nature of longer-term credit, perhaps extending over 10 to 20 years (albeit that statistically most would be redeemed within 10 years). Securitisation in effect allowed lenders to tap international capital markets.<\/p>\n<p>From the investor\u2019s perspective, it was thought in principle that securities could be structured in a way so as to lower risk. Provision was made for tiered rights, the theory being that the higher rate obligations would have very low risk.\u00a0 In practice, when the financial crisis emerged, there was much greater contagion between the tiers than had been anticipated.<\/p>\n<p>Securitisation allows for creation of securities which are tailored to requirements of investors.\u00a0 They may range from securities that are relatively high risk or low risk.\u00a0 It allows investors to be exposed to the credit market.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Securitised_Assets\"><\/span>Securitised Assets<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>A wide range of assets have been securitised.\u00a0 A range of securitisation has been undertaken by financial institutions and large-scale commodities and industrial entities.\u00a0 Residential and commercial mortgage-backed securities involve portfolios of loan receivables.\u00a0 The receivables are transferred to the SPV, and the notes are collateralised against the underlying real estate mortgages.<\/p>\n<p>Asset backed securities comprise revenue streams from particular types of loan, for example, car loans, credit card loans.\u00a0 Commercial asset-backed securities involve packages of commercial loans.\u00a0 Collateralised debt obligations involve the issue of tiered capital.\u00a0 Capital is issued which has different tranches or rights, ranging from same senior, mezzanine to subordinated notes.<\/p>\n<p>The most senior notes were assumed to have the minimum risk, with the subordinated junior notes having the greater risk.\u00a0 Accordingly, the lower risk tranches would have a lower interest rate corresponding with the lower risk, while the higher risk would carry potentially greater return.<\/p>\n<!--themify_builder_content-->\n<div id=\"themify_builder_content-10079\" data-postid=\"10079\" class=\"themify_builder_content themify_builder_content-10079 themify_builder tf_clear\">\n    <\/div>\n<!--\/themify_builder_content-->\n","protected":false},"excerpt":{"rendered":"<p>Structured Finance Structured financing refers to various typical methods of raising money, in particular, standard loans, debentures, debt or equity. Some structures are based on exploiting taxation laws or tax differences between States so as to create deductions that might not otherwise be available or convert non-tax deductible expenses in the tax-deductible expenses or taxable [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[133],"tags":[],"_links":{"self":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/10079"}],"collection":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/comments?post=10079"}],"version-history":[{"count":3,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/10079\/revisions"}],"predecessor-version":[{"id":32572,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/10079\/revisions\/32572"}],"wp:attachment":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/media?parent=10079"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/categories?post=10079"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/tags?post=10079"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}