Contributed By Russell McVeagh
In New Zealand, financial assets must be the subject of a true sale by the originator to the relevant special-purpose entity (SPE) in order to insulate the SPE from the financial risk of the insolvency of the originator. If the transfer is not a true sale (and could be characterised as a secured loan), certain creditors of the originator may have recourse to the SPE’s assets such that the assets would form part of the originator’s insolvent estate.
In New Zealand, securitisations are usually structured using a trust as the SPE, which is intended to be bankruptcy remote from the originator. An independent trustee company will generally act as the trustee, holding the trust assets for a beneficiary (which may be a charitable entity). A trust manager will also be appointed to oversee the day-to-day operations of the trust. The trustee grants security over the trust assets to a security trustee for the benefit of secured creditors (the investors and other parties to the securitisation).
The programme documents include detailed provisions around the operation of the trust and the securitisation, and leave little or no discretion for any of the parties – in particular, the trustee. Where New Zealand securitisations are structured using a trust, a trustee may only exercise its powers in accordance with the trust documentation. The trust documentation will usually explicitly or implicitly exclude or modify the application of the Trust Act 2019, which regulates the operation of express trusts in New Zealand.
Company SPEs can also be used in the New Zealand market; however, these structures are less common.
There are a number of risks of some form of consolidation in insolvency proceedings of the originator, the most likely of which are set out below.
Statutory managers can be appointed under four statutes, depending on whether the originator is a licensed insurer, registered bank, an overseas person with an interest in sensitive assets or is otherwise a “corporation”. If a statutory manager is appointed to the originator, there is a risk that the assets of the SPE will be consolidated with the assets of the originator. For this to occur, the SPE must be a subsidiary or an “associated person” of the originator. The definition of an associated person varies depending on the relevant operative statute. Whether the SPE is an associated person of the originator is broadly a question of whether the originator exercises ownership or control over the SPE. It is not possible to assess or address this risk in the abstract – consideration of all the circumstances of the structure of the securitisation is required and a legal opinion from counsel is usually necessary.
In certain circumstances, a liquidator appointed to the originator could unwind the transfer of assets from the originator to the SPE or the granting of security by the SPE to the security trustee. The originator or SPE (as applicable) usually gives various solvency certifications upon the transfer of the assets to the SPE, or the granting of security (as applicable), to mitigate these risks.
There is also the risk that a liquidator appointed to the originator may seek a court order to “pool” the SPE’s assets together with the originator’s assets such that the total pool of assets is available to satisfy the claims of the originator’s creditors. This can occur if the SPE is “related” to the originator. This risk can be addressed by ensuring that the affairs of the originator and the SPE are operated in such a manner as to avoid the operation of the pooling provisions of the Companies Act 1993.
Where the SPE is established in respect of a registered bank’s covered bond programme, the analysis is simplified by the legislative framework noted in 4.2 General Disclosure Laws or Regulations, which means that, if properly structured, the risks of the SPE being caught by the statutory management and liquidation of the originator should not exist.
The two essential elements of a true sale are an absolute transfer of property (rather than a transfer by way of security) and the payment of a price. In determining whether a transaction is a true sale or is more properly characterised as creating a security interest, it is necessary to first consider the intention of the parties, and second to consider the substance of the transaction taken as a whole. A court will give effect to the intention of the parties unless it reaches the conclusion that the form of the transaction is a sham and the transaction is more properly characterised as the creation of security.
Ultimately, it is a factual matter as to whether a transaction is characterised as a true sale or a secured loan.
The transfer of financial assets for a securitisation is generally done via two possible methods:
Neither of these methods requires notice to the underlying obligors to be effective as a true sale.
Under an absolute assignment, the originator passes on to an SPE all its rights and remedies in relation to the receivables and the power to give a good discharge to the relevant obligor.
It is not necessary for notice to be provided to the relevant obligor before these rights, remedies and powers pass to the SPE. However, the passing of those rights, remedies and powers is subject to any equities in relation to the receivables that arise before the relevant obligor has actual notice of the assignment.
Notice to the relevant obligor is required to “perfect” the assignment and thereby prevent further equities arising that have priority over the SPE’s claim. In the case of certain underlying security (eg, a mortgage over land), additional steps are also required to perfect the assignment (such as registration of a transfer in respect of a mortgage over land). The originator usually grants a power of attorney to allow these perfection steps to take place upon certain perfection triggers occurring (as discussed further in 5.3 Principal Perfection Provisions).
If a transfer does not comply with the above requirements for a true sale, the SPE may face the risk that the receivables are recovered by an insolvency practitioner appointed to the originator (because of the bankruptcy remoteness risks discussed in 1.1 Insolvency Laws and 1.2 Special-Purpose Entities).
The Personal Property Securities Act 1999
In contrast, for a secured loan the secured party would take a security interest over the relevant receivables. This is a much simpler process under the Personal Property Securities Act 1999 (PPSA) than the true sale of a receivable and requires perfection, usually by registration of a financing statement on the Personal Property Securities Register or the taking “possession” of the relevant receivables. However, merely taking security over the receivables exposes the SPE to the bankruptcy risk of the originator (which is described above in 1.1 Insolvency Laws and 1.2 Special-Purpose Entities), and so is not used in securitisations in New Zealand.
The PPSA does, however, need to be considered when undertaking a securitisation in New Zealand. For example, the security granted by the SPE to the security trustee needs to be perfected (this is usually achieved via registration of a financing statement on the Personal Property Securities Register). In addition, transfers of accounts receivable, chattel paper and leases of greater than one year are deemed to be security interests under the PPSA. Accordingly, the perfection and priority regime of the PPSA needs careful consideration when structuring a securitisation. For example, when transferring chattel paper under a securitisation, the best form of perfection is the SPE taking possession of the underlying chattel paper in order to ensure it obtains the best priority against competing interests in the chattel paper.
There are no other means of constructing a bankruptcy-remote transaction that are commonly used in New Zealand.
A legal opinion would be obtained from counsel to support the true sale characterisation and bankruptcy remoteness of the transfer. The legal opinion may qualify the conclusions based on known facts and matters.
In a New Zealand context, financial assets are typically transferred directly from the originator to an SPE as the ultimate transferee (ie, the SPE is not an intermediate entity in the chain of transactions).
For an originator, the transfer of financial assets (other than operating leases) may give rise to tax where there is a disposal of the relevant financial asset.
If the financial asset is a trade receivable, in respect of which income has already been recognised, no further income should arise from the transfer of the trade receivable. If the financial asset is treated, effectively, as a debt instrument for the purposes of the financial arrangements rules contained in the Income Tax Act 2007, the transfer will be treated as a disposal for the agreed consideration. The net difference between the cost of the financial asset (eg, principal advanced) and the consideration for the financial arrangement will give rise to income where the consideration exceeds the cost (or, where the reverse is the case, will give rise to deductible expenditure).
The tax treatment of the transfer of operating leases is somewhat more complex, as the consideration for the transfer gives rise to income, typically with no offsetting costs basis, and therefore acceleration of the income for the originator.
The debt funding special purpose vehicle (DF SPV) regime in the Income Tax Act 2007 can be used to ensure that income acceleration (for both debt instruments referred to above and operating leases) does not arise. The DF SPV regime, in short, allows the originator to elect to treat the SPE as transparent for tax purposes, thereby attributing the SPE’s property, purposes, activities and arrangements to the originator. The effect is that no tax consequences attach to transactions occurring between the SPE and the originator. In order to use the DF SPV regime, the SPE must be consolidated with the originator for financial reporting purposes.
The originator is able to elect into the DF SPV regime under the Income Tax Act 2007 from the commencement of its securitisation arrangements. Alternately, it can elect into the regime from when it files its tax return for the relevant income year (and the election then has effect for that year).
SPEs are subject to income tax in relation to the income earned from those financial assets which are subject to securitisation. Typically, the SPE is debt funded in such a manner that its deductions offset substantially all of the income derived. The consequence is that generally no net income (or no material net income) arises for an SPE for New Zealand income tax purposes.
In relation to withholding taxes, where an SPE is non-resident and acquires financial assets which are interest bearing and obligors are New Zealand resident, non-resident withholding tax is applicable, for example, where the financial assets constitute residential backed mortgages. There is no practical manner in which the withholding tax can be dealt with. Consequently, for such securitisations the SPE is generally a resident entity for New Zealand income tax purposes to ensure that non-resident withholding tax is not applicable to interest flows which may arise from the financial assets transferred to the SPE. New Zealand does have a withholding tax for residents, but the SPE will typically be able to avail itself of an exemption for this tax.
New Zealand has no stamp duty or other transfer taxes which apply to the transfers of financial assets. Similarly, New Zealand goods and services tax (GST) generally does not apply to the transfer of financial assets as such a transfer is treated as an exempt supply for GST purposes.
No other material tax issues arise in connection with securitisations in New Zealand.
Legal opinions are obtained for securitisations and those legal opinions are generally focused on the tax neutrality of an SPE (ie, to ensure that it has no – or materially no – net income on an annual basis from the securitisation). That conclusion is typically reached in relation to securitisations in New Zealand.
The opinion is typically given subject to a range of qualifications, based on the circumstances of the particular structure of the securitisation.
Issues may arise in connection with the accounting rules that apply to securitisations in New Zealand. A common issue is whether it is possible for the originator to achieve off-balance sheet treatment. Accounting issues are dealt with by the originator’s accounting firm. In the case of registered banks and non-bank deposit takers in New Zealand, the Reserve Bank of New Zealand’s (RBNZ) rules also take accounting treatment into account in determining the impact of securitisations on a registered bank’s capital adequacy requirements. This is described in more detail in 4.6 Treatment of Securitisation in Financial Entities.
The primary legal issues arising in relation to New Zealand securitisations are addressed elsewhere in this chapter.
There are currently no securitisation-specific disclosure laws or regulations in New Zealand.
The primary legislation that regulates the New Zealand capital markets is the Financial Markets Conduct Act 2013 (FMC Act). The FMC Act applies to any offer of financial products in New Zealand regardless of where the resulting issue or transfer occurs or where the issuer is resident, incorporated or carries on business. The FMC Act sets out the disclosure requirements for offers of financial products, which includes the debt securities offered in a securitisation.
“Retail” and “Wholesale” Investors
For an offer of financial products to “retail investors” (a regulated offer), among other requirements, a product disclosure statement (PDS) must be prepared and certain information relating to the offer must be contained in a publicly available register entry for the offer.
Securitisations in New Zealand are not marketed to retail investors. Other than a registered bank’s internal residential mortgage-backed securities (RMBS) and covered bond programmes, the market is dominated by warehouse securitisations and, depending on market conditions, term outs of those warehouse securitisations. Accordingly, the obligations imposed on regulated offers do not apply. Instead, securitisations are marketed to sophisticated “wholesale investors”, in particular:
each as defined in the FMC Act. Securitisations are not marketed to all categories of wholesale investors, as capturing certain other investors would trigger other regulatory requirements, such as the need to be licensed as a non-bank deposit taker under the Non-bank Deposit Takers Act 2013.
Fair Dealing Provisions
An offer that is not a regulated offer will still be subject to the general fair dealing provisions in the FMC Act. Broadly, these fair dealing provisions prohibit an issuer from engaging in conduct that is misleading or deceptive or likely to mislead or deceive in relation to a financial product, from making a false or misleading representation in relation to certain aspects of a financial product, or from making “unsubstantiated” representations.
Contraventions of a fair-dealing provision in the FMC Act may give rise to civil liability in respect of which a court or the Financial Markets Authority (FMA) may make certain declarations and orders. Such orders include:
The principal regulatory bodies for securitisations are:
Registered banks in New Zealand are regulated by the RBNZ, and a registered bank’s exposure to any securitisations will impact on its capital adequacy requirements, as discussed in 4.3 Credit Risk Retention and 4.6 Treatment of Securitisation in Financial Entities. Prior to the COVID-19 pandemic, the RBNZ was also developing a securitisation standard for New Zealand-registered banks in relation to RMBS. The RBNZ consulted market participants on the proposed standard between 2018 and 2019. The consultation extended to all aspects of RMBS by registered banks including the structure of the SPE, mortgage loans that can be sold to an SPE, the required credit enhancement (including risk retention) and the capital structure of an issue. Implementation of the new standard has been delayed due to the COVID-19 pandemic. On 5 December 2022, the RBNZ announced that it had determined not to introduce the proposed securitisation standard for New Zealand–registered banks.
In addition, the “big four” New Zealand banks (ANZ Bank New Zealand Limited, ASB Bank Limited, Bank of New Zealand and Westpac New Zealand Limited) are owned by Australian parent banks. These Australian parent banks are subject to the Australian Prudential Regulation Authority’s Prudential Standard APS 120 (APS 120) in relation to securitisations. As subsidiaries of these regulated Australian parent banks, the big four New Zealand banks may be required to comply with APS 120.
A significant use of securitisation technology in New Zealand for registered banks is through the issuance of covered bonds. Similar to the United Kingdom, New Zealand has a legislative framework for covered bonds which provides legal certainty as to the treatment of cover pool assets in the event of an originator’s liquidation or statutory management. However, as this legislation was not passed until 2013, the New Zealand covered bond programmes share certain key features with securitisations, namely a bankruptcy-remote SPE and true sale of the underlying assets.
There are no specific laws or regulations in New Zealand with respect to credit risk retention in relation to non-bank issuers. However, the RBNZ does impose limits on the aggregate funding registered banks can provide to non-consolidated associated SPEs under its current capital adequacy framework (see 4.6 Treatment of Securitisation in Financial Entities).
In addition, as also discussed in 4.2 General Disclosure Laws or Regulations, the big four banks may be affected by APS 120. For capital-relief securitisations, APS 120 caps the level of holding or funding of non-senior notes issued in a securitisation or provision of other loss positions or credit enhancements.
As noted in 4.2 General Disclosure Laws or Regulations, securitisations in New Zealand are structured to avoid being a regulated offer. This also means that the issuer would not be subject to the majority of statutory ongoing governance and periodic reporting requirements set out in the FMC Act.
While there are no specific legislative requirements for periodic reporting, the warehouse programme documents would usually impose such requirements. For term securitisations, periodic reporting is also provided (usually on the payment dates for the notes).
In addition, where an RMBS is intended to be eligible for the RBNZ’s repurchase facility, one of the ongoing requirements is to submit a monthly report to the RBNZ. For asset-backed commercial paper or asset-backed securities, originators need to update the RBNZ regularly on the net value of the underlying asset pool and any changes to the assets in that pool.
Registered banks also include disclosures about securitisations/covered bond programmes in their publicly available disclosure statements.
There are no laws or regulations in New Zealand with respect to rating agencies’ securitisation activities.
The RBNZ prudentially regulates the banking sector in New Zealand. The RBNZ imposes conditions in respect of a bank’s registration as a registered bank, which include a requirement to comply with capital and liquidity requirements. If a registered bank has not complied with its conditions of registration, the RBNZ can recommend to the government that the bank should have its registration as a registered bank cancelled. Criminal penalties may also apply in respect of a breach of a registered bank’s conditions of registration.
New Zealand’s capital adequacy framework, with which locally incorporated registered banks are required to comply, sets out how a registered bank is required to account for its securitisation activities in determining its capital adequacy compliance obligations.
A registered bank must consolidate an SPE when determining the banking group for the purposes of the capital adequacy framework if:
If a registered bank provides credit enhancement to an SPE but is not required to consolidate the SPE, it still must take this into account in its calculations of capital, for example as a deduction from Common Equity Tier 1 Capital.
The amount of aggregate funding provided to all associated SPEs not consolidated as described above and all affiliated insurance groups must not exceed 10% of the registered bank’s Common Equity Tier 1 Capital. Where the 10% limit is breached, the full amount of funding must be deducted from Common Equity Tier 1 Capital.
Non-bank Deposit Takers
The RBNZ also imposes restrictions on related party exposures and imposes capital requirements on non-bank deposit takers. For these purposes, a non-bank deposit taker must consolidate an SPE for the purposes of its capital and related party calculations if this would be required under New Zealand accounting standards for the purposes of group financial statements.
Deposit Takers Act
The regulation of deposit takers and banks has recently been reviewed by the New Zealand government and will result in a new Deposit Takers Act which will implement, among other things, capital requirements to be set through standards or as conditions of licences on individual deposit takers. The Deposit Takers Bill was introduced to Parliament on 22 September 2022, had its first reading on 27 September 2022, and is expected to be enacted in late 2023.
There are no specific rules in New Zealand regarding the use of derivatives in securitisations.
There are no specific investor protection rules applicable to securitisations. However, the fair dealing provisions (described in 4.2 General Disclosure Laws or Regulations) apply to securitisations.
There are no other specific rules that apply to registered banks that securitise their financial assets, except for the impact of APS 120 (in relation to the “big four” banks) referred to in 4.2 General Disclosure Laws or Regulations and 4.3 Credit Risk Retention.
The most common form of SPE used in securitisations is a trust, as described in 1.2 Special-Purpose Entities. Companies have also been used, but are less common.
Please see the description in 1.2 Special-Purpose Entities in relation to the use of trusts, which are generally accepted and well-established for New Zealand securitisations. Trusts were originally used in the New Zealand market for tax reasons, particularly in relation to achieving tax neutrality.
Separately, as discussed in 4.2 General Disclosure Laws or Regulations, securitisations are not offered to all types of wholesale investor in order to ensure the SPE is not classified as a non-bank deposit taker. Being a non-bank deposit taker results in the SPE needing to be licensed by the RBNZ and becoming subject to prudential regulation by the RBNZ.
Other than selling restrictions to ensure that any offer of notes, and any subsequent sales, do not result in a regulated offer or classification as a non-bank deposit-taker, as described in 4.2 General Disclosure Laws or Regulations and 4.10 SPEs or Other Entities, there are no particular activities that a securitisation entity would try to avoid.
The most common forms of credit enhancement for securitisations in New Zealand are subordination, cash reserves and over-collateralisation. In addition to credit enhancement, securitisations in New Zealand often have liquidity support in the form of a liquidity facility and the use of reserves (funded on day one and/or by trapping excess spread in the transaction).
Where an RMBS is intended to be eligible for the RBNZ’s repurchase facility, the RBNZ imposes requirements in relation to potential credit enhancement within the structure. These are a 5% limit on non-mortgage assets that can be held by the trust and an expectation that no more than 1% of the outstanding pool amount comprises non-performing loan or loans with a loan to value ratio over 80%.
No government-sponsored entities in New Zealand participate in the securitisation market other than the RBNZ through its repurchase facility (which applies to various types of debt securities) or as a potential investor.
Typical investors in a securitisation include banks, fixed income managers, insurance companies (including life insurance companies), superannuation funds (such as KiwiSaver funds), hedge funds and government agencies. Any restrictions on these investments will depend on the rules of the particular entity, such as statutory requirements, constitutional documents and/or investment policies.
There was a significant increase in term-out securitisations (including a number of new issuers) during 2021. However, the economic and political instability in 2022 resulted in less term out securitisations. Other than registered banks’ internal RMBS and covered bond programmes, the New Zealand market is dominated by warehouse securitisations.
Please see the descriptions in 1.1 Insolvency Laws, 1.2 Special-Purpose Entities and 1.3 Transfer of Financial Assets regarding the use of trusts, trustee companies, trust managers and true sale.
Warranties vary, depending on the role of the party that is giving the relevant warranties.
Most importantly from a sale perspective, an originator will warrant:
The most common remedies for breach of such warranties are repurchase by the originator and/or an indemnity or other compensatory payment from the originator.
The warranties given by the trustee of an SPE are focused on (among other things) the validity of the trust, its status as the sole trustee of the trust and its solvency.
Perfection is required to occur when certain perfection triggers exist. For example:
Following such a perfection trigger, the SPE must notify the relevant obligors of the transfer, ensure the related security is transferred into its own name and potentially require the receivables files to be delivered to it.
To the extent the originator’s assistance is required to perfect the SPE’s title to the receivables and related security, the originator covenants to provide such assistance. In addition, it will grant a power of attorney in favour of the SPE to enable it to undertake any perfection action the originator is required to do.
As with warranties, the covenants given in a securitisation depend on the party’s role in the structure.
Usual covenants given by the originator include covenants about how the sale process for future receivables will be undertaken, its repurchase obligations in the event of a warranty breach and assistance with any perfection process.
Trustee and Trust Manager Covenants
As described in 1.2 Special-Purpose Entities, the trustee of an SPE will also be subject to restrictions on its activities in order to limit the number of potential creditors and manage insolvency risk, among other objectives. This limitation of trustee discretion is combined with obligations on the trust manager to operate the trust adequately in accordance with the parameters set out in the programme documents. For example:
The principal covenants given by the servicer relate to how it will service the portfolio, including:
Warehouse securitisations usually have more bespoke covenants (including additional reporting obligations) as required by the particular warehouse lenders.
Servicing of the relevant portfolio is usually undertaken by the originator acting as servicer. A detailed servicing agreement is agreed at the outset of the securitisation. In addition, the originator’s servicing standards are also reviewed by the warehouse lenders or (in the case of rated securitisations) the rating agencies. Under the servicing agreement, the servicer provides both day-to-day management and collection services for the portfolio.
The servicer’s appointment can be terminated in certain circumstances, ranging from unremedied breaches of a material covenant to insolvency of the servicer.
In some non-bank securitisations, back-up servicers or standby servicers may also be appointed at the outset of the securitisation.
The usual defaults used in securitisations include:
Covered bond programmes have both issuer-level (the registered bank) and SPE-level events of default. In such cases, additional defaults include a failure to meet asset coverage or amortisation tests in relation to the cover pool.
Upon an event of default, the notes or warehouse debt is accelerated and the security over the assets becomes enforceable. A post-enforcement waterfall is used following such defaults.
Warehouse securitisations typically have a multi-step process prior to a default being triggered, comprising:
A number of indemnities can be given in a securitisation. By way of example, it is common for the originator to undertake to repurchase “ineligible” receivables from an SPE or provide an indemnity where it fails to do so. In addition, the trustee of an SPE will also give indemnities under the programme documents – although in such a case the indemnity is limited to its recourse to the trust assets. It is also common for the trust manager and trustee to indemnify lead managers/dealers to any note issuance.
As mentioned in 1.2 Special-Purpose Entities, the issuer on a securitisation in New Zealand is most commonly a bankruptcy-remote trust.
Generally, the originator is the sponsor on a securitisation.
The underwriters and placement agents are financial institutions, commonly banks. Where the originator is itself a bank, it may also act as a dealer/placement agent on the securitisation.
The originators usually provide the management and collection services with respect to the receivables. In some non-bank securitisations, back-up servicers or standby servicers may also be appointed at the outset of a securitisation.
Investors directly lend to an SPE (on a warehouse securitisation) or acquire the notes issued by the SPE. As mentioned in 4.2 General Disclosure Laws or Regulations, securitisations in New Zealand are generally not public offers and so there is no need for a supervisor. To the extent that decisions are required of investors during the course of a term securitisation, the programme documents provide a process for investors to make such decisions, usually through a meeting.
Typically, investors in New Zealand securitisations are institutional or other sophisticated investors who are able to take part in a wholesale offer – see 4.14 Entities Investing in Securitisation.
A trustee of an SPE trust is generally an independent trustee company that holds the assets of the trust for the trust’s beneficiaries. In New Zealand, an issuer trust usually has a trust manager appointed that is responsible for the management of the trust. The trust manager is generally also the originator or an affiliate of the originator.
As with other common law jurisdictions, the trustee of an SPE trust will grant security in favour of a security trustee over the financial assets subject to the securitisation. The security trustee holds the security on trust for secured creditors of the securitisation (the investors and other parties to the securitisation).
There is no express prohibition on carrying out synthetic securitisations in New Zealand. However, in recent years such transactions have generally not been seen in the New Zealand market.
The most common financial assets securitised in New Zealand include auto leases, auto receivables, trade and equipment receivables and other receivables such as revolving credit (including credit cards). Residential mortgage-backed securitisations are also commonly seen in New Zealand, including a registered bank’s internal RMBS programme or covered bond programmes.
See 1.2 Special-Purpose Entities for more information.
Level 30, Vero Centre
48 Shortland Street
PO Box 8
DX CX 10085
+64 9 367 8000
+64 9 367 8163www.russellmcveagh.com