Securitisation 2024 Comparisons

Securitised assets include various types of financial assets, such as equipment finance receivables, unsecured consumer loans and trade receivables. The most active issuers are specialised lenders, which originate these types of assets. There is currently no securitisation market for housing and commercial mortgages in Finland, because these are typically used as collateral for covered bonds, but there is no legislative obstacle to securitising such assets. Some corporate and SME loans are securitised synthetically.

All securitisation transactions where tranched exposures are backed by a pool of assets are generally governed by the EU Securitisation Regulation. There is no specific Finnish securitisation law. The rules regarding the transfer of receivables are generally governed by the Finnish Promissory Notes Act and related legal principles, precedents and doctrine.

As there is no specific securitisation legislation that would steer or confine the market to a specific structure, there is some diversity in structures. However, generally, private transactions are structured in a less complicated manner than public transactions, with the latter being much influenced by existing public transaction structures.

The common goal in all off-balance sheet structures is that the pool of assets is segregated from the originator’s assets and safe from the reach of the creditors of the originator, even if the originator becomes insolvent. In practice, segregation is accomplished by the originator selling the assets to a special purpose entity (SPE) established specifically for the transaction to purchase and hold the assets and issue the instrument.

There are only a handful of synthetic transactions in the market and these are generally structured as risk sharing transactions involving the issuance of credit-linked notes to investors, referencing the first-loss piece of the portfolio.

The principal applicable laws and regulations that have a material effect on the structures referred to in 1.2 Structures Relating to Financial Assets are:

• the EU Securitisation Regulation (Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, as amended – the “EU Securitisation Regulation”), and its delegated rules and regulatory guidelines and technical standards.
• the Finnish Act on Credit Institutions (610/2014, as amended, implementing the EU Capital Requirement Regulation and Directive regime in Finland).
• the Finnish Promissory Notes Act (622/1947, as amended).
• the Finnish Act on Mortgage Banks and Covered Bonds (151/2022, as amended).

For commercial purposes, in Finnish securitisation transactions, it is common to set up the SPE in an offshore jurisdiction such as Ireland or Luxembourg that:

• is within the EU, for reputational and stability reasons;
• is well known to investors and rating agencies, for pricing reasons;
• has specific securitisation legislation or otherwise suitable companies law and tax law and praxis, for legal opinion reasons; and
• has a large selection of experienced and cost-efficient corporate services providers, for operational reasons.

It is common to combine different methods of credit enhancement – eg, subordination, over-collateralisation and cash reserves – in a manner that is proportionate to the transaction, so that the credit risk of the underlying assets is still overwhelmingly transferred to the SPE. An excessive use of credit enhancement may adversely impact the true sale assessment and off-balance sheet treatment.       

The is the SPE that issues the debt, usually in the form of notes. The SPE’s role is limited to purchasing the assets and issuing the debt to finance the purchase. The SPE does not have any employees and it does not conduct any other business activities beyond the securitisation transaction. It is wound up when the transaction ends.

Under the EU Securitisation Regulation, a sponsor is a credit institution or an investment firm, other than an originator, that establishes and manages a securitisation transaction involving purchases exposures from third-party entities. Finnish securitisation transactions are typically led by the originator and there is no sponsor.

The originator begins the entire transaction to obtain funding, manage capital or risk, or both. The originator engages all the other transaction parties to assist it in the transaction. The originator typically has many additional roles, such as subordinated lender, servicer and risk retention holder. The originators in Finnish transactions are typically non-bank lenders (such as auto financing companies or unsecured consumer lenders financing their portfolios) or industrial companies (financing trade receivables) seeking to obtain funding at beneficial terms compared to bond markets or leveraged financing.

The main adviser in a Finnish securitisation transaction is generally the arranger or lead manager, which usually helps the originator engage all other advisers (including agent, trustee, cash manager, swap counterparty, legal advisers in all jurisdictions, corporate services provider, listing agent, rating agencies, verification agent and securitisation repository), structure the transaction and sell the transaction. In a public transaction, there is typically more than one such adviser, in which case they are called joint lead managers. In a private transaction, it is common for the arranger or its affiliate to also be the original noteholder or lender.

The servicer needs to have the requisite experience and operational readiness to take care of the portfolio, including monitoring and reporting collections and loan-level performance. The servicer acts as the interface with the underlying debtors, since the SPE does not have any employees. The servicer sends notices of transfer to the underlying debtors at the commencement of the transaction and in connection with any additional portfolio sales. The servicer also manages debt collection, with the help of an external debt collection agency where required.

Generally, the originator is appointed to act as the servicer for seamless customer service and cost-efficiency reasons. The parties agree in the transaction documents that the servicer manages the receivables portfolio essentially as it would manage its own, unsecuritised portfolio, but on behalf of the SPE. However, the transaction documents usually provide for a back-up servicer, or back-up servicer facilitator, to step in if the servicer defaults, to ensure continuing operations. Back-up servicers are typically debt collection agencies.

Investors are usually large, international institutions. Pursuant to the EU Securitisation Regulation, the investors are obliged to conduct due diligence on the securitisation transaction prior to investing. The investors generally act as passive holders of the notes, but in certain situations they may be called upon to vote on certain matters, such as amendments to the main transaction documents or enforcement actions.

An agent or bond trustee is usually appointed to manage the practical relationship between the SPE on the one hand and the investors on the other. The agent usually receives the reports to be distributed to investors and the SPE primarily communicates with the agent while the transaction is ongoing. If there is only one lender, there is no need to have an agent or bond trustee.

The security agent or security trustee is entered into the transaction security documents as a representative of the secured creditors and holds the security assets on behalf of the secured creditors. The security agent or trustee also carries out enforcement of security and represents the secured creditors collectively in matters relating to the enforcement process. Finnish law does not have a concept of trust or trustee and, from a Finnish law perspective, a party appointed as security trustee acts as an agent and representative of the secured creditors.

The asset purchase agreement is the primary document used to effect a bankruptcy-remote transfer of assets. It typically contains the transfer and perfection mechanics, the purchase price, the eligibility criteria, representations and warranties relating to the business of the seller and the purchaser as well as the underlying assets, possible repurchase mechanisms (which need to be limited in scope to achieve a true sale), covenants, indemnity for breach of representations and covenants, the conditions and mechanism for further purchases, jurisdiction and dispute resolution information. It is common for the asset purchase agreement to be governed by the laws of the place where the assets are located and for the courts of that same place to have jurisdiction.

The seller’s warranties typically relate to the seller as a corporate entity on the one hand and to the securitised assets on the other hand. The seller warrants through corporate warranties that it has the legal and factual ability to enter into the contemplated transactions. The seller’s warranties relating to the assets typically relate to the quality of origination, the eligibility and quality of the assets and underlying debtors, and certain tax matters.

The purchaser also typically gives certain corporate warranties, but these are more limited than the seller’s warranties and generally relate to its corporate powers and tax presence in Finland.

If the parties wish to achieve a simple, transparent and standardised (STS) securitisation under the EU Securitisation Regulation, certain additional warranties are given to cover the matters required for the assets and the transaction to meet all STS requirements.

Breach of a corporate warranty, if not remedied, could result in a default by the breaching party and an early termination or amortisation of the transaction. Breach of eligibility criteria and asset warranties will typically result in an obligation to repurchase and replace the affected asset.

The specific perfection measures required for a valid and enforceable transfer of assets depend on the type of assets to be securitised. In Finland, an undisclosed transfer of receivables is not effective other than between the parties. Therefore, a notice to the underlying debtor is always required for a perfected transfer of receivables. The underlying debtors should also be instructed to make payments to the transferee instead of the transferor. A general requirement for a perfected transfer of assets is that control of the assets is vested with the transferee. It is also important to ensure that the incoming collections are not commingled with the assets of the transferor. In practice, a new collection account is usually opened in the name of the SPE to receive collections. If the securitised assets are receivables secured by collateral, the related collateral should generally also be transferred to the transferee.

The parties agree in the asset purchase agreement and the relevant security documents on the nature and timing of perfection measures. If the party required to complete a perfection measure fails to do so, certain other transaction parties are usually authorised to complete such measures on their behalf. Unlike in certain other jurisdictions, perfection measures in Finland should always be taken without delay. Accordingly, it is not feasible to delay perfection until a trigger event in transactions involving Finnish assets.

Typically, the SPE’s activities will be limited by negative covenants in the debt documents that restrict it to the role of a securitisation SPE. The covenants in the asset purchase agreement generally relate to maintaining the seller’s and the purchaser’s ability to comply with their respective obligations under the asset purchase agreement. A breach of covenants, if not remedied, may result in an early termination or amortisation of the transaction.

The main document governing servicing is the servicing agreement. The SPE and the security agent, as part of their respective roles, appoint the servicer to carry out its tasks during the transaction. The servicer’s primary tasks include:

• reporting on the receivables and the collections;
• maintaining records;
• processing personal data with respect to the securitised portfolio; and
• making payments from the collection account to the transaction account.

The servicing agreement also contains provisions on servicer default and termination and replacement of servicer.

The principal defaults and their effects in securitisation documentation are slightly different for each transaction party, but generally the default is triggered by insolvency, a ratings downgrade or failure to comply with transaction documents. If the SPE defaults, the notes become payable, transaction security becomes enforceable and the transaction switches to post-enforcement priority of payments. If the servicer defaults, it is replaced by the back-up servicer. If the originator defaults, any revolving period ends and the seller is no longer able to sell further assets to the SPE.

The principal indemnities in a securitisation relate to the seller indemnifying the SPE against any breach or  misrepresentation by the seller. These indemnities are typically included in the asset purchase agreement.

However, to achieve a true sale, it is crucial that the seller does not indemnify the SPE for any losses resulting from the inability or unwillingness of the underlying debtor(s) to make payments.

The various external service providers, including in particular the agent and security trustee, will typically demand that they receive customary indemnities against any claims that arise from them performing their respective services.

The main liability documents can be in any form that the parties structuring the transaction consider appropriate for the transaction. In a public transaction, the liability documents are in the form of listed notes. In a private transaction, the main liability document is usually a loan facility agreement or variable funding note issuance facility agreement. These documents regulate the terms of the funding provided by the investors or lenders to the SPE.

The types of derivatives commonly used are for interest rate hedging and, if relevant, currency hedging.

If the securities are listed, a prospectus compliant with Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market is required. If the transaction falls within the scope of the EU Securitisation Regulation, a transaction summary is required if no prospectus is prepared.

Detailed and specific disclosure requirements are contained in EU Securitisation Regulation and its delegated rules and regulatory guidelines and technical standards.

The due diligence and transparency provisions of the EU Securitisation Regulation impose obligations on originators, SPEs and sponsors to provide detailed disclosure, and on investors to seek such disclosure. The disclosed information includes the prospectus or transaction summary, transaction documents, initial and ongoing loan-level data and information on certain exceptional events affecting the securitisation transaction throughout the life of the transaction.

This is not applicable in Finland.

The EU Securitisation Regulation requires the originator, sponsor or original lender to retain a material net economic interest in the securitisation transaction of not less than 5%, on an ongoing basis. The regulation sets out the permitted methods for risk retention, which include retaining 5% of the first loss tranche or 5% of randomly selected exposures that would otherwise have been part of the securitisation. The national competent authorities, including the Finnish Financial Supervisory Authority (FIN-FSA) in Finland, are tasked with supervising the satisfaction of the risk retention requirement, and non-compliance will trigger administrative sanctions.

The EU Securitisation Regulation imposes periodic reporting requirements on loan-level data on a quarterly basis for transactions that are not asset-backed commercial paper programmes, and on a monthly basis for transactions that are. Sometimes, the parties will voluntarily agree on a more frequent reporting interval than required under the regulation – for example, if the investor itself is an asset-backed commercial paper conduit subject to the more frequent reporting interval. The European regulatory authorities issue technical standards and guidance on the form and contents of reporting and the national competent authorities, including the FIN-FSA in Finland, are tasked with supervising the satisfaction of the reporting requirements.

The EU Credit Rating Agencies Regulation (Regulation (EU) No 462/2013 amending regulation (EC) No 1060 on credit rating agencies) and its delegated rules and guidelines regulate the activities of rating agencies in the European Union, including Finland. Any firm that is established in the EU and carrying out credit rating activities without being registered with the European Securities and Markets Authority (ESMA) is operating in breach of the regulation and will be subject to supervisory measures and fines. Any firm that is registered with and certified by ESMA to act as a rating agency but fails to comply with the ongoing requirements of the regulation may be subject to an investigation resulting in public notices, fines and withdrawal of registration.

The capital, liquidity and risk rules that apply to credit institutions and investment firms are set out in Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (the EU CRR) and its related directives, implementing domestic legislation, regulations and guidelines. Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (“Solvency II Recast”) and its implementing domestic legislation, regulations and guidelines set out the capital and liquidity rules that apply to insurance undertakings. The treatment of securitisation positions under capital, liquidity and risk rules is regulated by these pieces of legislation in detail, including the calculation of regulatory capital to be held with respect to securitisation exposures.

The use of derivatives under the EU Securitisation Regulation is limited to hedging the SPE’s interest and currency risk. The key piece of legislation that applies to the use of derivatives by SPEs in securitisation transactions is Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories, as amended and recast (the “EMIR Recast”). The EMIR Recast contains requirements to report detailed information on each derivative contract to trade repositories and make the same available to supervisory authorities, and generally to clear all standardised OTC derivatives contracts centrally through a central securities depository, or to apply risk mitigation techniques.

The EU Securitisation Regulation provides that securitisations may only be sold to retail clients subject to a suitability test. Furthermore, the mandatory provisions of the EU Securitisation Regulations regarding investor due diligence, reporting, risk retention and a ban on resecuritisation are all designed to protect investors and promote stability in the securitisation market. The provisions of the EU MiFID, EU Market Abuse Regulation, Prospectus Regulation and other applicable securities markets legislation must also be taken into account when selling securitisations. In addition, Finnish consumer protection legislation on the sale of financial instruments may become applicable. The national competent authorities, including the FIN-FSA in Finland, are tasked with supervising compliance with the investor protection provisions. Penalties for non-compliance include prohibition on operations, administrative fines, or criminal liability in certain cases.

The Finnish act on credit institutions (610/2014, as amended, implementing the EU CRR and CRD regime in Finland) regulates certain aspects of banks securitising their assets and investing in securitisation positions.

Finland is a covered bond jurisdiction. The Finnish act on mortgage banks and covered bonds (151/2022) regulates the licensing of mortgage banks in Finland and the issuance of covered bonds by Finnish mortgage banks. The act sets out requirements on certain operational matters and structures of covered bonds and their permitted collateral. It also regulates the disclosure requirements to investors and the treatment of covered bonds following the insolvency of the mortgage bank.

In Finnish transactions, the SPE is usually established offshore in an EU jurisdiction that is commonly used for SPE structures. Where the SPE is a Finnish entity, the legal entity is generally formed as a limited liability company, although it has been suggested in literature that a limited partnership might also be suitable. In Finland, the companies act does not specifically cater for special purpose entities, but it is in principle possible to include provisions in the SPE’s articles of association regarding its purpose and, for example, winding-up. Limited recourse and non-petition provisions may also be included in the articles, but their enforceability is limited.

Where the SPE is established in Finland, it should avoid activities that would trigger licensing or registration requirements – for example, taking deposits or other repayable funds or originating new loans. Penalties for conducting activities without an appropriate licence or registration include prohibition of activities and administrative fines imposed by the relevant supervisory authority, usually the FIN-FSA.

Historically, Finnish government and municipality-sponsored entities have actively participated in the securitisation market, but there has been no notable market activity by publicly sponsored entities since the mid-2000s.

Investors in Finnish securitisation transactions are typically large European institutions or their affiliates.

The Finnish Promissory Notes Act (622/1947, as amended) contains provisions that regulate, for example, transfer perfection requirements and the underlying debtor’s right to make payments or set off their receivables. Many of these provisions apply regardless of whether or not the seller is a bank or other financial institution, but some of the rules are different for banks and other financial institutions compared to non-financial originators.

Synthetic securitisation is permitted under the EU Securitisation Regulation, which sets out the rules for such securitisations.

If the originator becomes insolvent and is placed in insolvency proceedings, all transactions it concluded before the insolvency proceedings are reviewed carefully by the insolvency officer for any weaknesses that would enable the insolvency officer to demand the return of assets to the insolvency estate.

Under Finnish insolvency laws, the legal grounds for such demand for return primarily consist of sham transactions and transactions at undervalue, as well as so-called claw-back grounds, where transactions concluded during a specified period before insolvency may be revoked if they meet certain objective criteria set out under law. Claw-back grounds include improper preference of a particular creditor over other creditors, payment by unusual means and delayed granting or perfection of security.

In addition, where a transaction’s true factual nature does not correspond to its supposed form, the form may be ignored and the transaction may be recharacterised to fit its true nature. Recharacterisation may result in the counterparty of the transaction having to return all or some of the assets that it received from the insolvent party.

The SPE’s exposure to external liabilities should be limited to achieve bankruptcy remoteness, meaning that the SPE and its assets should be safe from bankruptcy proceedings. The SPE should be established specifically for the transaction and not have any business activities or liabilities beyond the securitisation transaction. Its only function is to purchase the securitised assets, issue the notes to fund the purchase of assets and passively hold the assets for the duration of the transaction. The SPE should not have any employees.

In Finland, there is no legal consolidation of an SPE or its assets in the insolvency of the originator as such, but transactions with related parties are scrutinised more closely and subject to longer claw-back periods than transactions between unrelated parties. For this reason, it is preferable for the SPE to be unrelated to the originator. In private securitisation transactions, the parties will sometimes take a conscious risk to deviate from one or more aspects that ensure the bankruptcy remoteness of the SPE – for example, by using an SPE held by the originator group and not an orphan SPE.

To avoid the securitisation transaction falling into any of the above-described traps in the event of the insolvency of the originator, the transaction should be structured so that the transfer of assets away from the originator is legally valid and enforceable even if the originator becomes insolvent and so that no aspect of the asset transfer can be avoided, revoked or recharacterised under insolvency laws to the detriment of the SPE and investors.

To ensure that the transaction is not recharacterised as a secured loan transaction, the transfer of assets from the originator to the SPE should meet the requirements for a legal true sale. For a legal true sale, it is generally required that the transaction seeks to irrevocably transfer title to – and risk of – the assets to the SPE and not, for example, to create a secured financing transaction that is meant to be unwound once the financier has received payment. There is no specific legislation on true sales: the criteria are discussed in legal doctrine, but not in a clear or definitive manner. A true sale is assessed as a whole, considering all relevant facts and circumstances of the transaction either supporting a true sale or speaking against it. Legal opinions are typically obtained to confirm the validity and enforceability of a transaction, and to assess its true sale nature. Due to the lack of definitive rules, the Finnish true sale opinion is a reasoned or discussing opinion.

Legal opinions will typically address certain aspects of insolvency laws that are critical to the assessment of the bankruptcy remoteness of the transaction, such as rules on the avoidance or revocation of transactions in the event of the insolvency of the originator.

Limited recourse and non-petition provisions are included in the constitutional documents and transaction documents to safeguard the SPE  against legal action and insolvency filings that could jeopardise the transaction. However, the effectiveness of such provisions may be limited by general principles of law with respect to a Finnish SPE.

The transaction cashflows need to be modelled and reserves need to be sized such that the SPE’s liquidity is ensured.

There is no transfer tax on the transfer of receivables, assuming that the receivables do not qualify as securities for transfer tax purposes. There are no stamp, registration or similar taxes in connection with the execution of securitisation transaction documents.

Finnish tax issues are typically mitigated by establishing the SPE offshore. Finnish corporation tax is assessed in accordance with territorial limitations, such that a company may only be assessed to Finnish corporation tax to the extent that it is:

• resident for corporation tax purposes in Finland; or
• carrying on a trade in Finland through a Finnish permanent establishment (which generally excludes agents of independent status acting in the ordinary course of their business).

In addition, a non-Finnish resident company that does not have a branch or permanent establishment in Finland may be liable to Finnish income tax on certain Finnish source income, subject to the provisions of an applicable double tax treaty.

Neither a permanent establishment nor any other charge to Finnish income tax would generally be expected to arise for the SPE solely as a result of purchasing Finnish receivables and appointing a servicer to service them. In public securitisation transactions, it is common to seek an advance tax ruling confirming that no permanent establishment will arise for the SPE in Finland as a result of the transaction.

Withholding tax is generally not levied on any payments on receivables to a non-Finnish resident purchaser.

Certain goods and services are excluded from VAT, such as financial and insurance services. The purchase of receivables would generally qualify for this exemption. Servicing and debt collection are generally subject to Finnish VAT at the standard rate (currently 24%). However, services that are not deemed to be supplied in Finland for VAT purposes are not subject to Finnish VAT. With respect to certain types of collateral assets, the SPE may be liable for VAT in Finland for the realised profit margin in connection with an enforcement action against the underlying debtor.

It is common for the transaction parties to seek customary tax opinions and for such opinions to be qualified by standard assumptions and qualifications – for example, to the effect that the tax authorities may change their interpretation or application of the provisions of law or regulations in the future.

The off-balance sheet treatment analysis of accounting and the legal true sale analysis have many features in common and the conclusions are frequently the same, but not always. The lawyers advising the transaction parties will conduct their analysis based on the transaction documents and applicable legal rules, and the seller’s and purchaser’s accountants will conduct their own analysis following the applicable accounting rules. Accordingly, it is possible to reach off-balance sheet treatment without a legal true sale and vice versa.

The lawyers advising on a securitisation transaction are usually required to opine on the legal true sale nature of the transaction. As there are no definitive rules on what constitutes a legal true sale, the opinion is a reasoned or discussing legal opinion.