Securitisation 2024 Comparisons

The financial assets most commonly securitised in Malaysia are as follows:

• commercial real estate;
• hire-purchase loans;
• housing loans;
• loan receivables;
• credit and debit card receivables;
• automotive loans; and
• debt-settlement receivables.

Transaction Structure

The usual transaction structure would be as follows.

Identification of assets

The identification of the assets to be the subject matter of the securitisation transaction. Such assets must fulfil the criteria set out in Chapter 2 (Structure) of Part 4 (Asset-Backed Securities) Section B (Specific Requirements) of the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (the “LOLA Guidelines”) issued by the Securities Commission Malaysia (SC), which includes the following:

• the assets must generate cash flow;
• the originator must have a valid and enforceable interest in the assets and in the cash flows of the assets prior to the securitisation transaction;
• there must be no impediments (whether contractual or otherwise) that would prevent the effective transfer of the assets or the rights in relation to such assets from the originator to the special purpose entity (SPE) – to this end, all the necessary regulatory and/or contractual approvals must be obtained and the originator must not have done or omitted to do any act which would enable the debtor of the originator to exercise a right of set-off in relation to such assets; and
• the assets must be transferred at a fair value.

Additionally, for an issuance of asset-backed sukuk, the assets that are the subject matter of the securitisation transaction must also be Shariah-compliant.

Identification of originator

The identification of the originator, who must be an entity incorporated in Malaysia and must be a going concern at the date of transfer of any assets to the SPE. Additionally, the originator is restricted from purchasing or subscribing up to 10% of the original amount of the asset-backed securities (ABS) issued by the SPE at market value unless with the prior approval of the SC, but there is no restriction on the holding of subordinated ABS by the originator.

Incorporation of SPE

The incorporation of the SPE, who must be a resident in Malaysia for tax purposes and must not have the same name as the originator or be similarly identified with the originator. The SPE must have independent and professional directors, and must be bankruptcy-remote. Please refer to 4.10 SPEs or Other Entities for more information on the bankruptcy remoteness test.

The more common structure of the SPE would be that of a standalone special purpose vehicle incorporated for the sole purpose of the securitisation transaction, with its shares held on trust by a share trustee in favour of charitable organisations to be identified by the share trustee.

Sale of assets to SPE by originator

The sale of the assets to the SPE by the originator. Such a sale must fulfil the true sale criteria set out in the LOLA Guidelines. Please see 6.3 Transfer of Financial Assets for more information on the true sale criteria.

Issuance of ABS by SPE

The issuance of the ABS by the SPE, whether conventional or Islamic in nature.

Corporate administrator appointment

The appointment of a corporate administrator of the SPE and a servicer for the assets.

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

• the Capital Markets and Services Act 2007 (CMSA);
• the Companies Act 2016;
• the LOLA Guidelines; and
• the Guidelines on Islamic Capital Markets Products and Services.

Depending on the type of asset being securitised, the relevant laws and regulations in Malaysia that would apply to such asset would also need to be taken into account when structuring a securitisation transaction.

As mentioned in 1.2 Structures Relating to Financial Assets, the SPE must be incorporated in Malaysia for tax purposes.

Typically, the material forms of credit enhancement used in the securitisation marketplace would be:

• subordination, where the senior class ABS are assigned a higher rating, while the subordinated class ABS would be lower-rated or unrated;
• over-collateralisation;
• cash reserves or deposits; and/or
• financial guarantee.

The issuer is typically a bankruptcy-remote special purpose vehicle incorporated solely for the purpose of the securitisation transaction, and must comply with the requirements of paragraphs 2.15 to 2.22 of Chapter 2 (Structure) of Part 4 (Asset-Backed Securities) Section B (Specific Requirements) of the LOLA Guidelines. Please refer to 1.2 Structures Relating to Financial Assets for more information on the requirements for an issuer.

In Malaysia, there is no specific concept of a sponsor in a securitisation transaction.

The originator/seller is the owner of the assets. The type of businesses the originators/sellers of the financial assets referred to in 1.1 Common Financial Assets are include the following:

• commercial real estate – owners and operators of shopping malls;
• hire-purchase loans – providers of hire-purchase automobile loans who are not financial institutions;
• housing loans – providers of housing loans who are not financial institutions;
• loan receivables – providers of loans who are not financial institutions;
• credit and debit card receivables – providers of credit and/or debit cards; and
• debt-settlement receivables – water concessionaires.

The originator/seller is responsible for ensuring that its internal systems are in place such that funds due to the SPE are separated and ring-fenced from other funds due to the originator. For more information on the originator, please refer to 1.2 Structures Relating to Financial Assets.

The concept of “underwriter” or “placement agents” is not used in securitisation transactions in Malaysia. There are, however, principal advisers, lead arrangers and lead managers.

Principal advisers are generally investment banks who would typically structure the securitisation transaction and advise the originator on this.

Lead arrangers, on the other hand, typically submit the necessary applications to the SC (where necessary) or lodge the relevant documents (such as the lodgement kit, the information memorandum and the trust deed relating to the issuance of the ABS) with the SC. The lead arrangers are also investment banks.

Lead managers who are investment banks would function as the intermediary between the issuer and the investors, and would help to market and sell the ABS.

A servicer is appointed by the SPE pursuant to a servicer agreement to administer the assets of the SPE and/or to perform on behalf of the SPE such services as may be required under the securitisation transaction.

Typically, the role of a servicer is undertaken by the originator of the assets as they would be the best person to administer the assets, and would have the proper systems in place. However, the servicer role may be undertaken by a third-party service provider instead. If the originator is also the servicer, it is necessary to ensure that the services provided by the originator are provided on an arm’s length basis on market terms and conditions.

Pursuant to the LOLA Guidelines for asset-backed transactions, the duties of a servicer must include the following:

• the servicer must keep proper accounts;
• the servicer must have adequate operational systems and resources in place to administer the assets – such internal systems should ensure that the cash flow belonging to the SPE are “ring-fenced” and segregated in relation to the securitisation transaction;
• any change of the servicer must be informed to the trustee; and
• where there is any change of servicer, the legal documents must provide for the periodic transfer of the necessary information from the originator to the new servicer to enable the monitoring of the assets, its performance analysis and collections from debtors of the originator.

In relation to servicers of real estate assets which entail the management of property, the servicer would need to:

• have a property manager licence under the Valuers, Appraisers, Estate Agents and Property Managers Act 1981 of Malaysia; or
• appoint the relevant service provider who is a licensed property manager under such Act to perform and carry out such managerial functions accordingly.

Investors of securitisation transactions include financial institutions and investment funds. Investors are primarily involved in the provision of funds to the originator vide the SPE in a securitisation transaction.

A bond/sukuk trustee is required for a securitisation transaction, and the role is typically undertaken by trust companies registered with the SC. The bond/sukuk trustee’s role is primarily to hold the benefit of the covenants, rights in and to the assets on behalf of the investors, and to enforce the rights of the investors in and to the ABS.

A security trustee/agent holds the benefit and rights of the investors in and to the security on trust for the secured investors, and will generally enforce such rights upon the instructions of such investors following the declaration of an event of default/dissolution event.

A security trustee/agent role can be undertaken by a trust company registered with the SC (as a security trustee) or an investment bank (as a security agent).

The documentation used to effect bankruptcy-remote transfers of assets to the SPE is typically the sale and purchase agreement, which would, at the very least, contain the following provisions.

• Description of the parties to the agreement.
• Description of the assets to be transferred.
• The intention by the parties to effect a true sale of the assets.
• The transfer of the seller’s rights in and to the assets to the SPE.
• The purchase consideration payable by the SPE to the seller in consideration of the sale of the rights in and to the assets.
• The conditions precedent to be fulfilled prior to completion of the sale.
• The representations, warranties and covenants by the seller in respect of itself and the assets.
• The undertaking by the seller to repurchase the assets in the following circumstances:
1. where the assets have declined to a level that renders the asset securitisation transaction uneconomical to carry on, under which the seller may retain a first right of refusal to repurchase such assets at a fair value; or
2. where the seller is under an obligation to do so when it has breached any condition, representation or warranty in respect of the securitisation transaction.
• The declaration of trust by the seller in favour of the SPE of any receivables received by the seller on or after the completion date of the transfer.

The principal warranties to be provided by the seller/originator in the sale agreement would include the following:

• representations as to its capacity and corporate authority to enter into the agreement, its compliance with the relevant laws and regulations, and its solvency status; and
• representations as to its title to the assets, and whether such assets are free and clear from encumbrances.

A breach of such representations and warranties by the seller/originator, which, if capable of being remedied is not remedied within the period specified in the agreement, may result in the rescission of the sale agreement and the refund of the purchase consideration by the seller/originator to the SPE. This would in turn result in the mandatory early redemption of the ABS to which such assets relate.

The principal warranties to be provided by the SPE would be similar to that of an issuer of bonds/sukuk, and a misrepresentation thereby would be an event of default/dissolution event, which may result in the acceleration of the ABS.

The perfection provisions would vary depending on the type of assets.

Real estate assets would require registration of the transfer from the seller/originator to the SPE at the relevant land authority to be completed within a specified period of time following the date of completion; while the perfection provisions for receivables would entail the delivery of a written notice of assignment to the obligor of such receivables, such that the assignment of such receivable has been made known to the obligor, and the SPE may, via the servicer, take action against such obligor in the event of a default.

The principal covenants to be provided by the seller/originator vary depending on the type of asset being securitised. Such covenants by the seller/originator would be set out in the sale agreement and given in favour of the SPE, and would typically include the following:

• restriction from disposing, assigning or transferring to parties other than the SPE or from essentially doing such things as may jeopardise the SPE’s ownership of the assets;
• restriction from creating any security interest over the assets; and
• restriction from claiming any ownership interest over the assets.

The principal covenants applicable to the SPE and that would be set out in the trust deed for the ABS include the following:

• restriction from amending/revising its constitution;
• restriction from having any employees or incurring any fiduciary responsibilities to third parties other than to parties involved in the securitisation transaction;
• restriction from having any subsidiaries;
• restriction from incurring further indebtedness or creating any security interest, other than those contemplated under the securitisation transaction; and
• an undertaking to subcontract to third parties all services that may be required by the SPE to maintain the SPE and its assets.

Failure to comply with the covenants will typically result in an event of default/dissolution event under the ABS, and all amounts outstanding thereunder shall immediately become due and payable.

The principal covenants applicable to the servicer and set out in the servicer agreement would include the following:

• maintenance of all licences, approvals, authorisations and consents that may be necessary in connection with the assets and/or the provision of its services;
• undertaking to exercise due care and skill expected of a prudent owner of the assets in the administration and management of the assets;
• undertaking to have adequate operational systems and resources to administer the assets; and
• restriction from amending, modifying, waiving or varying any provision in the underlying agreements relating to the assets.

Failure by the servicer to comply with the above covenants would result in a servicer event of default, which may result in the termination of the servicer and appointment of a new servicer.

As mentioned in 2.5 Servicers, a servicer is appointed by the SPE, pursuant to a servicer agreement, to administer the assets of the SPE and/or to perform on behalf of the SPE such services as may be required under the securitisation transaction. The servicer agreement would principally contain the following provisions.

• The period of appointment of the servicer.
• The payment of fees to the servicer for the provision of its services.
• The list of services to be provided by the servicer, including but not limited to:
1. the administration and management of the assets of the SPE;
2. the appointment of third-party service providers for the management of the assets;
3. the collection of all payments due to the SPE;
4. the enforcement of obligations due to the SPE;
5. the preparation of the relevant reports relating to the assets and/or the SPE; and
6. the preparation and maintenance of accounting records, and all such other accounts, books, documentation and records, in respect of the assets.
• The conditions for termination of the appointment of the servicer.

Failure by the servicer to comply with its obligations in the servicer agreement may result in the termination of its appointment and the appointment of a new servicer to replace it.

The events of default/dissolution events relating to the ABS are set out in the trust deed, and would typically include the following:

• default in payment of any principal, premium, interest or profit under the ABS;
• a breach by the SPE of any term or condition of the ABS or the provisions of the securitisation documentation;
• any misrepresentation by the SPE;
• the occurrence of an insolvency event relating to the SPE; and
• the appropriation or nationalisation of the assets of the SPE.

Upon the occurrence of such events of default/dissolution events, the holders of the ABS may declare that an event of default/dissolution event has occurred – such ABS shall become immediately due and payable, and the security granted thereunder shall become immediately enforceable.

The seller/originator would indemnify the SPE against all claims, losses, damages, costs, expenses and deficiencies suffered, incurred or sustained by the SPE as a result of any breach by the seller/originator or its representatives.

The servicer would indemnify the SPE from any loss, damage, liability and expenses incurred or sustained by the issuer as a result of a default by the servicer in the performance or observance of its obligations under the servicer agreement, and from any misrepresentation by the servicer.

The SPE, on the other hand, would provide the trustee for the benefit of the holders of the ABS the indemnities as usually provided in a normal bond/sukuk transaction.

The terms and conditions of the ABS are set out in the trust deed, and would generally comprise the typical terms and conditions of ABS, including but not limited to the following:

• redemption of the ABS, whether early or mandatory redemption;
• trigger events;
• covenants/undertakings by the SPE;
• events of default/dissolution events;
• limited recourse to the SPE; and
• meeting provisions for ABS holders’ meetings.

Additionally, pursuant to the LOLA Guidelines, the trust deed must also provide for:

• covenants on the SPE to give effect to the bankruptcy-remoteness of the SPE; and
• a provision that would entitle the trustee to appoint a receiver in respect of the assets of the SPE in the event of default/dissolution.

No derivatives are used in a securitisation transaction.

In Malaysia, the Offering Memoranda typically take the form of an information memorandum, which is a marketing and disclosure document describing the securitisation transaction and the terms of the ABS, the SPE, the originator, the assets and the risks in investing in the ABS.

The LOLA Guidelines set out the minimum contents to be included in the information memorandum for ABS, such as the following.

• Risk factors in investing in the ABS.
• A detailed description of the structure of the securitisation transaction and all significant agreements relevant to the structure.
• A corporate profile of all parties involved.
• A detailed description of the securitised assets, including:
1. cash flow profile;
2. ageing of cash flows; and
3. if available, historic levels of arrears or rates of default for the assets and stress levels of cash flows.
• An explanation on the fund flow, particularly on:
1. how the cash flow from the assets is expected to meet the SPE’s obligation to the holders of the ABS;
2. how payments are collected in respect of the assets;
3. the priority of payments to the holders of the ABS of different classes;
4. details of any other arrangements upon which payments to holders of the ABS are dependent;
5. information regarding the accumulation of surpluses in the SPE; and
6. details of any subordinated securities.
• Information on credit enhancement, including an indication of where material potential shortfalls are expected to occur.
• Credit rating for the ABS and the definition of such credit rating.
• Disclosure of the fees payable by the SPE, including management fees and expenses charged by the servicer.

In addition to the above, additional disclosures are required to be made by the principal adviser and originating bank in primary collateralised loan obligation (CLO) transactions, for the purpose of enhancing transparency and clarity of information to investors and parties involved in a primary CLO transaction, such as:

• the lending policies involved and the extent of terms and conditions which are set on borrowers, which can be made on an anonymous and aggregated basis;
• the utilisation of proceeds by the borrowers, in amount on a projected or actual basis, where applicable;
• the sources of repayment by the borrowers, in percentage;
• whether any early repayment or prepayment by the borrowers is permissible, and the terms and conditions for such early repayment or prepayment;
• the date of repayment by borrowers to the SPV and maturity date of CLOs; and
• the responsibilities of all transaction parties, including the principal adviser, originating bank, solicitor, portfolio manager, trustee and technical adviser (if any).

Additionally, the information memorandum must clearly provide that an originator does not in any way stand behind the ABS issued by the SPE, except to the extent specified in the transaction documents and such credit enhancement provided by the originator (if any). If an originator is intending to subscribe for the ABS, the information memorandum must also clearly disclose this.

In addition to the information memorandum, a product highlights sheet is required to be issued by the SPE to investors. Paragraph 1.06 of Part 1 of the Guidelines on Sales Practices of Unlisted Capital Market Products issued by the SC (the “Sales Practices Guidelines”) sets out the types of investors for which a product highlights sheet is applicable. In the case of ABS, a product highlights sheet is required for investors who are:

• high net worth entities (unless they have opted out of this);
• high net worth individuals;
• retail investors; and
• a person who acquires the ABS where the consideration is not less than RM250,000 or its equivalent in foreign currencies for each transaction.

The product highlights sheet must contain clear and concise information, which must not be false or misleading or contain any material omission. The information required to be included in the product highlights sheet includes the following.

• Date of issuance of the product highlights sheet on the first page thereof.
• Information on the preparer of the product highlights sheet.
• A brief description of the ABS.
• Key features of the ABS, particularly:
1. any significant unusual feature;
2. the applicable Shariah principle;
3. issue size;
4. rating;
5. mode of issue;
6. events of default/dissolution; and
7. an illustration of the best-case scenario and worst-case scenario (where permitted and applicable).
• Key risks of investing in the ABS, particularly risks that commonly occur or may cause significant losses.
• All relevant fees, charges and commissions – including any management fees, distribution fees, redemption fees, switching fees and any other substantial fees payable by the investors – and an indication as to when such fees are payable, whether one-off or on a recurring basis.
• Valuations and relevant matters relating to exit from the investment, such as:
1. the frequency of publication of valuations;
2. duration of the cancellation period;
3. how the investors may exit during the cancellation period; and
4. any costs, charges or penalties for early exit or early redemption, and the basis for such costs, charges or penalties.
• Contact information to facilitate enquiry or complaints.

Other requirements of a product highlights sheet are set out in Part 3 of the Sales Practices Guidelines.

Please refer to 3.10 Offering Memoranda.

Please refer to 3.10 Offering Memoranda.

There are no laws or regulations on credit-risk retention for securitisation transactions in Malaysia.

There are no specific laws or regulations in Malaysia that require periodic reporting for securitisation transactions in Malaysia, save for in primary CLO transactions, where under the LOLA Guidelines the principal adviser and originating bank must ensure that there are adequate provisions in the loan agreements or facility agreements to require borrowers to provide the following reporting criteria, and to ensure that these are enforceable (together with the imposition of various forms of penalties):

• submission of financial statements, including semi-annual accounts and audited annual accounts, to the trustee, portfolio manager and rating agency (RA) on a timely basis; and
• immediate notice to the trustee and RA of any material changes to the nature of the business and shareholding structure.

There are no laws or regulations in Malaysia that regulate the securitisation activities of RAs. In Malaysia, RAs are regulated by the SC pursuant to the CMSA and the Guidelines on Credit Rating Agencies issued by the SC. Presently, in Malaysia there are only two RAs registered with the SC:

• RAM Ratings Services Berhad; and
• Malaysian Rating Corporation Berhad.

Bank Negara Malaysia (BNM) regulates the banking and financial sector in Malaysia, and Part F of the Capital Adequacy Framework (Basel II – Risk-Weighted Assets) and the Capital Adequacy Framework for Islamic Banks (Basel II – Risk-Weighted Assets) issued by the BNM set out the securitisation framework.

This framework outlines the approaches in determining regulatory capital requirements on exposures arising from securitisation transactions, and the operational requirements for allowing regulatory capital relief for originating banking institutions.

Under the securitisation framework, all financial institutions, whether acting as originators or as third-party investors, must hold regulatory capital against all securitisation exposures in the banking book. Regulatory capital relief is granted based on the assessment of whether risks under a securitisation transaction have been effectively and significantly transferred. An originating banking institution may, upon receiving the written approval of the BNM for capital relief, exclude the underlying securitised assets from the calculation of risk-weighted assets or reduce the capital requirement using credit-risk mitigation techniques.

In Malaysia, there are no specific laws or regulations that apply to the use of derivatives in a securitisation transaction.

In general, the regulatory framework in Malaysia relating to securitisation transactions and bonds/sukuk transactions aims to protect the rights of investors. The CMSA require that any documents submitted to or lodged with the SC do not contain any statements or information that are false or misleading, and that there is no material omission from such documents.

Additionally, the LOLA Guidelines and the Sales Practices Guidelines prescribed minimum contents to be disclosed in disclosure documents. All these are intended to ensure that investors can make an informed assessment of the ABS into which they are investing.

The SC is the regulator for capital market instruments, and civil and criminal liabilities are imposed on the responsible party (as identified in the LOLA Guidelines).

In general, financial institutions in Malaysia are required to comply with the requirements of the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA). Pursuant to Section 100(1) of the FSA and Section 112(1) of the IFSA, the BNM’s approval must be obtained for a financial institution to enter into an agreement or arrangement for a scheme to transfer the whole or any part of the business of such financial institution. However, for the purposes of securitisation transactions where the underlying financial assets are not serviced by a licensed person – ie, the SPE – such transfers are exempted from obtaining the BNM’s approval.

Additionally, financial institutions are also expected to comply with the expectations set out in the Prudential Standards on Securitisation Transactions and the Prudential Standards on Securitisation Transactions for Islamic Banks issued by the BNM, and with other applicable regulatory requirements and guidelines.

Please refer to 2.1 Issuers.

As mentioned in 2.1 Issuers, the SPE is incorporated solely for the purpose of the securitisation transaction, and therefore must not undertake any other activities unrelated to the securitisation transaction.

The limitations on the SPE’s activities are set out in the constitution of the SPE, as well as a restrictive covenant in the trust deed for the ABS. A breach by the SPE of such covenant would result in an event of default under the ABS.

Government-sponsored entities in Malaysia do participate in the securitisation market, albeit not frequently.

Entities that invest in securitisation transactions include financial institutions and investment funds. There are no specific rules restricting investments in securitisation transactions by such entities, save for the requirements described in 4.6 Treatment of Securitisation in Financial Entities.

Please refer to 1.3 Applicable Laws and Regulations.

Synthetic securitisations are permitted in Malaysia. They generally comprise a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk, which involves the transfer of credit risk of an underlying pool of exposures by the originator, in whole or in part, by way of credit-linked notes, credit default swaps or guarantees to hedge the credit risk of the underlying exposures.

Securitisation transactions in Malaysia would require that the sale of assets by the originator to the SPE be a “true sale”, such that the assets are beyond the reach of the originator and its creditors in the event of a winding-up of the originator. Please refer to 6.3 Transfer of Financial Assets for further elaboration on the true sale criteria in Malaysia.

In Malaysia, the SPE in a securitisation transaction would need to have at least the following characteristics.

• It must be resident in Malaysia for tax purposes.
• It must have independent and professional directors or trustees, as the case may be.
• It must be bankruptcy-remote. For more information on this, please refer to 6.4 Construction of Bankruptcy-Remote Transactions.
• It must be dissolved in the following circumstances:
1. when the SPE refuses to accept transfers of the assets or to issue ABS within 90 business days from the date on which the securitisation transaction has been lodged with the SC or such other period as may be specified by the SC;
2. when more than 75% of the holders of the ABS have resolved, in accordance with the terms and conditions of the securitisation transaction, that the SPE be dissolved, and the SC has been notified of this resolution – if there are classes of ABS, more than 50% of the senior classes of the holders of ABS must have agreed to the dissolution of the SPE; or
3. upon the full repayment of the ABS in accordance with the terms and conditions of the securitisation transaction.

Please also refer to 1.2 Structures Relating to Financial Assets and 2.1 Issuers.

Asset Transfer and “True Sale” Criteria

The transfer of the assets from the originator to the SPE must be a “true sale”, in that the risk of the transfer of assets from the originator to the SPE being recharacterised as a financing transaction instead of a “true sale” should be minimised as far as possible. To that end, the true sale criteria set out in paragraphs 2.09 to 2.14 of Part 4, Section B of the LOLA Guidelines must be complied with. Such criteria include that:

• the underlying asset must have been isolated from the originator to the extent that it is put beyond the reach of the originator and its creditors, even in a receivership or bankruptcy, as far as possible;
• all rights and obligations of the originator in the underlying asset must be effectively transferred to the SPE;
• the originator must not hold any equity stake, whether directly or indirectly, in the SPE, and the originator must not be in a position to exercise effective control over the decisions of the SPE in relation to the securitisation transaction;
• the SPE must have no recourse to the originator for any losses arising from the assets save for any credit enhancement provided by the originator at the outset of the securitisation transaction; and
• if the originator is also the servicer, the services provided by the servicer must be on an arm’s length basis and on market terms and conditions – also, there must be no obligation imposed on the originator to remit funds to the SPE, unless and until such funds have been received by the originator from the debtor of the underlying assets.

Typically, a true sale opinion is also obtained from the transaction solicitors to confirm that the true sale criteria above have been fulfilled.

In Malaysia, the following are ways in which an effective transfer of the assets from the originator to the SPE can occur.

By way of registration of transfer

This is the most-preferred method, as it is clear that ownership of the asset has changed from the originator to the SPE. However, this typically applies to real estate assets only.

By way of assignment (equitable or legal)

A legal assignment is preferable compared to an equitable assignment, as under Malaysian law the holder of the legal assignment would have priority above the holder of an equitable assignment over the same asset. However, the perfection of legal assignments in a securitisation transaction may be difficult if there is a large pool of assets. This is because in order to create a legal assignment in Malaysia, a written notice of assignment must be served to the obligors/debtors to the asset, which proves to be a problem when there are a lot of obligors/debtors to such asset.

As such, another way transfer of assets from the originator to the SPE is performed in Malaysia is by way of an equitable assignment. While there is a risk that the originator may transfer the asset to a third party and register such transfer or serve a notice of assignment (whereby a legal assignment is deemed to have been created), such risk can be mitigated by imposing restrictive covenants on the originator in the sale agreement, such as:

• a restriction on creating security interests over the asset; and
• a restriction from disposing, transferring or selling the asset to a third party.

By way of novation

This is the cleanest way to transfer, as both the originator and its counterparty/obligor/debtor acknowledge (and the SPE agrees) that all the rights, title, interests and obligations of the originator are novated to the SPE, and that the SPE shall be the “replacement” for the originator.

However, this method may be time-consuming and difficult to complete if there are a large number of counterparties/obligors/debtors involved, as their signatures and agreement to the novation are required.

There are no means of constructing a bankruptcy-remote transaction in Malaysia other than by the requirements set out in paragraph 2.17 of Part 4 of the LOLA Guidelines. In order to determine whether an SPE is sufficiently “bankruptcy-remote”, the following must be taken into account:

• the SPE cannot include in its objectives the power to enter into any other activities that are not incidental to its function as a special purpose vehicle in relation to the securitisation transaction;
• the SPE must subcontract to third parties all services that may be required by it to maintain the SPE and its assets;
• the SPE is not permitted to have employees or incur fiduciary responsibilities to third parties other than to parties involved in the securitisation transaction; and
• all present and future liabilities of the SPE (including tax) must be quantifiable and capable of being met out of resources available to it.

Additionally, an SPE will be considered “bankruptcy-remote” if the chances of proceedings being brought against it for liquidation are remote. This would be fulfilled if the SPE complies with the covenants set out in the trust deed for the ABS, which would, among others, restrict the SPE from incurring any further liabilities. Additionally, the transaction documents for the securitisation transaction may also provide for the service providers’ agreement with the SPE that their claims be limited to the assets of the SPE, and that they will not be in a position to file any winding-up proceedings against the SPE.

A bankruptcy-remoteness legal opinion is obtained from counsel to confirm whether the SPE is sufficiently “bankruptcy-remote” for the purposes of the securitisation transaction in Malaysia.

Please refer to 6.4 Construction of Bankruptcy-Remote Transactions.

Stamp duty exemptions are available for all instruments relating to the securitisation transaction, including:

• any instrument for the transfer or assignment of rights in any asset to or from the SPE; and
• any instrument or document that the SPE is a party to.

Real Property Gains Tax

In Malaysia, real property gains tax exemption is available in respect of chargeable gains accruing on the disposal of any chargeable assets to or in favour of the SPE, or in connection with the repurchase of such chargeable assets to or in favour of the originator for the purpose of the securitisation transaction.

Income Tax

Pursuant to the Income Tax (Asset-Backed Securitisation) Regulations 2014 (the “ABS Income Tax Regulations”) of Malaysia, the SPE’s income from all sources shall be treated as gross income of the SPE from a single source consisting of a business in the basis period for a year of assessment. Any expenses incurred by the SPE for the acquisition of trade receivables or stock in trade pursuant to the securitisation transaction that is deductible under the Income Tax Act 1967 shall be deemed to have been incurred throughout the period of the securitisation transaction, and is allowed to be deducted in arriving at the SPE’s adjusted income in the basis period for a year of assessment that relates to the period of the securitisation transaction.

For the originator, the ABS Income Tax Regulations provide that the proceeds, gains or losses from the disposal by the originator of trade receivables or stock in trade pursuant to the securitisation transaction are deemed to accrue evenly throughout the period of the securitisation transaction, and shall constitute the gross income (or be allowed as deduction, as the case may be) of the originator in the basis period for a year of assessment that relates to the period of the securitisation transaction.

Notwithstanding the foregoing, for a property developer originator where any stock in trade in respect of such property development business is disposed of by the originator pursuant to the securitisation transaction, and where there is a call option for the originator to buy back such stock in trade, the proceeds, gains or losses from such disposal shall constitute the gross income (or be allowed as deduction, as the case may be) of the originator in any basis period for a year of assessment in which the call option expires. Additionally, any expenses incurred by the SPE for the acquisition of stock in trade that is deductible under the ITA are allowed as deduction in computing adjusted income of the SPV in the basis period for that year of assessment in which the call option expires.

Additionally, any balancing charge or allowance under Schedule 3 of the Income Tax Act 1967 of Malaysia arising from disposal of fixed assets is deemed to have been made in the basis period for a year of assessment that relates to the period of the securitisation transaction, in accordance with a prescribed formula.

In general, interest payable to a non-resident is subject to withholding tax at the rate of 15% (or such other rate as prescribed under the relevant tax treaty between Malaysia and the country where the non-resident is a tax resident). However, an exemption exists for interest income earned by non-residents from ringgit-denominated corporate bonds/sukuk approved or authorised by (or lodged with) the SC.

In Malaysia, law firms do not typically advise on tax matters. Advice is usually given by the tax advisers appointed for the securitisation transaction.

In Malaysia, tax opinions are obtained for securitisation transactions from the tax adviser.

Common issues that may arise in connection with accounting rules that apply to securitisation transactions in Malaysia include:

• the treatment of the transfer of the assets as a true sale;
• the originator’s off-balance sheet treatment; and
• the consolidation of the SPE for accounting purposes into the originator’s group of companies.

In Malaysia, accounting issues are addressed by accountants, and lawyers do not give legal opinions in this respect.