Insolvency Laws in Relation to Securitisation
Under Guatemalan law, the insulation of the financial risk of the originator depends on the execution of a “legitimate sale” – that is, one where the originator and the other parties that arrange the securitisation have proceeded in good faith; this includes the fact that the originator does not intend to defraud its creditors. In other words, the originator’s intention must be to enter into a transaction that does not affect its financial situation adversely. The intention of the originator – or any transferor for that matter – reveals itself objectively by the terms and conditions of the transaction, by the fact that these can be considered reasonable given the conditions in the relevant market at the time of the transaction.
Thus, a “true sale” under Guatemalan law requires a transaction by which the financial assets are transferred to the vehicle in the course of business and under market conditions. There is a legal presumption, however, that transfers of assets and/or the creation of liens on the debtor’s assets ten business days or less prior to the point where the debtor becomes unable to pay its current obligations are fraudulent transfers.
True Sale v Secured Loan
A true sale entails that the financial assets cease to be the property of the originator. The originator ceases to be the holder and the one entitled to enforce the rights derived from the transferred financial assets. In the originator’s balance sheet, the transferred assets no longer appear and are “balanced” by the sums of money derived from the placement of the securities that represent the financial assets transferred to the vehicle.
The assets subject to security interest in a secured loan remain in the debtor’s balance-sheet, because the encumbered assets remain the debtor’s property (even if encumbered). Under Guatemalan law, where the lien over any financial assets has been created legitimately (ie, without the intention to defraud any creditor), the financial assets will be set aside and will be unavailable to cover claims by unsecured creditors.
Difference in Protection for Transferred Assets
The most important difference is that in a true sale, the debtor loses legal control over the financial assets that are transferred. Even where the originator undertakes to become involved in the collection of the receivables from the transferred financial assets, control remains with the vehicle, which is the legal owner of the assets. In a secured loan, the assets remain under the debtor’s control, although it is common that the security agreement provides for certain limitations and/or for the creation of a security deposit with a third party.
Insolvency Laws for True Sale and Secured Loan
Under Guatemalan insolvency laws, unsecured creditors do not have recourse to assets that have been legitimately transferred (in the sense discussed above) to third parties, nor to those assets that have been legitimately subjected to liens (in the same sense). Thus, the level of protection is the same in this regard.
Opinion of Counsel
If the securitisation takes place only among local parties, it is normal that the parties’ counsel will examine the bankruptcy remoteness, but not issue an opinion except for its client. However, if an international financial institution is involved, it is normal to seek an opinion of counsel to support the bankruptcy remoteness of the transfer.
Other Insolvency Law Aspects of Bankruptcy-Remote Transfer
In general, it is fundamental that the transfer of the financial assets can be characterised as a good faith market transaction in the ordinary course of business.
One should utilise a bankruptcy remote special purpose entity (SPE) in order to transfer the financial assets and insulate the financial risk of the originator or an affiliate. To the extent that the transfer is a legal and legitimate transfer in the sense discussed in 1.1 Insolvency Laws, the transfer achieves this purpose. At present, there are no regulations in Guatemala which provide for the possibility of creating an independent group of assets to be managed by a professional entity for securitisation purposes, but it is possible to organise either an ordinary trust and/or an investment trust. The former is regulated by the Code of Commerce and the latter by the Securities and Securities Market Act of 1996.
The SPE can be organised as a stock company (“sociedad anónima”), thereby limiting the shareholder’s liabilities to their underwritten investment commitments. The SPE can have a single manager (“administrador único”) or a board of directors and a CEO. It is highly recommended that the SPE's corporate purpose is exclusively circumscribed to the securitisation process and that the SPE carries no other operations or business than those directly related with it. If the SPE is organised in the form of a trust or an investment trust, it is customary that a “technical committee” be provided, in order to run the operation.
It is important that the SPE be organised independently from the originator so as to (i) control it through ownership, and/or (ii) control it through the administration and governance of the SPE. The SPE must not be seen as a mere “strawman entity” since this could risk a third-party creditor claiming that a “simulation” has taken place.
In strictly local transactions, it is not customary to obtain an opinion of counsel to support the bankruptcy remoteness; however, conversely, it is customary where an international or cross-border element is present.
Although the nature of the financial assets transferred may have an impact on the requirements to achieve “perfection”, there are some steps to ensure a valid transfer. The requirements, generally, include the following:
In general, the requirements to perfect a true sale transfer and a secured loan are, mutatis mutandis, the same. However, it is customary that the secured loan be recorded with the Movable Property Registry of Security Interests to have effect vis-à-vis third parties.
The failure to comply with certain requirements may create problems upon the collection of the financial assets’ payments. To give one example, failure to give notice to a debtor of the financial asset transferred (where notice is required) may have the consequence that the transferee will not be recognised as the valid creditor at the time payment is due. Therefore, failure to comply with some requirements may have important consequences.
Perhaps the most effective way to create a bankruptcy-remote transaction (in addition to the legitimacy of the transaction, as discussed above) is to provide the transaction with “publicity”. Namely that, depending on the nature of the financial assets transferred, there are public registries where it is possible to record the transaction. If this is not available, another way to create the same effect is to give notice of the transfer to the main creditors of the originator so that if any of them have any objection they may formally object to the transfer.
Material Characteristics of Bankruptcy-Remote Transactions
The material characteristics of a bankruptcy-remote transaction are, firstly, that the originator seeks a reasonable business objective through the securitisation of the originator’s financial assets such that the financial consequences to the business of the originator can be considered reasonably favourable, under the circumstances of the originator at the time of the securitisation process.
Secondly, that any third-party creditor of the originator will not be made worse off through the securitisation process, to the point that the value of its credit rights against the originator diminish as a consequence of the securitisation process. This points to the importance that the price for the transfer of the financial assets to the SPE be determined under market conditions and that the use of the proceeds from the securitisation be considered earned from a legitimate business purpose.
Financial Risk Protection
The main risk that a bankruptcy-remote transaction protects against is the “revocation” of the transfer of the assets to the SPE. In accordance with the Civil Code, any transfer of assets made with the consequence that third-party creditors are defrauded can be revoked by a court through a “revocation action”. Any third party may file for a revocation of the transfer within one year from the date of transfer. It is important to mention that this is a case of “civil fraud”, as opposed to the felony of “fraud” as defined in the Criminal Code. Civil fraud does not require the deliberate, criminal intent to defraud, but rather that the third-party creditor proves, as a matter of fact, the transaction (the transfer of the financial assets) was to the detriment of the third-party creditor and that the originator was at fault in this regard.
Obtaining Legal Opinions
The legal opinions of this nature are not customary for merely local transactions, but are standard where a foreign investor and/or financial institution are involved. These typically include the following:
One of the obstacles to the further development of securitisation in the jurisdiction has been the lack of clarity and certainty as to the taxes applicable to certain parts of the transaction. In particular, there is some disagreement as to whether receivables on the books of the originator (originating from the sale of the originators’ business) are subject to the 12% charge of VAT or to the 3% charge of Stamp Tax; we are of the opinion that it is the latter. There is agreement that, where the financial assets are negotiable instruments, the transfer to the SPE is not subject to any tax. Interest paid to the SPE (where the case) is subject to a 10% withholding tax and so is any interest paid to the holders of the securities issued by the SPE.
In order to avoid VAT or Stamp Tax charges, some have considered structuring the transaction by way of a capital contribution of the originator to the SPE. The transfer of the financial assets this way is not taxable. The SPE then issues the shares and these are sold to the investors, tax-free. The shares are redeemable according with a scheduled plan, in order to pay the investors.
Typically, financial assets yield either interest or dividends to their holders. Interest (and other analogous income, such as price differentials) and dividends are subject to withholding taxes of 10% and 5% respectively, so the SPE usually does not pay any other income tax.
On the transfer of financial assets to an SPE located in another jurisdiction, the applicable taxes are the same (VAT or Stamp Tax, where the financial assets are not incorporated by negotiable instruments). However, since Guatemala is a territorial tax system, if the transfer of the assets takes place in another jurisdiction, Guatemalan taxes would generally not be applicable.
It is important to mention that, where the SPE is a trust, the trustee is subject to pay, on behalf of the trust, the same taxes as if it were a legal entity (such as a stock corporation). Thus, a trust under Guatemalan law is not a "look-through entity".
The tax opinion is only customary where a foreign and/or international element is part of the transaction and, on occasion, is given separately from the general legal opinion.
Currently, there is no specific legislation on securitisation, although a draft amendment to the Securities and Securities Exchange Act of 1996 would include a chapter on this matter. Therefore, the general rules on accounting also apply to these transactions. Essentially, Guatemala has adopted the International Financial Reporting Standards.
Legal issues are given adequate consideration, but, unless the investors, the bank in charge of the securitisation process and/or the originator are foreign or multinational corporations, the role of legal opinions is limited. Under Guatemalan law, the fact that any of the parties to a transaction has proceeded on the basis of a legal opinion will not, per se, have any consequence. Any party that has incurred legal liability having relied on a legal opinion may seek redress against the issuer of the opinion, but the legal consequences to the acting party remain the same.
Laws and Regulations
The Securities and Securities Exchange Act of 1996 regulates the offering of securities to the public. Unless the securities are offered to institutional investors or to those who are already shareholders of a stock corporation, the threshold for disclosure is 35 individuals or legal entities; above that, it is necessary to disclose information.
Forms of Disclosure
There are two ways to offer the securities to the public: (i) by listing the securities with a Securities Exchange, or (ii) by registering the securities with the Securities’ Registry (an office of the Ministry of Economy in charge of the enforcement of the Securities and Securities Exchange Act of 1996). In both cases, a prospectus is required as well as the rating of the securities by an independent rating agency (mostly for debt securities). The issuer must provide financial statements, copies of its corporate documents, information as to the officers and directors of the company, a basic discussion of the risks related to the issuer, and a detailed description of the rights of the holders of the securities. The Bolsa de Valores Nacional, S.A. has a detailed summary of the legal requirements at www.bvnsa.com.gt.
Under the exchange regulations, the financial and other relevant information must be updated and/or disclosed on a monthly basis.
The Securities’ Registry (Registro del Mercado de Valores y Mercancías) is much more than just a “registry” – it is the main regulator. It has powers of oversight of all issuers. However, the exchanges are self-regulatory organisations (SROs) and therefore have regulatory and enforcement functions as well.
Violations of Required Disclosure and Consequent Penalties
The Securities and Securities Exchange Act of 1996 is the principal set of rules concerning the disclosure of information when offering securities. Violations include:
Public Market v Private Market
Most of the issuers go to the Securities Exchange, even for the initial placement of their securities. Most of the private securities issued consist of commercial paper and the investors belong mostly to the financial sector, investment funds, and pension funds (of a private character). The private market issuing of securities is, to all intents and purposes, inexistent. The main statistics for the several markets can be found at www.bvnsa.com.gt.
It is not a common practice that legal opinions are sought as to compliance with the rules concerning disclosure and registration. However, the exchange does require a legal opinion by independent counsel, as to this effect.
There are no special rules concerning disclosure for the securitisation processes. However, two bills are being prepared to amend the Securities Act and Securities Exchange Act of 1996 and these do include standard securitisation rules. It is expected that these bills will be introduced in 2020.
For related matters, please refer to 4.1 Specific Disclosure Laws or Regulations.
In Guatemala, there are no laws or regulations on credit risk retention.
For those securitisations that are publicly offered, the main source of regulation is the Securities and Securities Exchange Act of 1996.
Section 40 of the Act requires a basic duty to update the financial information provided by the issuer on a quarterly basis, in addition to any amendment to corporate statutes and the annual report to the shareholders (where applicable). The annual report of the external auditors to the shareholders must also be disclosed.
The Securities’ Registry and, when listed on an exchange, the Securities Exchange, regulate and are also charged with the enforcement of the rules concerning the updating of information. The penalties for non-compliance can include fines and also the cancellation of the authorisation to issue and trade in the securities.
The Securities and Securities Exchange Act of 1996 does not specifically regulate rating agencies (RAs), but does require that the issuers of debt securities seek and obtain a rating before issuing their securities.
The rating can be rendered by a local or regional rating agency registered with the Securities Registry.
There are very few regulations on rating agencies, beyond the obligation to register with the Securities Registry, which requires basic information to determine that the interested RA has the means to operate as such.
In general, the banking laws of Guatemala have followed the Basel rules and the Monetary Board has the power to issue regulations to develop the basic legal provisions. However, at this point there are no rules applicable specifically to securitisation processes.
Capital requirements are, in general, 10% of the computable equity of the banks. Insurance companies must invest a certain portion of their technical reserves in securities and other financial assets issued by the State, the Central Bank, and/or the regulated banking system. Banking reserves vary, but are set at approximately 14% of sight deposits.
The regulation of capital requirements and liquidity reserves corresponds to the Monetary Board.
There are no rules on giving capital or liquidity benefit for any transaction that complies with comparable BASEL or IOSCO regimes.
Except for the regulation of future and conditional agreements, there are no legal rules regarding derivatives transactions. The exchange, Bolsa de Valores Nacional, has issued some regulations on hedge transactions and posted a master agreement, but as yet the agreement has not become active. Those issued by the exchange, which are SROs, are enforced by the exchange itself.
The matter is not relevant in this jurisdiction.
The protection of investors is found in the Securities and Securities Exchange Act of 1996, its regulations, and the regulations issued by the exchange (the most important of which can be found at www.bvnsa.com.gt). These rules are not specifically geared towards securitisation, but to the offering of and trading publicly in securities.
The basic elements include disclosure of relevant information, the prevention of conflicts of interest, registration with the Securities Registry, and fair dealing in the public securities market.
The main regulatory body and the one in charge of oversight powers concerning possible infractions and pursuing the application of fines is the Securities Registry.
The principal financial product issued and traded among banks are mortgage-backed securities. Most of them are backed by the insurance coverage of the Mortgage Insurance Institute, but the law has allowed for other private institutions to do so as well. The main rules applicable are those in the statute that created and regulate the Mortgage Insurance Institute, in the Banking and Financial Groups Act of 2002.
This kind of trust is organised to issue securities in the public securities market in order to invest in registered securities. Thus, the investment trust cannot be used to purchase receivables, unless these would have been packed in securities that represent the receivables and registered for public offering.
Neither stock corporation nor investment or regular trusts are “transparent” for tax purposes. This is one of the factors that has deterred economic agents and made securitisation relatively costly. Thus, every SPE, regardless of its nature, is a separate taxpayer and must comply as any other taxpayer would.
In general, SPEs are created with the exclusive purpose of functioning as such. Thus, there are no specific activities to be avoided. Additionally, investment trusts can invest only in registered securities.
The biggest market in Guatemala in terms of securitisation is that of mortgage-backed securities and the main form of credit enhancement used is the insurance coverage by the Mortgage Insurance Institute or by other licensed insurance companies.
The main government-sponsored entity that participates in the securitisation market is the Mortgage Insurance Institute, subject to a specific statute and, of course, to the general legislation of the jurisdiction. The main purpose of this entity is to foster the housing industry and, thus, in addition to the funding of the Institute, those securitised mortgages that are covered by the Institute’s insurance enjoy a special tax treatment (where popular housing is financed).
As stated in 4.13 Material Forms of Credit Enhancement, the largest market is that of mortgage-backed securities and the largest investors are commercial banks (which are, also, the most important issuers).
The documentation of bankruptcy remote transfers depends on the nature of the financial assets to be transferred. For mortgage-backed securities, the certificate must be endorsed, but the creation of the mortgage requires that the loan agreement be executed before a notary and registered in the property registry. Upon the registration of the mortgage as a security, the property registry issues a “cédula”. This represents the mortgage-backed loan and is a negotiable instrument.
The enhancement, where it is taken, is documented through a certificate issued by the insurer showing that the application has been approved and that the risk is covered. If the assets to be transferred were ordinary receivables from retailing activities, usually a formal agreement (often before a notary public) is executed and the transferor represents that the receivables are valid, disposable, and free of any encumbrance or limitation. Often, as the debtors are the originator's clients, the originator agrees to provide the collection services of the receivables.
The main warranties are: (i) that the asset transferred is a valid credit right, existing and enforceable against the debtor at the time of the transfer; and (ii) that the transferor can freely dispose of the credit right and that the credit right is not subject to any approval, consent, notice to a third party or, if the case, that it has been obtained.
In the Civil Law system, “perfection” is a consequence of a valid consent given by the parties (Article 1518 of the Civil Code). Therefore, it is not necessary to affect any further action in order to achieve perfection. The parties can agree to conditions that must occur prior to an effective transfer and, also, to the giving of notice and ratification. All of these are “perfect” obligations on the condition that the valid consent of the parties would have been given.
No response provided.
For mortgage-backed securities, the issuing banks agree to collect the loan secured by the mortgage; for other products – much smaller in market size – the above model is usually emulated. These covenants are a consequence of ordinary contract law and enforced by the civil courts.
A securitisation process involves several relations among various parties and, therefore, there are several kinds of defaults that can take place. Some concern the obligations and warranties of the originator vis-à-vis the investors, others concern the arranger vis-à-vis the originator, while still others concern the investors vis-à-vis the arranger and the originator.
The key element for a successful securitisation process is that the originator discloses true and complete information regarding the financial assets transferred and that the due diligence verifies that the expectations of these assets as “performing assets” are acceptable to the prospective investors. Thus, the principal defaults centre on these aspects of the process. An event of default in any of these aspects would require taking the matter to a court.
The principal indemnity is only as to the validity and existence of the credit right at the time of the transfer. It is not per se forbidden that the originator guarantees the assets transferred, but it is can be problematic. In other words, the bankruptcy remoteness begins to blur.
All matters concerning securitisation documentation have been addressed above.
Please see 6.2 Effectiveness of Overall Enforcement Regime.
In considering enforcement, given the fact that, firstly, the largest market is that of mortgage-backed securities, secondly, the enforcement of the credit rights transferred to the SPE is relatively effective and, thirdly, the main players are the banks (which are subject to regulation and supervision), it is fair to say that the enforcement regime is effective and reliable.
The picture changes when it comes to commercial receivables because in this case the enforcement of the agreements with the ultimate debtors and among the parties to the securitisation has to rely on the regular operation of a weak and formalistic judiciary. This explains why the costs of securitisation processes are relatively high.
At present, as previously stated, the main issuers are the banks. There are a variety of initiatives towards expanding the securitisation business to the retail sector and to the development of public infrastructure, such as toll roads, for example. As noted above, the Securities and Securities Exchange Act of 1996 is under review and will soon include a major revision concerning securitisation (among other matters). Additionally, the tax system needs to be revised so that SPEs become look-through entities for tax purposes in order that the tax cost will not make the securitisation processes too costly in this sense.
The main responsibility of the issuers is to disclose all relevant information allowing the professionals to provide the prospective investors with reasonable expectations as to the performance of the assets transferred to the SPE. Where it is agreed that the issuer will also provide the collection services, it is very important that this be effective and that any material obstacle be dealt with efficiently.
There are no true sponsors in the Guatemalan market at this point.
At this point in the evolution of the securitisation business in Guatemala, the roles of underwriters or placement agents are primarily played by commercial banks.
No response provided.
There are generally two kinds of investors – institutional investors and ordinary investors. The former has the means to consider the risks involved with the potential investment and will generally ask for and obtain the relevant information. The ordinary investor does not have the means and should consider, instead, joining a collective investment vehicle; however, it must be said that there are relatively few collective investment vehicles in this jurisdiction at the present time.
Trustees in this jurisdiction are overwhelmingly the commercial and the investment banks. Securities brokers can act as “co-trustees” together with a commercial bank, but they do not act alone. Again, this is because trusts are considered as a different taxpayer and not as a look-through structure, so they are not used frequently for securitisation processes.
At present, there are no synthetic securitisation processes in Guatemala.
Please see 8.1 Synthetic Securitisation.
Please see 8.1 Synthetic Securitisation.
Please see 8.1 Synthetic Securitisation.
Please see 8.1 Synthetic Securitisation.
Please see 8.1 Synthetic Securitisation.
At this point, the largest market by far is that of mortgage-backed securities, and it is also the oldest one. There are initiatives under way to amend several pieces of legislation, as noted above, to lower the tax and transaction costs of securitisation so that retail and other commercial activities, auto leases, equipment receivables, consumer term credit, marketplace lending, residential and commercial real estate, collateralised loan obligations, revolving credit (including credit cards), and trade receivables can be more easily the object of securitisation processes, as well as toll roads and other public infrastructures.
The most common structure is that commercial banks issue the mortgage-backed securities (often with insurance enhancement) and trade them with other banks in order to, at times, handle their liquidity requirements. Thus, it is not the “typical” securitisation structure.
For other types of financial assets, the structures used include one of the following.
Here, the originator organises a stocks corporation with an exclusive corporate purpose to issue the securities backed by the financial assets to be transferred to the SPE. The corporate governance of the SPE is provided by the sponsor/bank/broker that operates as the arranger of the process and, also, which obtains the commitments of the prospective investors – these are mostly institutional investors.
Here, the originator organises a trust with a commercial or an investment bank with the exclusive purpose to issue the securities backed by the financial assets to be transferred to the SPE. The trustee, usually aided by a technical committee, provides the administration and/or oversight of the collection process of the credit rights transferred.