During the insolvency of a Nigerian company, all its assets (including the financial assets) become available (after settlement of debt mandatorily preferred by law and secured creditors) for settlement of its liabilities on a pari passu basis. Accordingly, in Nigeria, when structuring and preparing documentation for a securitisation transaction, various contractual tools and structural techniques are used to ring-fence any financial assets which are the subject of securitisation, from the credit and insolvency risk of the seller/originator of the financial assets. It is imperative that the financial assets are insulated from other assets of the originator in order to ensure that the underlying securities being issued are not affected by the insolvency risk of the originator or its affiliates.
As in other jurisdictions, in Nigeria, the main contractual tool used in securitisation transactions, is a “true sale” of the financial assets by the originator to the issuer of the securities, which is usually a bankruptcy remote/orphaned special purpose entity (the SPE); thereby removing the financial assets from the originator’s pool of assets. If the transfer of the financial assets does not qualify as a true sale, then during the insolvency of the originator, the sale may be recharacterised as a loan advanced to the originator and secured with the financial assets. Mindful that parties to the securitisation transaction would not have intended to create a security assignment of the financial assets, the requisite formalities for the perfection of security interests would not have been undertaken; and consequently, the security will be void against a liquidator and other creditors of the originator, thereby leaving the holders of the securities as unsecured creditors. This risk associated with the recharacterisation of the sale of financial assets makes it imperative that a true sale of the financial assets is achieved.
True Sale v Secured Loan
A secured loan, within the context of receivables financing, will involve the advance of a credit facility by a lender to the originator, with a security assignment of the financial assets in favour of the lender as continuing security for the repayment of the facility. Whereas, a true sale will result in an absolute transfer and sale of the financial assets by the originator to the SPE, in return for the payment of the purchase price by the SPE with funds raised from a debt securities issuance.
Whilst there is a paucity of Nigerian case law on the test for a true sale, in the few cases where the Nigerian courts have had to make a determination on this point, their approach has been similar to that of the English courts. In this regard, the Nigerian courts, in determining whether or not an arrangement constitutes a sale or a secured financing, will have regard broadly to: (i) the true nature/legal substance of the transaction as contained in the contract of sale and whether that legal substance conforms with the definition of sale under the provisions of the Sale of Goods Act; and (ii) whether the purchaser is obliged to pay/account to the seller any profit or income made on any future disposition of the financial assets and vice versa (Jajira v Northern Brewery Company Limited and Gaya v J Allen & Co Limited). Without prejudice to the foregoing, we are also mindful that English case law generally serves as persuasive authority before Nigerian courts; as such, we expect that the Nigerian courts may also have regard to other broad considerations that have been espoused by English case law.
In addition to the foregoing, the Securities and Exchange Commission (SEC) has also issued rules on securitisation (the Securitisation Rules) which set out the features of a “true sale” of financial assets. However, it is pertinent to note that the SEC’s regulatory purview is applicable where the securities qualify for registration with the SEC. This would usually be the case where the securities have a tenor above nine months and are being issued by a public company, whether by private placement or public offering, or where such securities are being issued via a public offering by an entity whose corporate form has been approved by the SEC (SEC-regulated securitisation issuances). The Securitisation Rules provide that the conveyance of financial assets to the SPE in a securitisation shall be deemed to be a true sale when it achieves the following:
Without prejudice to the foregoing, the Securitisation Rules also identify certain elements which may feature in a securitisation transaction (particularly as they relate to the conduct of the originator), and provide that the occurrence of same, will not negate a true sale, to wit (amongst others):
Furthermore, it is generally considered acceptable for the originator to have the right to repurchase all outstanding financial assets at a time when the principal amount outstanding under the securities has reached a sufficiently low threshold – as contractually agreed. At this point, all the securities would be fully redeemed and the securitisation would be wound down. This is typically referred to as the “clean-up call”.
Protection for the Transferred Assets – True Sale v Secured Loan Transaction
A true sale of financial assets effectively transfers title to those assets to the SPE, thereby removing same from the assets of the originator that are available for distribution in its insolvency. However, under a secured loan, even though the financier is conferred beneficial interest in the financial assets, title to the financial assets still belongs to the originator, albeit subject to the security interest of the financier. Subject to fulfilment of all the requisite perfection formalities, in the originator’s insolvency, a secured lender will be able to claim against those assets for the loan, in priority to any other creditor, other than debts mandatorily preferred by law.
Whilst there are no registration requirements under Nigerian law for the sale of financial assets, in practice, the originator is typically obliged, especially where the originator also acts as the servicer, to note in its records that the relevant financial assets have been sold and transferred to the SPE. With respect to a secured loan, the Companies and Allied Matters Act (the CAMA) requires that a security assignment of receivables/book debts of a Nigerian company be registered at the Corporate Affairs Commission (the CAC) within 90 days of its creation, otherwise that security will be void against a liquidator and other creditors of the relevant company. Also, further to the provisions of the Secured Transaction in Movable Assets Act, security interests over financial assets are required to be registered at the National Collateral Registry, and the failure to so register will result in a loss of priority by the creditor to a subsequently registered secured creditor over the same asset.
Furthermore, in order to perfect a security assignment of financial assets under Nigerian law, secured creditors typically require that notice of the security assignment of the financial assets be delivered to the counterparties/underlying obligors for the relevant receivables. In a securitisation transaction, the originator is also required to deliver notices to relevant underlying obligors in relation to the financial assets or ensure that such notices are delivered upon the occurrence of certain trigger events; however, failure to deliver such notices will not detract from the true-sale nature of the transfer.
Opinion of Counsel
Whilst there is no specific statutory or regulatory requirement under Nigerian law for the provision of counsel’s legal opinion in securitisations, parties typically obtain transaction opinions from their counsel to provide relevant comfort which may be required. Indeed, rating agencies typically require the provision of a satisfactory legal opinion to confirm, amongst others, the bankruptcy remoteness of the transaction structure, prior to issuing the ratings for the relevant securities. In this regard, the rating agencies require specific confirmation from counsel that:
Other Matters Relevant to Insolvency Law
Pursuant to the provisions of the CAMA and the Bankruptcy Act; under Nigerian law, any transfers, conveyance, payment, etc made or granted by an insolvent company in favour of a creditor, with a view to giving that creditor a preference over other creditors shall, if a resolution to wind up the company is passed or a petition for winding up the company is presented within three months of making or granting the transfer, conveyance or payment, etc, be deemed a fraudulent preference of that creditor and be invalid. Accordingly, where the sale of financial assets is recharacterised as a loan and the transaction (including the security assignment of the financial assets) is undertaken within three months prior to the commencement of insolvency proceedings of the originator, that transaction may be set aside as a fraudulent preference of the originator’s creditor and held as invalid.
In securitisations, the issuer is usually structured as a bankruptcy remote and orphan SPE, in order to ensure that the transferred financial assets are insulated from the credit/insolvency risk of the originator or its affiliates. In relation to SEC-regulated securitisation issuances, the Securitisation Rules prescribe that the SPE must be formed as either a public limited company, a trust created by a written instrument, or any other legal form which the SEC may prescribe by regulation from time to time.
The constitutional documents of the SPE must limit the objects of the SPE to matters and activities related to the securitisation transaction, including the acquisition, management and collection of financial assets, the issue of asset-backed securities and the engagement of a servicer to administer the pool of assets. Also, the transaction documents typically include covenants restricting the SPE’s activities to undertakings related, or ancillary, to the securitisation; as such the SPE is not expected to engage in any commercial activity other than as contemplated under the transaction.
The Securitisation Rules stipulate that the SPE shall not have any employees, as it is expected to contract out all services to third parties. Whilst the Securitisation Rules stipulate that the originator/sponsor may nominate up to 30% of the board of the SPE’s membership, in practice, the SPE typically engages a corporate service provider to be responsible for the running and day to day administration of the SPE, including nominations of the directors to its board.
Risk of Consolidation in Insolvency
Under Nigerian law, there is no framework for joint insolvency proceedings for corporate groups or the concept of substantive consolidation. Even where the SPE is an affiliate of the originator, a Nigerian company is considered a legal personality distinct from its shareholder(s). As such, the assets/liabilities of the SPE (where an affiliate of the originator) and those of the originator or its affiliates cannot be consolidated in the insolvency of either entity, except in cases of fraud where the court may be inclined to pierce the corporate veils of the relevant entities. Moreover, this risk is mitigated by the SPE being an orphaned entity.
Opinion of Counsel
As indicated in 1.1 Insolvency Laws (Opinion of Counsel), legal opinions on the transaction that are provided to rating agencies in securitisations also cover confirmation of the bankruptcy remoteness of the SPE.
General Requirements for Transferring Financial Assets
The transfer of title to financial assets can generally be effected either by way of a legal/statutory assignment or an equitable assignment.
For a transfer of financial assets to take effect as a legal assignment under Nigerian law (pursuant to Sections 25(6) of the Judicature Act 1873 and 150(1) of the Property and Conveyancing Law 1959), the following requirements must be fulfilled:
From the date of the notice to the underlying obligor, an assignment shall transfer the legal right to the financial assets, all legal and other remedies for those assets, and the power to give a good discharge of them without the concurrence of the assignor.
Any assignment that does not fulfil any of the foregoing perfection requirements, will amount to an equitable assignment. Whilst a legal assignment will transfer both legal and beneficial title to the financial assets to the SPE, an equitable assignment will only transfer the beneficial title to the SPE, and the originator will retain the legal title. The major implication of this legal distinction is that, where a bona fide assignee (for value) of a pool of financial assets, without notice of an existing equitable interest at the time of its own assignment, meets the criteria for a legal assignment, its interest will take priority over any prior equitable interest or assignment.
Notwithstanding the foregoing, in Nigeria, there are still many securitisation transactions where the transfer of financial assets is done by way of an equitable assignment, as not every underlying obligor is given notice at the time of the assignment. Indeed, in practice, even though the financial assets are transferred to the SPE, the originator remains the counterparty on record or the collector of the receivables (albeit in the capacity of a servicer) in order to preserve existing customer relationships and the actual delivery of notice to the underlying obligors may be deferred or waived.
However, to mitigate the priority risks associated with equitable assignments, parties put in place different contractual mechanics including:
In any event, save for the priority issue indicated above, legal and equitable assignments are enforceable against the originator, its creditors and a liquidator.
In addition to the foregoing, the transfer agreement must be stamped with the Stamp Duties Office (SDO) of the Federal Inland Revenue Service in Nigeria, in order to make it admissible in evidence before a Nigerian court, in the event of any dispute.
Differences between “True Sale” or a Secured Loan - Requirements
Please see 1.1 Insolvency Laws (Protection for the Transferred Assets – True Sale vs. Secured Loan Transaction) on the differences in the procedural formalities required for the perfection of a security assignment and a true sale of receivables under Nigerian law.
Please note that the perfection requirements set out above for legal assignments under a true sale (including delivery of notices to relevant counterparties/underlying obligors) are also applicable to security assignments, and where a security assignment lacks any of those features, this will amount to an equitable assignment by way of security with the attendant priority implications.
Rights for Transferees – Between Perfected and Unperfected True Sale
A transferee of an unperfected true sale of financial assets (ie, an equitable assignment) is exposed to certain risks which a transferee of a perfected true sale of financial assets (ie, a legal assignment) is not exposed.
First, at any time prior to the delivery of notice, an underlying obligor is entitled to continue to make payments to the originator and same will be a good discharge of the relevant obligations. As such, even though the SPE may not intend to directly collect the receivables from the underlying obligor (given that the originator is contractually the servicer), in the event of a default by the originator, where notice of assignment was given to the underlying obligor, it gives the SPE an immediate right to demand that the underlying obligor pays the SPE or its nominee, the relevant receivable. However, where notice has not been given, during the intervening period when the SPE seeks to perfect or procure the perfection of its assignment, it is possible to have a leakage of funds where the underlying obligor fails to pay the SPE or its nominee and where the originator fails to remit same to the SPE. Nonetheless, this risk is mitigated where the SPE has rights of recourse against the originator under the servicer agreement and also took security over the collection accounts into which the receivables were to be paid.
Second, the general rule is that all assignments are subject to equities. Thus, in the true sale of receivables, the SPE is generally subject to any equities that may exist in favour of the underlying obligors (such as a right of set-off) prior to the delivery of a notice of transfer. However, where notice is not delivered, the SPE will be affected by any subsequent equities that may occur after the date of the assignment. For instance, where, following a notice of assignment to the underlying obligor, the originator subsequently undertakes in any dealings with the underlying obligor that may give rise to a claim on the assigned receivables, neither the obligor nor the originator would be able to claim against the assigned receivables. This protection will not be available to a person who is the transferee of an unperfected true sale as no notice was given to the underlying obligor.
Third, without prejudice to the contractual undertaking by the originator not to modify the underlying contracts, where no notice is delivered following the transfer of receivables, there is a risk that the underlying contracts could be modified without the knowledge of the SPE.
Fourth, a later encumbrancer or assignee of the financial assets, for valuable consideration, acting in good faith, and who had no notice of the earlier assignment to the SPE but gives notice of its interest to the underlying obligors would take priority over the interest of the SPE. However, this risk is non-existent where relevant notices have been delivered to the underlying obligor at the time of the transfer.
Fifth, a transferee of an unperfected true sale will have to join the originator in any legal action it intends to institute against the underlying obligor in respect of the financial assets.
Trusts as Alternative Securitisation Structure
Whilst securitisations in Nigeria are generally structured as true sales of financial assets, the equitable trust concept could also be explored for the purpose of effecting a bankruptcy remote transaction. The trust structure entails a declaration of trust by the originator in respect the financial assets in favour of the SPE, pursuant to which the beneficial interest in the receivables will be transferred to the SPE, while the legal title remains with the originator, albeit as a trustee for the SPE. However, considering that the trust structure will only achieve a transfer of beneficial interest to the SPE, the restrictions highlighted in 1.3 Transfer of Financial Assets (Rights for Transferees – Between Perfected and Unperfected True Sale) in respect of an unperfected true sale of receivables may also adversely impact the effectiveness of this structure.
Except in cases where originators, under the transfer agreements, declare/create a trust of the relevant receivables in addition to the true sale of same, in our experience, we rarely see securitisations undertaken solely based on a trust structure.
Under Nigerian law, instruments executed in Nigeria, or relating (wheresoever executed) to any property situated or to any matter or thing done (or to be done) in Nigeria, are to be stamped in order for them to be admissible in evidence before Nigerian courts. Accordingly, the transaction documents in a securitisation including the transfer agreement (for documenting the sale of the financial assets), the vending agreement (for the sale and marketing of the securities), the bond or programme trust deed (for constituting the bonds – where the underlying securities are bonds), and the security documents (where the securities are secured) are required to be stamped in Nigeria in order to be admissible in evidence before Nigerian courts. In this regard, the transfer agreement is subject to stamp duty at an ad valorem rate of 1.5% of the purchase consideration; the vending agreement, at 1% of the issuing house’s professional fees; each of the bond or programme trust deeds (constituting the bonds) and security documents (where applicable) are stamped at 0.375% of the size of the securities; while most other documentation attracts a nominal/flat rate of NGN1,000 (approximately USD2.77).
In practice, the commissioner for stamp duties (applying relevant provisions of the Nigerian Stamp Duties Act) allows parties to a transaction, in respect of which several instruments attract ad valorem duty, to determine that one of those instruments shall constitute the principal document, and pay ad valorem stamp duties on only the principal document; while the remaining documents will be stamped at the nominal rate (so-called perfection bundling). Consequently, and in order to reduce the stamping costs, practitioners adopt the perfection-bundling approach and select a transaction document with a reduced ad valorem rate/tax cost as the principal document for the purpose of the ad valorem assessment while other transaction documents are stamped at flat rates. For instance, most practitioners try to put forward the vending agreement or the security documents, which attract a significantly lower stamp cost as the principal document whilst the other documents, including the transfer agreement, are stamped at a nominal rate. This approach achieves a significant reduction in transaction costs where successful. However, it is imperative to highlight that there is no guarantee that the stamp duties commissioner will accept the selection of the vending agreement or the security documents as the principal document; as it is the commissioner’s prerogative. Indeed, the tax authorities may insist that the transaction document that attracts the highest rate/returns is selected as the principal document.
Alternatively, transaction parties may also consider initially stamping the transfer agreement for a nominal sum (usually a minimal percentage of the full purchase consideration) rather than the full purchase consideration, so that the ad valorem rate can be applied against the nominal amount (rather than the full purchase consideration). In this regard, it is imperative to note that the incentive to undertake the stamping of the transfer agreement is to ensure that it is admissible in civil proceedings before Nigerian courts – in the event of any dispute. As such, unlike registrable security where the amount of stamp duties paid may impact the amounts that may be recovered from enforcement, the amount of stamp duties paid on the transfer agreement should not prevent the SPE from a claim to the entirety of the relevant financial assets.
Capital Gains Tax
In order to deal with any incidences of capital gains tax payable by the originator at the time of transfer; securitisation practitioners ensure that the accounting treatment is structured such that no gain is recorded on the account of the transfer.
Value Added Tax
The Value Added Tax Act (VATA) imposes VAT on the supply of all goods and services other than those specifically exempted under the VATA; and the list of exemptions under the VATA does not contain any item that suggests the exemption of a true sale of receivables from the ambit of VAT. However, the Nigerian Federal High Court has decided, in CNOOC & Anor v FIRS (2011) 4 TLRN 185, that the assignment of rights, incorporeal property, or choses in action are outside the purview of the VATA as they do not qualify as goods or services; and as such, are not liable to VAT. This decision however remains subject to any subsequent pronouncements that may be made by the Nigerian appellate courts on the subject. To the extent that the decision represents the current law, VAT will not be applicable on the true sale of receivables, this being the assignment of incorporeal property or a chose in action.
The income of a Nigerian company is generally subject to certain taxes including companies’ income tax, and capital gains tax. Accordingly, any income earned by the SPE from the financial assets, will be subject to these taxes. However, practitioners ensure that the purchase consideration for the financial assets is structured in a manner that no income or profit is recorded by the SPE from the realisation of the financial assets. With respect to companies’ income tax, even where the SPE records no taxable profit for the relevant year of assessment, it will still be subject to a minimum tax (determined on the basis set out in the Companies Income Tax Act) except during the first four calendar years of its commencement of business or where the SPE is structured as a company with at least 25% imported equity capital. In this regard, transaction parties sometimes structure the SPE to include a foreign shareholder which holds 25% of the SPE’s share capital and imports foreign exchange for the purpose of its investment in the SPE.
There are no special tax exposures on the transfer of financial assets on the basis of the transferee being an offshore entity. However, where the financial assets include certain payments that attract withholding tax, such as interest payments, such payment to the SPE or the servicer on its behalf will be subject to withholding tax. In practice, the underlying loan receivables contract will include an obligation on the part of the underlying obligor to gross-up these interest payments.
There are no tax issues, arising in connection with securitisation, other than those discussed elsewhere in 2 Tax Laws and Issues.
Transaction parties typically obtain tax opinions on the securitisation structure, covering issues such as the tax treatment of the SPE, potential tax liability for the transfer of financial assets, and any other potential tax exposures that may arise as a result of the transaction structure. The potential tax liabilities and exposures typically identified in these opinions include stamp duties, capital gains tax, value added tax, companies’ income tax, and withholding tax on payments related to the securities as well as payments made by the SPE for the services provided to it in relation to the transaction.
The legal issues on the structure of securitisations are separate analyses, distinct from the accounting treatment of the transaction. The accounting issues are separately dealt with in opinions provided by the auditors appointed for the purpose of the transaction.
Please see the comments on transaction opinions in 3.1 Legal Issues with Securitisation Accounting Rules.
The Securitisation Rules set out specific disclosure requirements that are applicable to SEC-regulated securitisation issuances. In this regard, Rule F of the Securitisation Rules provides that an application to the SEC for approval of a securitisation transaction shall include (in addition to general disclosure requirement applicable to public offerings of securities) disclosures covering the mechanism for effecting the sale of the financial assets; liquidity support arrangements as credit enhancements for the issuance; the identities and qualifications of the directors of the originator and the servicer, as well as a description of any compensation any party will receive in connection with the proposed transaction; the identity, qualification and compensation of the trustee(s); the aggregate value of the securities to be issued; the proposed structure of the transaction, including payment priorities, anticipated payment yields and circumstances under which the securities may be redeemed; the description of any relationship or interest of the originator – or its parent, subsidiaries, affiliates or shareholders, directors or officers – with the SPE.
These disclosures are typically set out in the prospectus and memorandum prepared in connection with the securitisation issuance.
Further details in this regard are set out in 4.2 General Disclosure Laws or Regulations.
The Investments and Securities Act (ISA) is the principal legislation that governs public offerings of securities in Nigeria; and it is supplemented by rules and regulations issued by the SEC from time to time, including the SEC Rules and Regulation, 2013 (as amended) (SEC Rules). Pursuant to Section 54 of the ISA, all securities issued by public companies must be registered with the SEC. Accordingly, to the extent that an SPE is constituted as a public company, its securitisation issuance is required to be registered with the SEC prior to the issue.
Thus, in addition to the specific disclosure requirements set out in 4.1 Specific Disclosure Laws or Regulations SEC-regulated securitisation issuances shall include as part of the offer documents (to be filed with the SEC for registration), a prospectus which must cover all disclosure requirements set out in the Third Schedule to the ISA and Rules 287 – 288 of the SEC Rules. These disclosure requirements cover, amongst other matters, the details of the offer and transaction overview; information relating to the SPE and the originator including details of shareholders, directors, and key management staff; the financial information of the SPE and the originator (essentially their respective financial statements); related party transactions/conflict of interest; details of material contracts; nature and extent of directors’ interest; auditors’ and accountants’ reports; rating report(s); risk factors peculiar to the SPE, the issue and the originator; and information on the financial assets.
Where the securitisation issuance is by way of a private placement by a public company, the prior approval of the SEC is required; and in addition to the Securitisation Rules, Rule 344 of the SEC Rules sets out the information that must be disclosed in the placement memorandum, including summary of the offer, financial summary of the SPE and the originator (for five years, or less if the originator has been in operation for less than five years), and general information relating to the SPE and the originator.
Also where the securities will be listed on securities exchanges, such as the Nigerian Stock Exchange (NSE) or the FMDQ OTC Exchange (FMDQ), the issuance will be required to comply with the disclosure requirements in the relevant exchange’s listing rules.
Securitisation issuances by a private company will not be subject to the disclosure requirements under the ISA, SEC Rules and the Securitisation Rules.
The SEC is the principal regulator of capital market activities and public companies in Nigeria; and is responsible for ensuring compliance with the disclosure requirements through its review of offer documents prior to the launch of an SEC-regulated securitisation issuance. Also, where securities are to be listed on any of the securities exchanges, those securities and underlying transaction documentation will be subject to the review and regulations of the relevant exchange.
Regulations and Laws on Violation of Disclosures and Penalties
A violation of the foregoing disclosure requirements may attract both civil and criminal liabilities pursuant to the provisions of the ISA and the SEC Rules. With respect to civil liabilities, the directors of the relevant company, officers of a company that participated in or facilitated the production of the prospectus as well as the issuing house and its principal officers, may be liable to pay compensation to all bond/noteholders for any loss or damage they may have suffered by reason of any untrue statement or misstatement included in a prospectus. However, an expert (such as a legal practitioner or an accountant) shall not be liable as a person who authorised the issue of the prospectus except in respect of a misstatement made by him or her as an expert. Also, where the prospectus contains an untrue statement or misstatement, any director or officer who authorised the issue of the prospectus may be liable, upon conviction, to a fine of not less than NGN1 Billion or a term of imprisonment not exceeding three years, or both.
Between the Public Market and the Private Market
As indicated above, the disclosure requirements in the public market (ie, SEC-regulated securitisation issuances) are more detailed and robust when compared to private issuances. In terms of size, issuances in the public market are perceived as assuring more liquidity. Whilst the investors in the Nigerian public and private market appear to be similar, generally featuring qualified institutional investors and high net worth individuals, public issuances allow access to a wider base of investors. Also, certain qualified institutional investors require, based on their internal investment policies, that the securities be listed; so SPEs may prefer to undertake public offerings rather than private placements or issuances by a private company, so as to attract a wider pool of investors.
Whilst the transaction opinion typically highlights the need to comply with the relevant provisions of the ISA and SEC Rules (including the disclosure requirements) in the case of an SEC-regulated securitisation issuance, such opinions do not confirm the sufficiency of the disclosure made under the prospectus issued for the securitisation issuance.
There are no laws or regulations in Nigeria requiring “credit risk retention” by the originator, or any other party, under securitisation issuance in Nigeria.
All entities that have issued securities to the public are required to release and file with the SEC (and simultaneously with the exchange the securities were listed, where applicable): (i) quarterly interim financial statements within 30 days of the end of the quarter; and (ii) annual reports within 90 days after the end of the financial year. These reports must be published within 48 hours of being filed with the SEC. Also, by virtue of Paragraph N of the Securitisation Rules, the servicer is required to prepare periodic reports as may be required by the SPE and the trustee in advance of the interest payment date; and copies of that report shall be forwarded to the SEC on a quarterly basis. Under SEC Rule 279(2)(r), the rating agency for the securitisation is required to annually review its rating of the issue and the SPE throughout the life of the securities. The SEC and, where applicable, the relevant exchange regulate and ensure compliance with the reporting requirements. The penalty imposed by the SEC for late filing of these periodic reports is NGN2,000 for every day that the filing if delayed.
Whilst there are no specific regulations on the securitisation activities of rating agencies, all rating agencies operating in Nigeria are regulated by and must be registered with the SEC. The SEC Rules mandate that all rating agencies in Nigeria be a private or public limited company, incorporated in accordance with CAMA. However, the SEC may allow a foreign credit agency to participate in a transaction, by granting it a registration exception certificate, if the foreign credit agency can provide evidence that it is validly registered in a jurisdiction with an established regulatory and supervisory framework in accordance with the standards set out by International Organisation of Securities Commissions. The code of conduct for rating agencies includes prohibitions against making proposals or recommendations regarding the design of structured finance products the rating agency rates; and requires that rating agencies adopt reasonable measures so that the information they use is of sufficient quality to support a credible rating.
Any company that carries out the functions of a rating agency without first registering with the SEC, or obtaining a registration waiver exemption, will be in breach of the provisions of the ISA and the SEC Rules, and may be exposed to civil liabilities in payment of penalties, as well as criminal liabilities as appropriate.
The capital adequacy framework applicable to all banks licensed by the Central Bank of Nigeria (CBN) is currently based on the Basel rules and incorporates elements of both the Basel II and Basel III frameworks. The CBN regulates the banking sector in Nigeria and is responsible for setting and enforcing liquidity and capital requirements.
The CBN’s Regulatory Capital Guidance Note as well as its Credit Risk Capital Guidance Note (Standardised Approach to Securitisation Exposures) state that where a bank increases its equity capital, as a result of a securitisation transaction, that increase must be deducted from the bank’s Tier 1 capital.
The Credit Risk Capital Guidance Note further instructs all banks to deduct eligible securitisation exposures from their Tier 1 and Tier 2 capital, at a rate of 50% each. The Credit Risk Capital Guidance Note defines “securitisation exposure” as any exposure of a bank to a securitisation, and includes asset-backed securities, mortgage-backed securities and collateralised debt obligations, credit enhancements, liquidity facilities, interest rate swaps, currency swaps, and cash collateral accounts. The securitisation exposures that must be deducted from a bank’s Tier 1 and Tier 2 capital are:
However, a bank’s securitised exposures will not have a negative impact on its calculation of total risk-weighted assets. Accordingly, a bank is allowed to exclude securitised exposures from its calculation of risk-weighted assets if all the following conditions are met:
There are no specific laws or regulations in Nigeria with respect to the use of derivatives in securitisations.
No response provided.
The principal laws providing for investor protection in Nigeria are the ISA and the SEC Rules. Accordingly, where a securitisation transaction falls within the ambit of any of these laws (ie, an SEC-regulated securitisation issuance), the relevant investor protection rules available under same would be applicable. Whilst there are no investor protection laws or regulations that apply specifically to securitisation transactions, we are aware that there is a Securitisation Bill before the House of Representatives, which contains provisions for investor protection in securitisation transactions. However, until the Bill is passed and enacted into law, the ISA, as well as the SEC Rules and Securitisation Rules will continue to provide the investor protection regime for securitisation transactions.
Please refer to 4.6 Treatment of Securitisation in Financial Entities.
See also 4.1 Specific Disclosure Laws or Regulations for the applicable disclosure rules, which are of general application to all relevant entities including banks.
Under Nigerian law, only a public company is allowed to invite the public to subscribe to its securities; as such, practitioners typically use public companies in order to be able to issue securities by way of public offering and attract a wider base of investors. However, as a public company, the SPE will be subject to the Securitisation Rules and the SEC, as the regulator in this regard. Although, the SPE may also be constituted as a private company, where the securitisation issuance is not being offered to the general public, the parties will need to consider the benefits of having a wide investor base and the potential success of the offering vis-à-vis the benefit of a less stringent disclosure regime.
Generally, the Securitisation Rules require that the activities of the SPE be limited to undertakings related, or ancillary, to the securitisation issuance. That said, irrespective of the nature of the activities in which an SPE engages, to the extent that it is an SPE created for a securitisation transaction, and it is a public company issuing securities, it will fall within the purview of entities regulated by the SEC.
Securitisations in Nigeria typically feature the following credit enhancements:
There are no particular government sponsored entities which are active in the Nigerian securitisation market.
Securitisation issuances attracts a wide range of investors including banks, insurance companies, specialised funds, high net worth individuals or their corporate (investment) vehicles, institutional investors, pension fund administrators (PFAs), and private equity funds. The investment activities of banks, insurance companies, and PFAs are regulated by the CBN, the National Insurance Commission, and the National Pension Commission, respectively; and the effects of these regulations are set out below. With respect to investments by banks in securitisation issuances, please refer to 4.6 Treatment of Securitisation in Financial Entities. Furthermore, specialised and private equity funds and other institutional investors typically have internal investment policies guiding their investment in securities, including securitisation issuances.
With respect to pension funds, the Regulation on Investment of Pension Fund Assets provides for the rules applicable to the investment of pension fund assets in debt securities (including securitisation issuances). Specifically, pension fund assets are to be invested only in those debt instruments which have a minimum credit rating of ‘A’ issued by at least two rating agencies, one of which must be incorporated in Nigeria and registered with the SEC. Notwithstanding the foregoing, pension fund administrators may invest a maximum of 20% of pension assets under their management in securities issued by states, local governments, corporate entities as well as other allowable debt instruments, with a credit rating of ‘BBB’ issued by at least two rating agencies, one of which must be incorporated in Nigeria and registered with the SEC.
The Prudential Guidelines for Insurers and Reinsurers in Nigeria sets out guidelines for investment decisions by insurance firms in Nigeria. Insurance firms may invest no more than 20% of their funds in securities offered by any one company; and not more than 10% of their funds can be invested in debt instruments issued by corporate entities. In addition, insurance funds may be invested in debt instruments issued by corporate entities if:
The primary documentation customarily used to effect bankruptcy remote transfers in securitisation transactions in Nigeria is a (receivables) sale and purchase agreement (RSPA), typically entered into between the originator (as the seller) and the SPE (as the purchaser). Apart from documenting the transfer of the financial assets, the RSPA will typically cover payment of the purchase consideration; conditions precedent and subsequent to the transfer (if any); relevant representations and warranties; covenants and undertakings; further assurances on the transfer of the financial assets; perfection requirements for the transfer; indemnities; seller’s option to repurchase/clean-up call option; sale rescission events; amongst other matters.
The RSPA will typically cover warranties given by the originator/seller in relation to:
Particularly, in respect of the transferred assets, the originator will usually give warranties that:
The SPE as the purchaser will also give warranties covering its corporate existence; authority and power to execute transaction documents; and the validity and bindingness of the transaction documents on it.
A breach of the originator/seller’s warranties, if not remedied within the timeline specified in the transfer agreement, will trigger the consequences specified in the RSPA, which will typically include an obligation on the seller to repurchase the affected assets (in the case of breach of asset-related warranties); and liabilities for damages, misrepresentation, etc. The SPE may also institute an action against the originator before a court of competent jurisdiction for damages.
As indicated in 1.3 Transfer of Financial Assets (General Requirement for Transferring Financial Assets) the perfection requirements usually undertaken for the transfer of the financial assets are the stamping of the RSPA and delivery of notice of assignment to the underlying obligors. Please refer to 1.3 Transfer of Financial Assets for more information.
The RSPA will also include further assurance provisions/undertakings on the part of the seller to undertake any further act required for the perfection of the transfer, including stamping of the RSPA.
The SPE may institute an action for specific performance of an undertaking in relation to any perfection requirement.
The transfer agreement usually contains, amongst others, the following covenants and undertakings on the part of the seller:
Any breach of these undertakings may constitute an event of default under the bonds documentation, triggering an early amortisation of payment obligations under the bonds and/or enforcement of security (where the bonds are secured). The SPE may institute an action against the originator for breach of any undertaking and may claim damages or seek for the relief of specific performance of any undertaking.
For the purpose of servicing the financial assets, the SPE and the originator (as servicer), enter into a servicing agreement pursuant to which the servicer is appointed by the SPE to service and administer the collection of the receivables. The servicing agreement will generally cover:
A breach of the servicing agreement may lead to termination of the servicer’s appointment, and appointment of another servicer; and the SPE may bring an action against the servicer for any such breach and claim any contractual and legal remedies available to it in this regard.
The principal events of default typically included in a securitisation transaction include:
The occurrence of any of the following events, subject to any applicable grace period, will entitle the trustees on behalf of the bondholders/noteholders to accelerate the payment obligations of the issuer under the bonds/notes.
The scope of indemnities to be given in any securitisation transaction is dependent on different factors including the nature of the financial assets; and is usually a product of negotiations amongst transaction parties. Such indemnities may include an indemnity by the originator to the SPE for losses incurred in connection with the transfer of the financial assets.
Also, the servicer will typically give indemnities to the SPE for any claims, losses, damages, liabilities, costs, expenses arising out of and to the extent attributable to any grossly negligent or wilful act or omission of the servicer, its employees or agents, or a material breach of performance by the servicer of its obligation under the servicing agreement, or as a result of its failure to comply with applicable laws.
There are no other principal matters covered in a securitisation document.
There are no significant aspects of securitisation enforcement not already covered in this chapter.
The overall enforcement regime for securitisations is effective. In relation to SEC-regulated securitisation issuances, the SEC enforces compliance with its rules and imposes appropriate sanctions in cases of breach. Also, parties to transaction documents are able to enforce any breaches of contractual obligations and seek relevant redress in courts/tribunals of competent jurisdiction.
The issuer is the SPE to whom the originator sells the financial assets; and who issues the asset-backed securities to the investors. The issuer applies the proceeds of the issuance as consideration for the purchase of the financial assets from the originator. Please see 1.2 Special Purpose Entities for further details on the form, role, and nature of the SPE.
The sponsor is usually the originator, or an affiliate or parent of the originator, who initiates the securitisation; and, together with other transaction parties, structures the transaction. Sponsors in some transactions provide credit enhancement for the securitisation issuance; and are typically investment companies, financial institutions and trading companies.
The underwriter and placement agent are usually investment banks who (together with the sponsor) arrange, structure, market, and manage the securitisation issuance, engage potential investors for the issuance, run the book building process and where applicable, agree to underwrite the subscription to the securitisation issuance.
The servicer is the party responsible for administering and collecting the receivables due under the transferred financial assets, and the originator (or the sponsor) is typically hired by the SPE to service the financial assets. In some cases, the servicer could also be a company that is in the business of managing or servicing financial assets. The responsibilities of servicers include administering the collections of the relevant receivables and ensuring necessary transfers are made into the relevant collection accounts, payment processing for the underlying obligors, default management and preparation of monthly reports for a fixed servicing fee. Please see 5.5 Principal Servicing Provisions for further details.
Investors are the parties who subscribe to the securitisation issuance. Please see 4.15 Entities Investing in Securitisation for further details.
There are generally two categories of trustees that may feature in a securitisation issuance, to wit: the bond/note trustee and the security trustee. The bond/note trustee is a trustee on behalf of the investors/subscriber to the securities, and as trustee it holds the benefit of covenants, warranties, and other rights under the transaction documents on behalf of the bondholders/noteholders. The security trustee, on the other hand, holds security interests created over the SPE’s assets (typically the receivables and transaction accounts) or other credit enhancements on behalf of the bondholders/noteholders. In certain cases, the same entity may undertake these distinct roles.
In either case, the trustees act in a fiduciary capacity and continually ensures that the rights of the investors are preserved. The bond/note trustee monitors the receipt and disbursement of the cash flow in accordance with the transaction documents. Where there is any contractual breach or potential payment default, the trustees will notify the investors in order to receive instructions regarding subsequent actions. The security trustee is responsible for taking security enforcement actions, when instructed to so do by the investors (usually through the bind trustee), upon the occurrence of an event of default.
Trustees are usually professional trust corporations or affiliates of financial institutions.
We are not aware of any specific rules or regulations that prohibit synthetic securitisations in Nigeria.
See 8.1 Synthetic Securitisation. Transactions of this nature have generally not been seen in Nigeria.
See 8.1 Synthetic Securitisation. Transactions of this nature have generally not been seen in Nigeria.
See 8.1 Synthetic Securitisation. Transactions of this nature have generally not been seen in Nigeria.
Securitisations in Nigeria feature varying classes of assets; however, the most common securitised assets are contract/trade receivables, personal/consumer loans, and commercial real estate receivables.
The structure used in most securitisation transactions in Nigeria is, as described in 1.2 Special Purpose Entities, irrespective of the underlying assets. In a typical securitisation transaction, the borrowing entity (the sponsor) incorporates an SPE (the issuer) to issue debt securities to investors. Essentially, the SPE purchases the financial assets and issues securities. The proceeds of the securities are paid as consideration to the originator for the financial assets, whilst the cash-flow generated from the transferred financial assets is used to meet the SPE’s payment obligation under the bonds/notes. The foregoing is without prejudice to instances where the peculiarities of a particular transaction may require a variation to this structure.