Swedish securitisations are structured to ensure that the issuer is bankruptcy remote from the originator and its creditors, and that the investors in the securitisations are exposed only to the assets and liabilities that form part of the securitisation. Navigating Swedish insolvency laws is central to achieving this, with key focus areas including limiting the number of potential creditors of the issuer, avoiding any bankruptcy proceedings relating to the originator affecting the issuer or its assets, and making sure that the securitised assets will not be included in the originator’s bankruptcy estate.
Assets of the Bankruptcy Estate
Under Swedish law, the bankruptcy estate shall include the property of the debtor at the time the bankruptcy order was issued, including property that may be subject to claw-back.
Transferred Assets and True Sales
Assets that have been transferred by the originator to the issuer in connection with a securitisation transaction may be included in the bankruptcy estate of the originator unless the transfer has been duly perfected and a valid right in rem (sakrättsligt skydd) has been established. The steps required to create a perfected transfer of assets depend on the asset, but will in most cases include the actual physical transfer of the asset from the transferor to the transferee and/or notification to the underlying debtor in connection with, for example, the transfer of a receivable under a non-negotiable promissory note (enkelt skuldebrev).
Although Swedish law does not recognise a true sale as an independent legal concept, the Swedish Supreme Court (Högsta Domstolen) has established a number of prerequisites (as further outlined in 1.3 Transfer of Financial Assets) that ought to be satisfied in a situation where an originator transfers receivables to another company, while at the same time maintaining the role as servicer towards the debtors under the receivables, in order to avoid the reclassification of the actual sale transaction.
In bankruptcy, under certain circumstances and subject to applicable time limits, transactions can be reversed and the relevant assets shall then be returned to and included in the bankruptcy estate. Broadly, these transactions include situations where the debtor has conveyed property fraudulently or preferentially to one creditor to the detriment of its other creditors before the initiation of the relevant insolvency proceedings, or created a new security interest or repaid a debt that is not due or that is considerable compared to the value of the debtor's assets, or if the payment is made through an unusual means of payment.
In the majority of situations, a claim for recovery can be made in respect of actions that were made during the three months preceding the commencement of the bankruptcy proceedings. In certain situations, longer time limits apply and, in some situations, there are no time limits. These include situations where the other party in a transaction is closely related to the debtor, such as a subsidiary or a parent company.
It should be noted that, under Swedish law, a perfected sale or security interest can also be subject to claw-back in accordance with the above-mentioned rules.
A Typical SPE Structure
An SPE (or special purpose vehicle – SPV) is typically organised as a limited liability company (aktiebolag) in accordance with the Swedish Companies Act (2005:551) (aktiebolagslag (2005:551)).
An SPE is usually set up for the sole purpose of the securitisation, and certain measures are taken to avoid liabilities relating to historic operations or to operations other than the securitisation. In most cases, an SPE is a newly established off-the-shelf company directly owned and controlled by the originator. Its business operations will be limited by its by-laws, which will typically contain restrictive language about the SPE’s business object. Although a typical Swedish securitisation structure (as further outlined in 8.2 Common Structures) involves the establishment of a Swedish limited liability company directly owned by the Swedish originator, it is not uncommon for Swedish securitisations to involve an orphan SPE set up in Luxembourg or Ireland, for example, for tax and/or regulatory reasons and purposes.
Consolidation in Bankruptcy
Under Swedish law, bankruptcy proceedings are conducted on a “company-by-company” level – ie, a subsidiary will not be declared bankrupt solely by reason of its parent company’s bankruptcy and the creditors of one company being declared bankrupt would not individually lead to there being recourse against any other company in the same group. Under normal circumstances, the concept of “substantive consolidation” does not exist under Swedish law. Consequently, in a typical securitisation structure – if done correctly – the bankruptcy of the originator would not have a direct legal impact on the SPE’s financial situation or operations.
However, it should be noted that there are certain exceptions to the above general principle. For example, if the SPE and the originator are organised as a group for VAT purposes (momsgrupp), each member of the group for VAT purposes is jointly and severally liable for the principal group entity’s (huvudmannens) VAT liabilities. Consequently, any claim for taxes directed towards the principal group entity (eg, the originator), in or outside of bankruptcy, could also be directed towards any other entity within the group for VAT purposes. Although this is not a bankruptcy issue per se, the implication could be viewed as an exception to the principle that each company is independently liable for its own debt.
Furthermore, it is a well-established principle under Swedish law that a Swedish limited liability company is a separate legal entity from its owners. Thus, as a main rule, the shareholders of a limited liability company cannot be held responsible for actions carried out by a subsidiary, nor become liable for a subsidiary’s obligations and liabilities. However, general principles of piercing the corporate veil (ansvarsgenombrott) have been developed in case law from the Swedish Supreme Court where shareholders have, under exceptional circumstances (disloyal purpose, undercapitalisation of the company and lack of independence), become liable for the obligations of a subsidiary.
Perfection of Transfer
Swedish law distinguishes between non-negotiable promissory notes (enkla skuldebrev) and negotiable promissory notes (löpande skuldebrev). As a general principle, both non-negotiable promissory and negotiable promissory notes (and receivables thereunder) are freely transferable by the creditor without the prior consent of the debtor, and a transfer is effective between the transferor and the transferee upon the execution of the transfer agreement.
However, while the new creditor who has acquired a negotiable promissory note will be protected against third-party claims by being in physical possession of the actual promissory note, a new creditor under a non-negotiable promissory note will obtain such protection first after the debtor has been notified of the transfer. Although there are no formal legal requirements regarding the form of such notice, it is usually made by the originator (ie, the transferor) in writing to the debtor.
A true sale is not an independently recognised concept under Swedish law – ie, it is not regulated as a specific type of sale transaction. This means that there are no formal requirements that must be fulfilled in order for a sale to be characterised as a true sale. Instead, a court would evaluate a transaction on the characteristics of that specific transaction.
Generally, under Swedish law, the parties’ intention when entering into an agreement is an important factor when interpreting the agreement. A court would take such intention into account, but it would also take into account the economic characteristics of the transaction (substance over form) when evaluating whether an intended sale of assets (a true sale) could instead be recharacterised as a security assignment. Factors that could affect such assessment include the extent to which the seller retains the following:
Although there is some uncertainty as to how a court would characterise a sale of assets under a securitisation structure, the situation whereby an originator transfers a non-negotiable promissory note to another company but maintains the role as servicer towards the debtors has been subject to the scrutiny of the Swedish Supreme Court. The starting point under Swedish law in connection with a transfer of assets is that the physical possession and right to access and operate the assets shall pass from the transferor to the transferee in order for the transfer to be fully perfected. A case from the Supreme Court (NJA 1995 s. 367) established a number of prerequisites that must be fulfilled in order to create a perfected transfer and a valid right in rem (sakrättsligt skydd), where assets that have been transferred to another party continue to be serviced by the transferor. The general view of the Swedish market is that those prerequisites are as follows:
Although these prerequisites are widely accepted and recognised in the Swedish market, it should be noted that they have been based on the facts and circumstances set out in one specific case tried by the Supreme Court, and it cannot be ruled out that a Swedish court would apply other principles in a similar but not identical case.
In addition to the above-mentioned principles and as briefly outlined in the preceding paragraphs, it is crucial that the substantial risks associated with the underlying assets are being transferred to the transferee (ie, the SPE) in order to achieve a true sale that would survive the scrutiny of a court. This means that any credit risk associated with the underlying assets must be assumed by the SPE, and that the SPE or any of its creditors would not have a recourse claim against the transferor (ie, the originator) if an underlying debtor fails to meet its payment obligations.
It should be noted that the legal treatment of a transfer of assets (whether it is characterised as a true sale or not, as further outlined in 3.1 Legal Issues With Securitisation Accounting Rules) is independent from the accounting analysis and treatment of such transaction – ie, the above-mentioned principles established by the Supreme Court do not necessarily have an impact on the accounting true sale analysis.
As outlined in 1.4 Construction of Bankruptcy-Remote Transactions, the legal counsel of the securitisation investors will usually issue one legal opinion addressing the true sale, amongst other things.
As outlined in 1.2 Special Purpose Entities (SPEs), it is a well-established principle under Swedish law that a Swedish limited liability company is a separate legal entity from its owners and that assets of a subsidiary (the SPE) would be part of its parent company’s (the originator’s) insolvency estate, assuming that any transfer of assets between the originator and the SPE has been duly perfected and comes within the applicable boundaries for any claw-back risks, as outlined in 1.1 Insolvency Laws.
In addition, as most securitisation transactions in the Swedish market are structured in such a way that the originator will continue to service the transferred underlying assets (in most cases receivables) and collect interest and principal receipt on such assets, it is crucial that such receipts are held as escrow funds by the servicer on behalf of the issuer in order to avoid being assets of the servicer/originator in the bankruptcy of the servicer/originator. Therefore, the servicing agreement, as further outlined in 5.5 Principal Servicing Provisions, usually contains provisions addressing this issue.
Other means to achieve a bankruptcy-remote structure include incorporating restrictive language in the by-laws of the SPE regarding its business objective and making sure that the SPE is not part of a group for VAT purposes; see 1.2 Special-Purpose Entities (SPEs).
It is not market standard in Sweden to obtain separate insolvency opinions in connection with a securitisation transaction. Instead, insolvency matters will be addressed and covered in the general legal opinion, which will normally cover:
Any gain on the transfer from the Swedish originator would be subject to Swedish corporate income tax at 20.6%. However, the transfer is generally made with no gain.
The Swedish legislation implementing the Securitisation Regulation (as defined in 4.1 Specific Disclosure Laws or Regulations) does not include any special treatment of securitisation transactions carried out by a Swedish company. A Swedish SPE is thus taxed on its taxable net profits at the corporate tax rate of 20.6%. The basis for the taxable net profits is the accounting net profits, adjusted for items that are not taxable or tax deductible. Tax deductions for interest expenses are generally restricted to 30% of tax adjusted EBITDA.
There is no Swedish withholding tax on cross-border transfers, nor on interest payments.
Swedish VAT may apply in respect of services performed for an SPE. It is common for such services to be performed for no consideration in order to mitigate the risk.
As outlined in 1.4 Construction of Bankruptcy-Remote Transactions, one opinion that addresses several issues, including tax, is obtained in connection with a Swedish securitisation transaction. The tax section of such opinion generally includes that:
In general, the legal analysis and treatment of a securitisation is independent from the accounting analysis and treatment, and vice versa. Consequently, a legal true sale of the securitised asset may not necessarily entail a derecognition of assets from an accounting perspective. However, the accounting analysis and treatment are often affected by the legal treatment, meaning that a legal true sale is necessary, accounting wise, to achieve a derecognition but it is not necessarily sufficient to reach such conclusion. On the contrary, the legal treatment is not affected by the accounting treatment, although the relevant transaction is often structured in a legal manner to achieve a certain accounting treatment.
A legal opinion addressing a true sale, amongst other things, is usually obtained in order to support a derecognition of the underlying financial assets in the originator’s balance sheet. However, as previously mentioned, the accounting analysis of a transfer of assets will be separate from the legal analysis, although a legal opinion will in most cases be necessary to achieve a derecognition from an accounting perspective.
Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (the “Securitisation Regulation”), has been directly applicable and enforceable in Sweden since its adoption. Therefore, the transparency requirements under Article 7 of the Securitisation Regulation are applicable in relation to a Swedish securitisation.
In addition to the transparency requirements under the Securitisation Regulation, Swedish limited liability companies are subject to mandatory disclosure rules in accordance with the Companies Act, the Accounting Act (bokföringslag (1999:1078)) and the Annual Reports Act (årsredovisningslag (1995:1554)). Such disclosure rules include obligations to disclose annual reports and the company’s articles of association, for example, and to keep available an updated shareholders’ register.
In addition, publicly listed companies are subject to certain disclosure rules in accordance with:
Furthermore, financial institutions such as banks are subject to applicable disclosure provisions pursuant to the European Union’s capital adequacy and liquidity regulation (CRR/CRD), which are directly applicable in Sweden.
There are currently no specific Swedish laws or regulations regarding credit risk retention, other than the rules pursuant to the Securitisation Regulation. However, in accordance with Article 30.1 of the Securitisation Regulation, certain supplementary legislation has been adopted in order to ensure that the relevant competent authority – ie, Sweden's Financial Supervisory Authority (Finansinspektionen) – has the necessary supervisory, investigatory and sanctioning powers to fulfil its duties under the Securitisation Regulation.
On 1 February 2020, the Supplementary Act to the Securitisation Regulation (Lag (2019:1215) med kompletterande bestämmelser till EU:s förordning om värdepapperisering) entered into force in Sweden. The act gives the Financial Supervisory Authority certain investigative and supervisory powers, and establishes interventions and sanctions for violations of the Securitisation Regulation.
As outlined in 4.1 Specific Disclosure Laws or Regulations and 4.2 General Disclosure Laws or Regulations, Swedish companies are subject to the transparency requirements of the Securitisation Regulation and local law requirements pursuant to the Companies Act, the Accounting Act and the Annual Reports Act. In addition, regulated entities such as financial institutions are subject to the regulatory regimen under which they operate. Such requirements can include, but are not limited to, reporting regarding capital adequacy and liquidity and anti-money laundering.
Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies is directly applicable in Sweden. Swedish national law does not contain any other material provisions regarding rating agencies.
As Sweden is part of the European Union, the Swedish legal framework is based on the single rule book for the European Union.
The Swedish legal framework regarding capital adequacy and liquidity is based on the European Union’s capital adequacy and liquidity regulation (CRR/CRD), and is valid for banks and other regulated financial entities (Kreditmarknadsbolag).
For insurance companies, the Swedish legal framework is based on the Solvency II regulation.
There are no specific national laws or regulations that apply to the use of derivatives in securitisations. However, Swedish companies are subject to the applicable EU regulations and directives.
There are no investor protection laws or regulations that apply specifically to Swedish securitisations, but the general Swedish and EU laws and regulations would come into play, depending on the extent to which a Swedish securitisation is a public issuance. In addition, the Securitisation Regulation provides the following protective measures:
Swedish banks that securitise any of their financial assets or invest in positions in securitisations are regulated by the Securitisation Regulation and the applicable capital adequacy and liquidity regulation (CRR/CRD).
As outlined in 1.2 Special Purpose Entities (SPEs), a Swedish SPE is usually set up as a limited liability company in accordance with the Companies Act. Swedish law does not provide for any specific regulation regarding SPEs; instead, an SPE will be subject to the rules and regulations generally applicable to Swedish limited liability companies.
Pursuant to the Swedish Banking and Financing Business Act (Lag (2004:297) om bank- och finansieringsrörelse), a company must have a licence in order to carry out financing business (finansieringsrörelse) in Sweden. The term “financing business” includes any commercial operations where the purpose is to:
In an opinion issued on 18 February 2021 (Ställningstagande: Obligationsfinansierad kreditgivning), the Swedish Financial Supervisory Authority established its view that the issuing of debt instruments, including bonds, would not be subject to the licence requirements under the Banking and Financing Business Act, unless such instruments are issued to a financial institution (as the term is used in the CRR) and the issuing company can ensure that the issued instrument cannot be transferred to a non-financial institution.
As a result of the above, for a Swedish company that is not a bank or a financial institution, it is crucial that any debt issued pursuant to a securitisation transaction is not held by or transferred to a private person or a company that is not a financial institution. Therefore, Swedish securitisation documents contain strict provisions regarding the transfer and assignment of debt, limiting such transfers and/or assignments to so-called eligible institutions.
It should be noted, however, that although an issuer can avoid being subject to the licence requirements under the Banking and Financing Business Act, in most situations it will (as outlined in 5.4 Principal Covenants) be subject to the registration requirements under the Currency Exchange and Other Financial Operations (Reporting Duty) Act (lag (1996:1006) om valutaväxling och annan finansiell verksamhet).
A number of different forms of credit enhancement have been used in the Swedish market over the last couple of years, including subordination, over-collateralisation, cash reserves, deposits, guarantees, letters of credit, credit default swaps and other forms of insurances.
Furthermore, and as addressed in 4.13 Participation of Government-Sponsored Entities, the European Investment Fund has in certain cases provided guarantees to the investors as part of its credit enhancement programme.
There are no Swedish government-sponsored entities that are specifically targeting Swedish securitisations, but Swedish pension funds and other managers of public funds are occasionally seen as investors in Swedish securitisations. However, European institutions such as the European Investment Fund have been involved in Swedish securitisation transactions by providing guarantees through their credit enhancement operations in order to facilitate and enhance access to finance for small and medium-sized enterprises.
Investors are usually major national or international banks, asset managers such as funds and pension funds, or other credit institutions, all of which are subject to the regulatory landscape under which such entities operate.
In order to achieve bankruptcy-remote transfers under a Swedish securitisation, two agreements are usually used:
Core Provisions of the RPA
The RPA sets out the details for the sale and purchase of the receivables to be securitised. For example, it contains provisions about the purchase price, the actions to perfect the transfer, lack of recourse and, if applicable, terms for the repurchase of transferred receivables by the originator. The RPA usually also contains certain originator warranties and asset warranties made by the originator. The originator warranties are similar to standardised representations made by an obligor under an LMA-form facilities agreement, including representations about status, power, capacity and authority, licences and corporate approvals. The asset warranties are more specific for a securitisation transaction and include representations that:
Core Provisions of the Servicing Agreement
Under the servicing agreement, the issuer appoints the originator as its servicer to administer and to collect amounts due under the transferred loans in accordance with the originator’s credit and collection policy. Loan proceeds are often collected on an account held by the servicer, where such proceeds are held as escrow funds, and then swept, by daily transfers, to an assigned account of the issuer. Typically, the servicing agreement contains an indemnification provision whereby the servicer undertakes to indemnify the issuer against any cost, claim, loss and liability that has arisen in connection with a breach by the servicer of its liabilities and undertakings under the servicing agreement.
As outlined in 1.3 Transfer of Financial Assets, it is an established principle under Swedish law that, in order to achieve a true sale where the transferor shall continue to service the sold assets, the transferee of the receivables (ie, the issuer) must be able to terminate the appointment of the transferor (ie, the originator) as servicer for the transferred loans, at any time and at its sole discretion. Thus, the servicing agreement usually contains such discretionary provisions alongside customary provisions regarding the resignation or termination of the servicer.
In addition to the servicing agreement, the servicer, the issuer and the security agent often enter into a back-up servicing agreement with a third-party service provider. This agreement, together with the servicing agreement, forms the basis for the replacement of the servicer in case of a termination or resignation, pursuant to the servicing agreement.
As outlined in 5.1 Bankruptcy-Remote Transfers, asset-related warranties are the principal warranties used in securitisation documentation governed by Swedish law, besides standard corporate warranties relating to the originator and the SPE. Such asset-related warranties are mainly focused on compliance with agreed eligibility criteria, agreed concentration limits and applicable laws and regulations.
Any breach of warranty would typically constitute an event of default and/or an early amortisation trigger event under the securitisation documentation, but any breach of asset-related warranties could usually be cured by a repurchase of the affected receivables by the originator within a certain period of time (and sometimes, a breach of asset-related warranties would only result in the affected loans falling out of the borrowing base without triggering an event of default if the borrowing base ratio is still being complied with).
As outlined in 1.3 Transfer of Financial Assets, the necessary perfection provisions depend on whether the receivables are non-negotiable promissory notes (enkla skuldebrev) or negotiable promissory notes (löpande skuldebrev). Generally, the necessary steps include notifying the debtor of the transfer and, in the case of negotiable promissory notes, transferring the physical promissory note to the SPE.
In most cases, the secured parties will obtain a pledge over the transferred receivables, under which the security agent, acting on behalf of the secured parties, will obtain a power of attorney authorising it to do all such acts and take any steps necessary to establish, maintain and preserve the pledge. There is normally a high level of focus on safeguarding that all relevant perfection steps are taken, and such perfection steps are typically conditions precedent to funding (both on the initial utilisation date and on future utilisation dates).
In addition to customary positive and negative covenants relating to the ring-fencing of the SPE and the assets and liabilities forming part of the securitisation, Swedish securitisation documentation usually includes certain covenants specific to the securitisation and the Swedish regulatory environment. For example, a company that intends to participate in financing by acquiring receivables and raising financing from financially regulated entities (eg, an issuer in a securitisation) does not need a licence from the Swedish Financial Supervisory Authority to conduct such activities. It does, however, need to register with the Swedish Financial Supervisory Authority pursuant to the Currency Exchange and Other Financial Operations (Reporting Duty) Act.
Once registered, the Company will be a so-called “financial institution” (finansiellt institut), which, in accordance with the mentioned act, will be subject to certain anti-money laundering and know-your-customer obligations, for example. Although the company can initiate its business as soon as the registration application has been submitted to the Swedish Financial Supervisory Authority, the securitisation documentation usually contains a covenant to promptly complete such registration and a covenant restricting the company from raising financing from non-regulated entities.
In addition, depending on the applicable credit enhancement structure and the applicability of the Securitisation Regulation, the securitisation documentation usually contains a covenant to maintain risk retention in order to ensure compliance with the Securitisation Regulation.
Any breach of covenants would constitute an event of default and/or an early amortisation trigger event.
As outlined in 5.1 Bankruptcy-Remote Transfers, the servicer is often the parent company of the issuer and also the original originator of the receivables. Due to the close corporate relationship between the issuer and the servicer, the servicing agreement contains strict provisions about the services provided, including but not limited to administration of the loans, record-keeping, the collection of loan receipts, reporting requirements (including requirements under the Securitisation Regulation) and related information undertakings.
A common Swedish law-governed structure (as further outlined in 8.2 Common Structures) entails that, following the transfer of receivables from the originator to the issuer, the debtor will continue to make payments of principal and interest into an account held by the originator, which will then make daily sweeps of collected monies to an account of the issuer. Given this typical structure, the servicing agreement usually contains provisions regulating that such loan receipts shall be held as escrow funds by the servicer on behalf of the issuer in order to avoid commingling with the servicer’s other assets.
Furthermore, as a result of the established true sale principles mentioned in 1.3 Transfer of Financial Assets and 5.1 Bankruptcy-Remote Transfers, it is fundamental for the issuer to be able to terminate the appointment of the servicer, at any time and at its sole discretion. Consequently, the servicing agreement usually contains such arbitrary termination provision.
Principal defaults used in Swedish securitisation documentation are similar to customary defaults in an LMA-form facilities agreement – non-payment, misrepresentation, breach of obligations, change of control and a material adverse change are common default triggers. Other securitisation-specific defaults commonly used include the failure by the originator to comply with the risk retention requirements of the Securitisation Regulation, and the failure to complete the registration as a financial institute pursuant to the Currency Exchange and Other Financial Operations (Reporting Duty) Act, as outlined in 5.4 Principal Covenants.
If the RPA contains a repurchase mechanism, under which the originator is obliged to repurchase transferred loans in certain situations, the failure to repurchase transferred receivables in order to cure an asset performance failure, for example, is a default.
Principal indemnities used in a Swedish securitisation are very broad and in line with international standards, including indemnities for losses resulting from defaults, any finance party acting on requests or instructions by the issuer, currency indemnities and tax indemnities. Indemnities are usually subject to the applicable priority of payments, and exclude any situation where the otherwise indemnified party has acted with gross negligence, fraud or wilful misconduct.
The role of the issuer is to own the securitised assets and to act as pledgor and borrower in relation to the securitisation investors. The issuer is typically an insolvency-remote SPE in the form of a limited liability company, usually established for the sole purpose of the securitisation transaction.
The role of the sponsor/originator is to originate, and subsequently sell to the issuer, the underlying assets by adhering to certain established and agreed-upon eligibility criteria in connection with the origination of such assets. A sponsor is usually a retail lender, SME lender, bank or industrial company with portfolios of trade receivables.
Underwriters and placement agents, sometimes referred to managers and/or arrangers, are usually not engaged or involved in Swedish law-governed securitisation transactions. Instead, transactions are usually managed directly between the originator, issuer and lender, with the latter often being a financial institution (eg, a major bank or asset manager). Consequently, book-building processes and similar steps are uncommon on the Swedish market.
The role of the servicer is to service the transferred receivables and thus function as the main point of contact for the debtors under the securitised receivables. The servicer is usually the originator/seller of the receivables.
Investors are usually major national or international banks, asset managers or other credit institutions.
Swedish law does not recognise the concept of a trust or trustees. However, it is common for a third party or, for example, an affiliate of a bank to act as “security agent” or “security trustee” in relation to the security granted for the benefit of the secured parties. The role of the security agent is to hold and administrate the security.
Swedish law does not explicitly regulate synthetic securitisations – ie, a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures being securitised remain exposures of the originator. However, synthetic securitisations are admissible in Sweden subject to the EU legal regime, in this case the Securitisation Regulation and the applicable capital adequacy and liquidity regulation (CRR/CRD), which are directly applicable in Sweden.
The most common types of financial assets being securitised in Sweden are:
The common structure for a Swedish securitisation involves an originator, a servicer, an issuer, one or several lenders and a number of third parties, including a back-up servicer. The originator, which is also the servicer of the receivables once transferred to the issuer, transfers the underlying assets to the issuer which, as outlined in 1.2 Special Purpose Entities (SPEs) and 1.4 Construction of Bankruptcy-Remote Transactions, is a newly established bankruptcy-remote SPE. The transfer and the servicing agreement are structured to ensure a true sale of the underlying assets.
The purchase of assets in accordance with the RPA, as further outlined in 5.1 Bankruptcy-Remote Transfers, is made pursuant to certain eligibility criteria and financed by the investors pursuant to a facilities agreement. The investors are usually major national or international banks, asset managers or other credit institutions. In addition to the senior and junior investors, the originator retains a material net economic interest in the securitisation of at least 5%, in accordance with the Securitisation Regulation, by making a subordinated facility available to the issuer.
In order to maintain the independence of the securitisation structure in relation to the potential bankruptcy of the originator, a back-up servicer is engaged, which, in the case of the originator’s bankruptcy or the issuer’s termination of the appointment of the servicer, for example, can step in and continue the servicing of the transferred assets on substantially similar terms.
Securitisation in Sweden: an Introduction
The European securitisation market commenced some time after the concept was well established in the US. The Swedish market was even slower in the early stages, due in particular to legislation resulting in the special purpose vehicle (SPV) being required to hold a licence and being subject to capital adequacy rules. These rules, together with tax benefits and international investors being more familiar and comfortable with the laws of other jurisdictions, meant that the SPV would typically benefit from being established outside Sweden, thus creating a cost and complexity threshold.
The major Swedish banks could also effectively use covered bonds for the financing of residential mortgages. New players in the mortgage market, however, saw the opportunity to establish offshore SPVs and refinance existing mortgage portfolios through securitisations. Since then, accounting rules, internationalisation, an unfavourable view of offshore jurisdictions, technical developments and regulatory changes have meant that securitisations have picked up in the Swedish market, and have also led to the use of Swedish SPVs. This development has also been fuelled by the growth of the Swedish consumer debt market.
This article sets out certain key developments that have formed the Swedish securitisation market in recent years, and highlights certain trends currently being seen in the market.
Offshore to onshore
In the early days of the Swedish securitisation market, SPVs were typically incorporated in Luxembourg, Ireland or Jersey (for reasons mentioned above), but as the Swedish securitisation market developed (including by way of regulatory changes) and as part of a general trend within the Swedish financing market to move funds and SPVs onshore to promote transparency and trust in the domestic market, most securitisations by Swedish originators or sponsors today use an SPV incorporated in Sweden.
Access to public funding for non-banks
The acquisition of receivables constitutes the provision of financial services, which is subject to a licensing requirement under Swedish law, if the purchaser (the SPV) finances itself using repayable funds from the public. Therefore, in order not to be subject to licensing and thus capital adequacy requirements, the SPV needs to use private funding only.
Repayable funds from the public are deposits first and foremost, but under Swedish law such funding also includes bonds and similar capital markets instruments that are publicly listed on any exchange or regulated market. At the outset, there was some uncertainty as to whether privately placed bonds could also constitute such funds from the public, if the bonds were freely transferable.
Relevant Swedish banking regulation includes an exemption from the licensing requirement if the activity of the SPV is limited to acquiring receivables on a few occasions and the SPV is not financing itself with repayable funds from the public on an ongoing basis – the so-called securitisation exemption (värdepapperiseringsundantaget).
In the years leading up to Swedish Financial Supervisory Authority (SFSA) investigations and clarification (described below), such exemption was frequently used by unlicensed issuers who wanted to tap the Swedish securitisation market. It was widely believed that an SPV would be exempt from the licensing requirement as long as it was limited to acquisitions and debt issuances on a few occasions.
SFSA investigations (2017–2019) and clarification (February 2021) – private placements
Around 2016–17, the Swedish regulator and competent authority, the SFSA, initiated investigations and proceedings against certain SPV issuers in Swedish securitisations, and ultimately forced them to restructure their financing on the basis that it was, in the view of the SFSA, subject to a licensing requirement where the originator and the SPV were part of the same corporate group and the originator did not itself hold a licence. The SFSA further argued that, whereas the securitisation exemption was sufficient to exclude the SPV from a licensing requirement, it was not sufficient to exclude the originator and owner from being required to hold a licence. Instead, the fact that origination and funding were separated into two legal entities within the same corporate group should not mean that the originator/issuer could avoid a licence altogether, according to the SFSA, which argued that the two should be viewed as a whole (genomlysning).
Since this was based on the SFSA’s interpretation of the regulations (which contrasted with parts of the market and were never tried by a Swedish court), and since it was enforced through the SFSA’s supervisory functions rather than its explicit regulations, for a number of years there was some uncertainty regarding what the regulatory status and requirements for Swedish securitisation SPVs really were. However, the securitisation market adapted and developed new standards
In February 2021, the SFSA clarified in a written communication that a company that finances its lending activities with repayable funds from the public is subject to a licensing requirement, unless the relevant financing instruments (including, for example, bonds) are (i) only issued to financially regulated entities (so-called eligible institutions) and (ii) include contractual transfer restrictions (whereby they are transferable to eligible institutions only in the secondary market)). In this way, by issuing the financing instruments in private placements to certain eligible institutions rather than public transactions with a widespread investor base and by restricting the secondary market, such financing instruments would not constitute repayable funds from the public in the view of the SFSA.
Growth of fintech and alternative lenders
Despite being a relatively small market, Sweden has a strong start-up scene and this is certainly true also within fintech and the space of alternative lenders. To be able to challenge the more traditional banks, digital challenger banks and other alternative lenders have strived to develop not only digital platforms, user-friendly software and cost- and time-efficient infrastructure, but also innovative and tailored financing solutions such as P2P (peer-to-peer lending), forward flow transactions and securitisations.
Access to affordable funding is one of the key challenges for these alternative lenders and if they do not hold a banking licence or are not licensed as a credit market company, they will generally have difficulties obtaining deposits or accessing the public debt capital markets (for the regulatory reasons described above). As a result, these new players have increasingly turned to the private securitisation market, which has contributed to a stable growth of the Swedish securitisation market for non-banks in recent years.
Key asset types
Trade receivables and supply chain financing
For large corporates, securitisation transactions have traditionally focused on trade receivables and that continues to be the case, but there are also an increasing number of more bespoke structures, such as more complex supply chain financing securitisation transactions and handset financing for telecoms in the form of securitisations.
Unsecured consumer debt
The bread and butter of the Swedish securitisation market in more recent years, especially for non-banks, has been unsecured consumer loans. This development has been driven to a large extent by new players, including niche banks and fintech start-ups focused on tech (as described above and similar to mortgage loans and SMEs, as described below). Such players include, for example, P2P lending platforms, credit card debt providers, niche banks engaged in blanco lending and alternative consumer lenders that finance or refinance short-term unsecured consumer debt arising in day-to-day purchases and other transactions made by consumers.
In relative terms, Sweden has a very large market for residential mortgages. Historically, this market has been dominated by the major Swedish banks, but in recent years it has seen a growth of new players and is becoming more diversified on the lender side (although the Swedish banks continue to be dominant).
First, it was niche banks and similar entities that focused on specific types of mortgage loans (typically those with higher risk). Then, more recently, it has been the non-bank alternative lenders that focus on tech-driven and more efficient operations. In both cases, they have showed significant interest in the securitisation market and the market for residential mortgage-backed securities (RMBS), although, so far, the non-bank alternative mortgage lenders that have turned to the market for alternative investment funds (AIFs) for funding, rather than the RMBS/securitisation market, have been more successful, at least in terms of lending volumes.
Recent years have seen a significant increase in securitisations of SME loans by Swedish originators. The originators are predominantly alternative lenders and traditional bank challengers who originate SME loans based on digital infrastructure, including automated processes for credit approvals, such as algorithms and artificial intelligence (AI), and who identified a gap in the market due to SMEs limited access to the regular banking market. They do not currently face the same regulatory hurdles as the alternative (non-bank) consumer lenders, but access to public funding is still subject to significant restrictions, and securitisations may still be an attractive route to financing.
This growth is partly tech-driven, but to a large extent it was also boosted by the EU (in particular the European Investment Fund/European Investment Bank) and the Swedish government in connection with the COVID-19 pandemic, since it was believed that SMEs were particularly vulnerable to disrupted markets (with limited access to begin with) and rapid and extreme changes in consumer behaviour; rescue programmes targeted at SMEs were launched as a response this, which benefited the securitisation market for SME loans.
EU Securitisation Regulation
The EU Securitisation Regulation that came into force on 1 January 2019 is directly applicable in Sweden and has significantly reformed the securitisation market. Prior to its introduction, there was very little regulation focused directly on securitisations and, initially, this increase in regulation created entry barriers for new issuers and introduced new requirements that, up to this point, had been free for transaction parties to agree upon.
However, as the dust settled, this increase in regulation has led to the development of a more sophisticated and coherent market, especially within the areas of reporting, transparency, standardisation, risk retention, etc. It still remains to be seen, but the EU Securitisation Regulation could help to create a more stable domestic securitisation market that is more attractive to international players due to its predictability and reliability.
Other recent trends
Other notable trends within the Swedish securitisation market in the most recent years include the following.
Looking ahead: NPLs and banks to offload balance sheets
The Swedish securitisation market has been relatively quiet when it comes to NPL securitisations and other securitisations designed to offload the balance sheets of banks. The Swedish banks have been well capitalised, but new regulation within capital adequacy and accounting standards, as well as the EU Securitisation Regulation, have created a new environment where it may become more beneficial for banks to turn to securitisations to improve their capital base, balance sheets and returns on equity. This is an area of potential growth within Swedish securitisations and an area that will see increased activity in the next couple of years.