The most commonly securitised financial assets in Nigeria are:

• mortgage loans (commercial and residential); and
• receivables under non-financial contracts such as consumer loans (including car loans and personal loans).

The Nigerian Security Exchange Commission (SEC)’s SEC Rules on Securitisation 2015 exempt the following assets from being securitised:

• revolving credit facilities (credit card receivables);
• encumbered assets; and
• loans with bullet repayment of both principal and interest.

The usual transaction structures for the most commonly securitised financial assets in Nigeria are as follows.

• Mortgage loans – the transaction structure employed for securitisation backed by a pool of mortgage loans involves the transfer of the assets (mortgage loan(s)) along with associated risks to a special purpose vehicle (SPV) for subsequent registration as securities with the SEC.
• Receivables under non-financial contracts – the securitisation of receivables under non-financial contracts such as car loans and personal loans also uses the transaction structure adopted in mortgage-backed securitisation. Receivables under car/personal loans are transferred, along with the associated risk, to an SPV for subsequent registration as securities with the SEC.

The securitisation process typically begins with the transfer of the assets from the originator to the SPV, the execution of the relevant transaction documents, and registration with the SEC to allow for the following:

• servicing of the securitised assets (collection and management of remittance of receivables);
• payment priorities of each class of security issued thereto;
• provision of liquidity in the event of temporary shortfalls in remitting receivables;
• clauses on redemption of the securities or substitution in the event of a breach of warranty or default in remitting receivables;
• the process of disposition of the assets; and
• the manner of disposal of any residual value or assets with the SPV after all obligations to the investors have been completed.

The applicable laws and regulations that govern securitisation include:

• the SEC Rules on Securitisation 2015;
• the SEC Consolidated Rules 2013;
• the Investment and Securities Act 2007; and
• the Companies and Allied Matters Act 2020 (as amended).

SPVs (also known as special purpose entities) must be registered in Nigeria. SPVs may take the form of a company, a trust created by written instrument, or any other legal entity that the SEC permits for securitisation transactions. Where they take the form of a company, they must be incorporated as public limited liability companies with the Corporate Affairs Commission (CAC) and must have the initials “SPV” in its corporate name.

The forms of credit enhancement used in the securitisation process are as follows.

• Guarantees – these are guarantees to make payment in the event of default in receivables. They are typically issued by a third party who is not a trustee to the transaction or by an affiliate/subsidiary of the originator or an affiliate/subsidiary of the originator’s parent company.
• Over-collaterisation – this involves the sale of assets to the SPV that exceed the value of the securities to be issued such that the excess in value can cover for any temporary shortfalls or disruptions in receivables.
• Subordination – this involves the ranking of the securities issued by the SPV to allow for the payment of priority claims by senior or super-senior security holders before the settlement of claims by junior security holders.
• Liquidity facility agreements – these are agreements entered into by the SPV to provide additional financial support in the event of any temporary disruptions or shortfalls in receivables. Sources of liquidity facilities include bank facilities and cash reserves. It is important to note that the liquidity provider will not provide protection against or assume risk for defaulted receivables.        

An issuer is the SPV responsible for creating and selling the asset-backed securities to investors. Issuers are typically SPVs incorporated for the sole purpose of acquiring the assets from the originators and thereafter issuing them to investors once they have been properly registered with the SEC.

The objectives of an SPV are strictly limited to the matters related to the securitisation process, which include:

• acquiring and managing the assets;
• assumption of risk associated with the acquired assets;
• entering into agreements with other persons or entities for the purpose of the securitisation;
• dealing in the assets in line with approvals obtained from the SEC;
• creation, registration and issuance of asset-backed securities; and
• collecting and remitting receivables to investors.

It is important to note that the issuer is not allowed to have employees and must subcontract all ancillary services to third parties.

A sponsor is typically a financial institution that initiates and facilitates the transaction by selecting the pool of assets to be transferred to the SPV. The sponsor’s role involves structuring the transaction and determining the types of asset-backed securities to be issued to investors. The sponsor may also oversee the servicing of the assets post-securitisation. Although not present in all securitisation transactions, the originator may also be the sponsor in some cases.

The SEC Rules on Securitisation provide guidance on the relationship between sponsors and SPVs in securitisation transactions.

An originator is a person or entity that is the original obligee of the assets that are eventually transferred from its own balance sheet to the SPV in a true sale. The responsibilities of an originator typically include the creation of the assets and the sale of the assets to the SPV. The originator may also act as servicer in the securitisation transaction, subject to obtaining the approval of the SEC.

Banks and other financial institutions regulated by the Central Bank of Nigeria (CBN) are the major originators. Non-bank institutions that have large pools of receivables under non-financial contracts are also originators.

Underwriters typically analyse the assets to be securitised, structure the securitisation transaction, determine a suitable price for the asset-backed securities, and facilitate the marketing and sale of the asset-backed securities to investors. The major businesses that act as underwriters in securitisations are investment banks. Underwriters are not generally mandated to be transaction parties in securitisation; however, they are present for good order when there is no sponsor to structure and facilitate the securitisation transaction.

Placement agents are only engaged when the asset-backed securities are to be sold to specific or pre-arranged purchasers. Placement agents typically facilitate the marketing and sale of the asset-backed securities and source for purchasers/investors.

Servicers are engaged by the SPV to provide administrative services in respect of the assets – for example, the collection and recording of payments received on the assets, remitting such payments to the SPV, and performing other related services. The servicer is responsible for the periodic reports to the SPV, the trustee and the SEC, as well as for keeping books, records and accounts of the securitisation transaction.

Originators are usually the servicers in securitisation transactions, subject to SEC approval. Where the originator also doubles as the servicer, there are restrictions as to its relationship with the SPV – namely, the servicer and the SPV cannot be related/affiliated parties, and they cannot have common directors or officers. As such, banks and other financial institutions regulated by the CBN are the usual servicers.

Servicers derive authority to act from the servicing agreement with the SPV and the written consent from the SPV’s board of directors or the trustee to the transaction. SEC also confers general administrative powers to servicers.

Investors are the purchasers of asset-backed securities issued by the SPV. They are entitled to the receivables on the assets usually paid out by the SPV. Investors are typically responsible for conducting their due diligence with regard to the securities being offered to them. This will involve reviewing the transaction documentation and assessing the rating reports on the assets before purchasing the securities.

Businesses that are typically investors in securitisation transactions include banks, insurance companies, and pension fund administrators. Public or privately owned companies in other sectors may also purchase asset-backed securities.

Bond/note trustees are required in securitisation transactions and are responsible for holding and administering the assets backing the securities on behalf of the investors. The bond trustees will typically execute a trust deed with the SPV and the investors.

Only companies registered with the SEC as trustees can act as bond/note trustees in securitisation transactions. Bond/note trustees are compulsory transaction parties, as the trust deed is one of the documents required for the registration of the securities by the SPV with the SEC.

A security trustee is an entity appointed to hold and enforce (where necessary) the security interests on behalf of the investors in a securitisation transaction, thereby ensuring that the terms of the transaction are followed and that investor interests are safeguarded. Key responsibilities of the security trustee include ensuring compliance with the securitisation documents, protecting the interests of the investors, managing the enforcement process in the event of default, and distributing proceeds from any enforcement actions.

Only companies registered with the SEC as trustees can act as security trustees in securitisation transactions. As such, the bond/note trustee may also act as the security trustee in some cases.

Bankruptcy-remoteness is achieved through a sale agreement between the originator and the SPV. The sale is deemed final and on a “without recourse” basis to legally isolate the assets and keep them beyond the reach of the originator and its creditors. The subject matters covered in the sale agreement include:

• the transfer of assets from the originator to the SPV;
• statements by the originator on the quality and validity of the assets;
• the purchase price or such other consideration agreed to by parties; and
• guarantees of liquidity during temporary shortfalls.

The warranties typically given by transaction parties concern the capacity of parties to contract, corporate status, compliance with relevant laws, possession of the relevant operational licenses required for the transaction, and corporate authorisations for representatives signing the documentation on their behalf.

The originator also provides warranties to the SPV in the sale agreement as to the quality of assets being transferred and its legal title to transfer the assets. The aforementioned warranties are typically enforced via an obligation on the originator to repurchase or replace the assets that fail to meet the quality standard set out in the documentation.

Perfection provisions are included in securitisation documentation to ensure that contractual terms are binding on and enforceable against the respective transaction parties. Hence, assets are usually transferred via legal assignment.

Perfection provisions that are typically inserted in securitisation documentation include stamping in accordance with the Stamp Duties Act and registering the transfer with the relevant authorities, such as the state land registries, for real estate under the Land Use Act 1978. In some cases, it may also involve informing the obligors (borrowers) of the transfer and – where applicable – obtaining the consent and approval of industry-specific regulators. For example, obtaining authorisation letters or “no objection” certificates  from the CBN where the originator is a bank or from the National Insurance Commission (“NAICOM”) where the originator is an insurance company.

Principal covenants include:

• covenant of repayment by the SPV in the liquidity facility agreement;
• covenant of payment of the principal and interest by the SPV in the trust deed; and
• covenant of the servicer to collect and manage the receivables in accordance with the servicing agreement

Covenants are typically enforced by the trustee on behalf of the investors and by the SPV. Breach of the SPV’s covenant of payment of principal and interest will result in the trustee commencing foreclosure on the assets backing the securities, on behalf of the investors, in order to redeem the securities and recover accrued interests. Breach of the servicer’s covenant will result in a termination of the servicing agreement and substitution of the servicer by the SPV.

Servicing agreements provide for the following obligations:

• servicing/ongoing administration of the securitised assets;
• management of incoming cash flows;
• provisions for actions to be taken to cater for shortfalls in interest payments due to defaults;
• procedure for advancing investors’ interest in the event of the SPV’s default or subpar performance of the assets;
• conditions for termination of the servicer’s appointment and subsequent appointment of a replacement servicer; and
• the process for proceeding against defaulting debtors in the event of the termination of the servicer’s appointment.

Principal defaults include:

• breach of material obligations by the issuer;
• insolvency/bankruptcy of the issuer;
• breach of representation and warranties by the issuer;
• non-payment of principal and interest by the issuer; and
• misrepresentation by the issuer.

Defaults are enforced via the instruction of the trustee by the investors to foreclose on the assets backing the securities in order to redeem the principal sums and recover accrued interests.

Principal indemnities are given by the originator to the issuer in respect of any breach or misrepresentation by the seller concerning the assets being transferred. These indemnities typically hold the originator responsible in the event of the breach of fundamental covenants given by the originator. They differ in each contract.

The trust deed sets out the terms and conditions relating to the securities. The trust deed contains provisions with regard to:

• the issuance of the asset-backed securities;
• the issuer’s payment obligations and interests;
• the trustee’s obligations to the investors;
• events of default;
• representations and warranties and covenants; and
• termination or winding-up of the trust.

Credit derivatives are mostly used in securitisations where the originator is a bank or financial institution regulated by the CBN. The credit derivatives recognised by the CBN for the purpose of securitisation include credit default swaps, total return swaps, or credit-linked notes. The credit derivatives are typically used to hedge against risks of default in payments by the SPV to the investors.

Offering memoranda are required when securitisation is limited to private or specific investors. The memorandum is synonymous to those used for private placements and will state the terms of the offer and other documentations the law may require. Applicable regulations include the SEC Rules on Securitisation 2015, the SEC Consolidated Rules 2013, Companies and Allied Matters Act 2020 (as amended), and the Investment and Securities Act 2007.

The SEC Rules on Securitisation 2015 requires the issuer and the originator to disclose the following:

• an offering memorandum or prospectus describing the securitisation transaction, which will typically contain information on:
1. the nature of the sale of the assets;
2. credit enhancement forms;
3. corporate information on the originators, servicers and issuer;
4. a rating report on the asset-backed securities; and
5. the structure of the transaction, including the principal amount of the value of the securities to be issued, the payment priorities of each class of security, and the anticipated yields and payments for each security class;
• their policy on the redemption and substitution of securities in the event that a covenant/warranty is breached;
• a description of the originator’s parent company, subsidiaries, affiliates, shareholders or directors relationship to or interest in the issue; and.
• authorisation letters from industry-specific regulators – for example, the CBN (where the originator is a bank/financial institution) or NAICOM (where the originator is an insurance company).

Please refer to 4.1 Specific Disclosure Laws or Regulations.

There are no regulations mandating credit-risk retention by originators.

The SEC Rules on Securitisation 2015 mandates the servicer to provide periodic reports to the issuer or trustee with regard to transaction details such as the interest payment dates, shortfalls, and any material development that may have an adverse effect on the collection of any receivables. The servicer must also submit the above-mentioned reports to the SEC every quarter during the transaction. The SEC Rules on Securitisation 2015 does not provide specific penalties for non-compliance; however, the SEC is empowered generally to impose penalties on persons engaged in the securities business in Nigeria.

Rating agencies are regulated by the SEC as “capital market operators” under the SEC Consolidated Rules 2013. Rating agencies may operate as public or private limited liability companies and must obtain the SEC’s approval before the commencement of its operations. Rating agencies operating with the SEC’s approval may have their licences suspended or cancelled if they do not adhere to the provisions of the Investment and Securities Act 2007, the SEC Consolidated Rules 2013, or such other regulations created by the SEC for the purpose of regulating their activities.

There are general applicable capital and liquidity rules made by the CBN for banks and other financial institutions under its regulatory purview. The Revised Guidelines on Regulatory Capital 2021 were developed by the CBN to outline the criteria that banks’ capital instruments must satisfy to qualify for regulatory purposes under the Basel III standards.

These guidelines provide specifically for the treatment of gains derived from securitisation transactions in relation to banks’ regulatory capital. Per the guidelines, banks must deduct any increase in equity capital resulting from a securitisation transaction from the Common Equity Tier 1 portion of its regulatory capital. Such deduction is necessary to ensure that the bank’s regulatory capital reflects its real loss-absorbing funds rather than expected future earnings that may not eventually be realised.

Banks are mandated to comply with the CBN’s regulatory capital requirements as contained in the above-mentioned guidelines in order to build resilience and ensure that they have:

• high-quality capital that can absorb losses on a going concern basis; and
• additional capital buffers to cushion against future unexpected losses.

There are no specific laws or regulations that apply to the use of derivatives in securitisations. However, derivative trading rules were recently approved by the SEC, and parties seeking to use derivatives in their respective securitisaion transaction may approach the SEC for its approval/consent.

The derivative trading rules are enforced by the SEC. Penalties for non-compliance are as prescribed by the SEC.

The primary securitisation legislation, the SEC Rules on Securitisation 2015, makes provision for investor protection by ensuring:

• specific disclosures by the originator and the SPV; and
• mandatory periodic reporting by transaction parties.

The SEC is the primary regulator.

Investor protection is typically enforced via penalties such as withdrawal of the registration of the securitisation, which ultimately results in the termination of the transaction. Such withdrawal is followed by the publication of the withdrawal notice in two national newspapers or on the SEC’s website.

The withdrawal notice is also sent to the SPV. The SPV is mandated to terminate the transaction and return any and all subscription monies received from investors within 48 hours of the publication of the withdrawal notice.

The CBN implemented the Guidance Notes on Pillar III (Market Discipline) for banks involved in securitisation transactions. The aforementioned guidance notes require banks to regularly make qualitative and quantitative disclosures on their securitisation activities to the CBN.

Qualitative disclosures include:

• a description of the bank’s objectives with regard to securitisation activity;
• an indication of guarantee of security for each type of risk;
• a summary of the bank’s accounting policies for securitisation activities (eg, specifying whether transactions are treated as sales or financing and specifying valuation criteria for securitisation assets);
• the identities of credit rating agencies used for the securitisations, as well as the types of exposure each rating agency used; and
• a description of procedures implemented to monitor changes in position in terms of credit and the market risks regarding the securitisation.

Quantitative disclosures include:

• the total number of securitisations to be carried out by the bank as originator and/or sponsor;
• the total number of assets awaiting securitisation; and
• a summary of the securitisation activity stating the amount of the securitised assets, as well as profits or losses from the sale of the assets to be securitised.

SPVs established for securitisations in Nigeria must be registered as public limited liability companies or as trusts created by a written instrument. The SPVs are regulated by the SEC Rules of Securitisation 2015 and, more generally, by the Companies and Allied Matters Act 2020.

Limited liability companies are the preferred form of SPV for the following reasons:

• they have legal personality and are able to enter into contracts with the relevant transaction parties; and
• they are regarded as a separate legal entity to ensure the bankruptcy-remoteness of the assets from the originator.

Activities of SPVs are highly regulated and monitored by the SEC. SPVs are not allowed to engage in any activity other than those related to the securitisation transaction. Thus, the activities contained in the SPV’s constitutional documents are restricted to:

• the acquisition, management and collection of assets;
• the assumption of risk;
• the issuance of asset-backed securities to noteholders;
• the engagement of a servicer to administer the pool of assets; and
• such other activities related to or ancillary to the securitisation transaction.

It is important to note that the content of the SPV’s constitutional documents cannot be changed without obtaining the SEC’s prior approval. In the event that the SPV engages in any activity outside its constitutional documents, the SEC may penalise the SPV.

The federal government of Nigeria recently undertook the securitisation of its “Ways and Means” (W&M) loans. W&M loans are loan facilities provided to the federal government of Nigeria by the CBN to cover temporary budget shortfalls when there is insufficient revenue to meet its budget requirements. The laws that primarily regulate such government securitisation are the Central Bank of Nigeria Act 2007 and the Debt Management Office Establishment Act 2003.

The securitisation process typically involves the conversion of the W&M loans to securitised bonds and the subsequent sale of the bonds to institutional investors such as banks, insurance companies, and pension fund administrators. In the above-mentioned instance, the bonds were resold to the CBN.

Financial institutions (mostly commercial banks), insurance companies, and pension fund administrators are the most common entities that invest in securitisation in Nigeria. Private investors also engage in the securitisations markets – albeit on a much smaller scale when compared to the aforementioned entities.

Other regulations that govern securitisation transactions – more specifically, in the banking sector – are the CBN’s Guidance Notes on Pillar III (Market Discipline) and its Revised Guidelines on Regulatory Capital 2021. They provide for disclosure requirements and the treatment of securitisation gains in relation to banks’ regulatory capital.

Securitisation transactions are primarily governed by regulations from the SEC. Although the SEC Rules on Securitisation 2015 generally provides a framework for true sale and asset-backed securitisations, the CBN’s Guidance Notes on the Calculation of Capital Requirement for Credit Risk provides for synthetic securitisation transactions undertaken by banks.

Synthetic securitisations are securitisations that involve the transfer of credit risk through the use of credit derivatives or guarantees with no transfer of the asset or portfolio of assets. The transaction structure is usually a combination of:

• the isolation and transfer of the credit risk attached to an asset by the bank while retaining the assets in the portfolio; and
• the effecting of such transfer in tranches.

Insolvency risks are a significant concern for investors holding asset-backed securities issued by the SPV. These risks are mitigated through mechanisms that ensure the SPV’s bankruptcy-remoteness. Such mechanisms include legally isolating the ownership and control of the SPV and the assets (via a true-sale and on a “without recourse” basis) from the originator and restricting the business dealings of the SPV to matters relating to the securitisation transaction. These essentially eliminate the risk of claw-back by an insolvency officer on the ground that the transfer constitutes a fraudulent preference if the originator eventually becomes insolvent.

The bankruptcy-remoteness requirement of the SPV is mandated by the SEC Rules on Securitisation 2015. Additionally, the perfection of such transfer of assets to ensure isolation from the originator’s insolvency estate is ensured through registration and compliance with laws such as the Companies and Allied Matters Act 2020, the Secured Transactions in Movable Assets Act 2017, and the relevant land registration laws (for real property).

An SPV incorporated for securitisation must be bankruptcy-remote from the originator at all times. As such, the SPV cannot be an affiliate or subsidiary of the originator and the SEC Rules on Securitisation 2015 further restricts the SPV from having more than 30% of its directors from the originator/sponsor. The objectives of the SPV as contained in its constitutional documents are strictly restricted to matters related to the securitisation transaction (see 4.11 Activities Avoided by SPEs or Other Securitisation Entities) and the constitutional documents of the SPV can only be amended with the approval of the SEC. Additionally, the SPV cannot have any operational employees or co-mingle its assets with any other entity.

Nigerian insolvency law does not expressly provide for substantive consolidation. However, insolvency practitioners have applied principles similar to consolidation when dealing with group insolvencies or structures where assets and liabilities have been co-mingled by affiliated entities. Given the bankruptcy-remoteness of the SPV and the statutory restrictions on the treatment of the SPV’s assets, the possibility of such instances arising are very minimal.

The validity and enforceability of the transfer of financial assets are typically ensured via an assignment that puts the assets beyond the reach of the originator and its creditors. Perfection provisions (see 3.3 Principal Perfection Provisions) are further included in transaction documents to ensure the legal assignment of the assets (true sale). The transfer of the assets will be deemed a true sale when the transfer is effected via a sale, assignment or exchange on a “without recourse” basis, the originator/seller relinquishes absolute control over the assets transferred and the originator/seller has no recovery rights over the assets transferred.

True-sale opinions may be provided by the legal counsel to the SPV to confirm that the transfer of the assets is legally binding on parties and compliant with relevant laws.

Bankruptcy-remoteness may also be constructed via the creation of a trust by the originator for the benefit of the SPV. The trust structure typically entails a transfer of the receivables to a trustee who holds them for the benefit of the SPV and the investors. Although it achieves bankruptcy-remoteness, the creation of a trust is not a widely used structure in Nigeria.

The SEC Rules on Securitisation 2015 also provide for the SPV to take the form of a trust created by a written instrument (see 4.10 SPE or Other Entities).

Securitisation documents typically include the “limited recourse” clause to restrict investor claims to specific assets held by the SPV or to the cash flows generated from such assets. Additionally, SPVs are restricted to engaging only in activities related to the securitisation transaction, not having any affiliations with the originator/seller, and having no operational employees. These measures are put in place by the SEC to prevent the SPV from becoming bankrupt.

There are generally no potential tax implications for the SPV following the transfer of the financial assets. However, stamp duty at the rate of 1.5% ad valorem will be chargeable on the transfer documentation (sale agreement). The transfer documentation needs to be stamped for evidentiary purposes.

Where the SPV is registered as a company, it may be subject to yearly company income tax. Under Nigerian company income tax law, company income tax is only chargeable on company profits.

However, the SPV may be exempt from the payment of company income tax on two conditions:

• the company is within the first four years of commencing business; or
• its gross turnover is less than NGN25 million.

Cross-Border Payments Received by SPVs

Given that the payments are being made from outside Nigeria to the SPVs, the issue of withholding tax in Nigeria may not apply. Withholding tax may be deducted at source in accordance with applicable laws in the payer’s jurisdiction.

Cross-Border Payments Made by SPVs

Where the SPV is a company, it is required by law to deduct withholding tax at source on all eligible transactions. The interest payable to investors on the asset-backed securities qualifies as an eligible transaction for which withholding tax is to be deducted. The withholding tax rates for non-resident recipients are 10% for corporate recipients and 5% for non-corporate recipients. These rates are doubled where the recipient has no Nigerian tax identification number.

It is also important to note withholding tax rates may be reduced to avoid double taxation if the recipient is the resident of a treaty country.

VAT is payable on services supplied to the SPV by transaction parties such as servicers, placement agents, underwriters and trustees. The services provided by transaction parties do not fall under VAT-exempt services and, as such, would amount to additional transaction cost.

Tax lawyers may provide tax opinions for securitisation transactions to address tax compliance. However, specialised tax practitioners or consultants are often engaged by SPVs to provide informed and detailed opinions on the tax implications of securitisation transactions. These tax opinions are based off the review of transaction documentation and typically contain the following information:

• confirmation of applicable taxes on the transfer of financial assets (eg, capital gains tax, VAT, or stamp duties) under Nigerian tax laws;
• confirmation of applicable taxes on the securitisation transaction and the services ancillary to the securitisation (eg, withholding tax, VAT or stamp duties) under Nigerian tax laws; and
• assessment of applicable stamp duty for transaction documentation and whether the SPV can benefit from any exemptions.

Legal issues often arise from the interplay between the structuring of transactions and compliance with financial reporting standards (eg, the International Financial Reporting Standards (IFRS)). Such issues include:

• whether the SPV is independent of the originator/seller, for the purpose of determining if the SPV should be consolidated into the originator’s financial statements; and
• whether the sale constitutes a true sale or a secured financing, for the purpose of determining whether the assets can be de-recognised from the seller’s balance sheet.

Legal issues are dealt with separately from accounting issues. Legal practitioners typically only address legal issues relating to the securitisation transaction. Such legal opinions usually touch on the authority/capacity of transaction parties, the enforceability and admissibility of transaction documentation, the SPV’s bankruptcy-remoteness, the transfer of the assets, and compliance with applicable laws. Legal practitioners rarely give opinions on core accounting issues.