The essentials for developing an effective legal and regulatory framework in securitisation

1. The essentials for developing an effective legal and regulatory framework in securitisation A presentation to the 2nd Annual Law series Sponsored by PERCHSTONE & GRAEYS Presented by Sonnie Ayere MD/CEO UBA GLOBAL MARKETS 25TH OF APRIL, 2008

2. Legal and Regulatory • Legal • Asset Transfer • The Special Purpose Entity or Vehicle • Bankruptcy Remoteness • Regulation • Taxation • Stamp Duty / Transfer • Accounting

3. Conditions for True Sale • The transfer of an asset must be a true sale, or its legally acceptable equivalent in Nigeria. If originator is only pledging the assets to secure a debt, then it becomes a collaterised financing in which the originator would stay directly indebted to investor • Therefore the legal profession will have to draft and accept legalise that addresses the transfer of assets under Nigerian law • Nigerian company regulation must also accept that assets can be owned by a special purpose entity, such entity being set up just to undertake one activity.

4. Conditions for True Sale cont’ • It must be legally accepted by the regulators that the actual ownership of the special purpose vehicle (“SPV”) can survive the bankruptcy of its originator • This is generally based on the premise that so long as the originator does not control the company but say, sell / originate receivables into the vehicle which are paid for by the vehicle and where the assets of the vehicle is the sole collateral of the investor, the SPV is legally viewed as a separate legal entity.

5. Agree all terms required for the confirmation of a asset sale • For example:- • The legal treatment and form of the transaction • The influence the seller has on the assets after the sale / assignment • The extent and nature of benefits transferred via the sale • The acceptance of the purchase price e.g. if +/- 10% of the independent valuation price – admissible as legally acceptable purchase price • Legally accept that notification to underlying borrowers when their assets are sold is sufficient for the borrower to have access to its new borrower and by so doing also convey all rights and beneficial interests of the incumbent borrower to the new borrower • Agree mutually, what’s acceptable by Nigerian law, as to the constitution of title ownership

6. Agree all terms required for the confirmation of a asset sale • Accept the legal concept of assignments • Legal assignment • Equitable assignment • And finally where necessary, Novation

7. The Special Purpose Vehicles • Generally set up by the originator with ownership vested in a charitable trust • Commonly set up in tax havens • Mauritius • Cayman Islands • Jersey • Apart from legally isolating the assets it also helps to avoid double taxation to investors and also assist in reducing the expenses (if any) of the trust • Cost of set-up an SPV is low

8. The Special Purpose Vehicles • Concept of a charitable trust coys • Where SPVs are set up in the form of a trust and by so doing all beneficial interest accruing to the trust will be for charitable purposes • Whilst saving on tax, excess cash allocable to the trust would otherwise be invested in other sectors of the economy.

9. Why Bankruptcy Remote • Nigerian regulation and law must accept that:- • Only the assets in the SPV are available to protect and pay investors and there can be no recourse to the originator • The vehicle can only receive the assets as purchased and issue notes or certificates • Hence, probability of Bankruptcy is remote from the originator • Essentially, if originator dies the SPV can continue to live

10. Regulation • Bank Regulators will place a strong emphasis on the amount of regulatory capital accorded to the transaction • For instance, regulators in certain countries will insist that an issuing bank holds 100% Risk Weighted Capital to the Equity portion of the transaction * • This will differ from country to country and will normally be defined by the securitisation laws of the country • But generally - *FASB 46 …? Consolidation of VIEs - Somewhat mitigated by QSPE under FAS 140 • Nigerian Accounting profession to recognise these rules to ensure acceptability under Nigerian law

11. Example of securitisation technology reducing risk- Current Basel II Proposals • Strong incentive for banks to issue or invest in higher rated debt given the penal capital weights allocable to bonds below investment grade

12. SPV Taxation • Generally speaking, the Special purpose Entities are carefully structured to ensure that its income is offset by its expenses so that little or no tax is incurred • The total economic benefit to all the entities involved in executing the transaction/structure outweighs the specific other interests • Hence, Tax incentives are from time-to time approved for special assets classes – e.g. most countries exempt the transfer of mortgages from Stamp Duty • Encouraging development of sector/group of companies and ultimately the country and citizenry

13. SPV Taxation cont’ • A key reason for allowing tax exemptions. • REITs are special purpose vehicles that are specially up for residential and commercial property investment. • REITs invest in property, assist the country develop vast array of properties by encouraging increased investments in the sector • Increased property investment means more jobs, more jobs leads to more income, more income means more tax • Counter – intuitive!

14. In conclusion • Where these basic issues are agreed / addressed, then some of the key legal and regulatory barriers will be removed • Key success factor is the “want to do spirit” • This should assist create the part for one of most innovative methods in recent history for raising finance Thank you for your attention