State
Bank of Pakistan has received requests from a number of financial
institutions desirous of performing various roles in assets
securitization transactions through special purpose vehicle.
These requests have been considered in consultation
with concerned quarters and it has been decided that banks/DFIs
can participate in assets securitization through SPV.
However, in doing so and performing various roles in
assets securitization through this mode, they shall adhere
to the guidelines prescribed below:
General
Guidelines
2.
Banks/DFIs participating in a securitization transaction
in any capacity shall ensure that:
i)
they do not own any share capital in the SPV
ii)
the SPV and the ABS (Assets Backed Securities) issued
by it do not carry the same or similar name as that of the
bank/DFI. SPV shall not include the name of the bank/DFI in
its name or imply any connection with the bank/DFI, for example,
by using a symbol closely associated with the bank/DFI.
iii)
all reasonable steps are taken to ensure that investors
are informed in writing that their obligations to the SPV
and investors in the ABS of the SPV are limited to the extent
expressed in their written agreement with SPV.
iv)
all transactions between them and SPV are conducted
at arms length and are market based.
Arranger/Structuring
Agent
3. The financial institution in this role may
structure the transaction keeping in view the requirements
of the originator, the market appetite, internal and external
credit enhancement, quality of receivables, etc.
Banks/DFIs performing this role shall ensure that:
i)
their legal advisers are satisfied that the terms of
the asset securitization issue protect them from any liability
to investors in the scheme or the vehicle
ii)
any offering circular contains a highly visible, unequivocal
statement that the banks/DFIs, serving in this capacity, do
not stand behind the issue or the vehicle and will not make
good any loss in the portfolio.
iii)
a fee at least at market terms and conditions is charged
for the services performed.
Administrator/Trustee/Servicing
Agent
4.
The role envisages collection of the assigned/purchased
receivables, defraying them to investors and taking appropriate
enforcement actions when necessary to ensure their payment.
The banks/DFIs performing this role shall comply with
the following guidelines:
i)
The bank/DFI should have clearly defined process flow
and roles and responsibilities of personnel needed to carry
out these activities.
ii)
There should be a written contract/agreement between
the bank/DFI, originator and SPV specifying the services to
be provided as also other functions antecedental and ancillary
there to.
iii)
The written contract/agreement shall specifically state
that the bank/DFI is under no obligation to remit funds to
the SPV or the investors in the ABS unless and until they
are received from the obligor.
iv)
The banks/DFIs shall ensure that any offering circular
precisely mentions a highly visible, prominent and unequivocal
statement that serving in this capacity, they do not stand
behind the issue or the SPV and will not make good any losses
in the portfolio.
v)
The bank/DFI shall place in record the written opinions
from its legal advisers that the terms of agreement protect
it from any liability to investors in the securitization transaction
or the SPV (except normal contractual obligations relating
to its role as servicing agent).
vi)
The bank/DFI may receive a performance-related payment
(or benefit from any surplus income generated),
in addition to its base fee, provided the same is on market
terms and conditions and any performance-related payment does
not commit it to any additional obligation.
Such payment shall be recognized for profit and loss
purposes only after it has been irrevocably received.
Investor
5. The conditions prescribed under Prudential
Regulation IV & V and NBFIs Rules 7 & 8 are relaxed
only in cases where banks/DFIs desire to invest in marketable
ABS representing distinct, identifiable and recurring cash
flows, issued by SPVs established under Asset Backed Securitization
Rules 1999 and duly registered with Securities and Exchange
Commission of Pakistan. They will, however, adhere to the
guidelines indicated below:
i)
The banks/DFIs holding Asset Backed Securities (ABS)
have risk exposure to these underlying ABS assets.
While determining total exposure under PR-I/NFBI Rule
9 to any particular obligor, they shall therefore take into
consideration the exposure against the ABS assets of that
particular obligor.
ii)
The banks/DFIs shall invest in only those ABS, which
are listed on the Stock Exchange and have a minimum credit
rating of A or equivalent from a Credit Rating Agency approved
by SBP or an international credit rating agency viz. Standard
& Poor, Moody or Fitch.
iii)
Total exposure of a bank/DFI towards ABS issued by
a SPV shall not exceed 5% of its own paid up capital or 15%
of the total value of the ABS issued by a SPV which ever is
less. Further,
the aggregate exposure on account of ABS shall not exceed
20% of the total paid up capital of the bank/DFI. (This will
encourage banks/DFIs to (a) invest in and sell-down these
ABS, i.e. to churn their ABS portfolio to stay within the
20% cap and to (b) actively trade in ABS to develop a secondary
market, rather than to simply purchase these ABS and hold
them till maturity)
iv)
For Capital Adequacy purposes, the banks holding ABS
shall treat them at par with investment in TFCs and accordingly
apply the risk weights prescribed by State Bank.
v)
The banks/DFIs will not invest in ABS in cases where
originator/the company setting up the SPV is defaulter of
any financial institution. For this purpose, banks/DFIs shall obtain report from CIB of
State Bank before making investment decisions.
Originator
6.
The banks/DFIs under this role would act as supplier
of the assets/receivables that are securitized. In this respect
they shall comply with the following guidelines:
i)
The banks/DFIs can securitize their assets relating
to lease financing (with acknowledged assignment of lease
rental proceeds), mortgage financing and toll financing (for
infrastructure developmental projects).
Other assets may be securitized by banks with prior
approval of State Bank, on a case to case basis.
ii)
The securitizing bank/DFI shall ensure that there are
no impediments (contractual or otherwise) that prevent the
transfer of the assets, or the rights in relation to such
assets, to an SPV and all the necessary consents have been
obtained. The
transfer of the assets should not contravene the terms and
conditions of any underlying agreement governing the assets.
iii)
The securitizing bank/DFI must have legal and accounting
opinions on record to the effect that it has retained no liability
for the loans so securitized.
iv)
The securitizing bank/DFI must ensure that it is not
obliged to support any losses suffered by investors in the
ABS issued by the SPV.
v)
The assets should be transferred at fair value.
A fixed amount of consideration for the securitized
assets must be received not later than the time of the transfer
of the assets.
vi)
The securitizing bank/DFI shall have no obligation
to repurchase any securitized asset at any time.
vii)
The transfer of assets must comply with the true sale
criteria, which at a minimum should have the following characteristics:
a.
The underlying assets must have been isolated from
an originator i.e., put beyond the reach of the originator
and its creditors even in receivership or bankruptcy.
b.
The risk that a transfer of assets by an originator
to an SPV might be re-characterized as a financing transaction
rather than a sale of assets be completely eliminated.
In this regard, the originator must effectively transfer
all rights and obligations in the underlying assets to the
SPV and should not retain any residual beneficial interest
in the underlying assets.
c.
An originator must not hold any equity stake, directly
or indirectly, in an SPV.
In addition, the originator must not be in a position
to exercise effective control over the decisions of the SPV
in relation to the securitization transaction.
The originator thus should not have any director, officer
or employee on the board of the SPV
d.
An SPV must have no recourse to an originator for losses
arising from those assets.
e.
Where an originator is also the Administrator/Trustee,
the services must be provided on an arms length basis and
on market terms and conditions.
viii)
Investors must be clearly informed in the offering circular
that the ABS they
invest in do not represent deposits or constitute other
liabilities of the securitizing bank/DFI and the securitizing
bank/DFI does not in any way stand behind the value or performance
of the ABS issued by the SPV or of the assets held by the
SPV.
ix)
Investors must be informed that their holdings of ABS
are subject to investment risk, including repayments or interest
rate risks, possible delays in repayments and loss of income,
principal invested, etc.
x)
The securitizing bank/DFI shall not support any loss
arising from the securitization transaction or by investors
involved in it. It
will also not bear any of the recurring expenses of the transaction.
xi)
The securitizing bank/DFI shall not underwrite or invest
in the ABS issued by the SPV.
Underwriter
7.
Banks/DFIs can underwrite the ABS issued by an SPV,
however, its share should not exceed 5% of its own paid up
capital or 15% of total value of the ABS which ever is less.
Provider
of Fund Based/Non-Fund Based Facilities
8.
Banks/DFIs are not allowed to extend any fund based
facility (for instance, temporary liquidity support) to the
SPV or provide any non-fund based facility (like credit enhancement
support in the form of stand-by letter of credit or guarantee)
to the ABS. However,
in the following circumstances, banks/DFIs may allow fund
based facility (temporary liquidity support) to the SPV or
provide non-fund based facility (credit enhancement support
in the form of stand-by letter of credit or guarantee) to
the ABS:
i)
Where the facilities are fully secured against the
guarantee of an International Ist Class Bank rated at least
A or equivalent by a recognized credit rating agency viz.
Standard & Poor, Moody or Fitch.
ii)
Where facilities are fully secured against cash or
near cash collateral under perfected lien of the bank after
taking into account the margin requirements as prescribed
by State Bank of Pakistan.
Cash or near cash collateral for the purpose of this
clause shall mean the bank deposits, deposit certificates
and Government Securities.
9.
In addition to these guidelines, banks/DFIs desirous
of participating in the assets securitization transactions
should formulate policies and develop controls, checks and
balances to effectively manage the associated risks.
10.
State Bank of Pakistan will closely monitor the market
developments and review the guidelines, as and when necessary,
to meet the needs of the market, while ensuring prudent conduct
of securitization transactions by banks/DFIs.
11. Please acknowledge receipt.
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