Securitization Flashcards

Question

As Administrator, what is the nature of the Originator's relationship with the SPV?

Answer 1

The **Originator will hold its benefit** in the Underlying Portfolio, and **any payments received** thereto, **expressly on Trust** for the SPV. There will also be **Servicing Agreement** between the two **governing** the former's **responsibilities** and **compensation**. ## Footnote Textbook -- P. 750-751. Monies received pursuant to the Trust should be held in a separate account to eschew issues of commingling and traceability.

Answer 2

* **EODs**; * **Succession** (of the Originator as Administrator); * **Interest rates**; * **Administration fees**; * **Rights and obligations**, e.g. information covenants or segregation of cashflows; * **Guarantees** and **indemnities**; * **Uses of** the SPV's **surplus cash**; * **Liability** for acts and omissions; * **Representations** and **warranties**; * **Arrears** and **enforcement** procedures; T Burns, *The Transfer of Future Rights in Securitisations: A Comparative Study of the Law in England and Scotland* (2009) 24 Journal of International Banking Law and Regulation 35.

Answer 3

* **Term loan facility**, i.e. credit enhancement facility. * **Subordination**, i.e. tranching. * **Over-collateralization**. * **Spread account**. * **Guaranteed investment contract**. * **Derivatives**, e.g. interest rate and currency swaps. The external means of credit enhancement do bear an additional cost for the risk reduction they bear.

Answer 4

**Subordination**. **Each subsequent Class credit-enhances the last** by acting as a barrier against credit-related losses, with the **junior-most Class credit-enhancing the entire deal** given its vanguard positon. ## Footnote Lecture Notes. A provision effecting subordination as such is called a Waterfall Clause.

Answer 5

**Class X Notes**, i.e. Notes which comprise a tiny proportion of principal but whose **interest is variable** and is **contingent upon the surplus profits generated** by the SPV **per quarter**. ## Footnote Lecture Notes. This does not offend §238 if entered into on Day 1, unless the Class X Notes are heavily subordinated, in which case, there may be a problem. It also allows the Originator to accelerate its income stream from the securitization.

Answer 6

A **payment mechansim** used to provide an **economic guarantee** to a Borrower from a Lender.

Answer 7

A **credit enhancement technique** whereby the **SPV does not fully pay for the Transfer to leave itself a cushion**, a sum **redeemable at the securitzation's end**. ## Footnote Textbook -- P. 751.

Answer 8

* To **fully disconnect itself from the SPV**. * To **raise finance at a favorable price** relative to other alternatives. * To **optimize its balance sheet** from the standpoints of both **capital adequacy** and **risk management**. * To **fully insulate itself from the risk of the portfolio's nonperformance**, and **any liabilities** associated therewith. Textbook -- P. 758.

Answer 9

By **evidencing no interest in the SPV's capital** and **total freedom from its influence**. Accordingly, the **SPV should be established as an independent entity** which, at most, deals with the Originator. ## Footnote Textbook -- P. 758.

Answer 10

* The **Underlying Portfolio's quality** and **real value** should be **clear**, and preferably, **strong**. * **Full** and **uncontestable beneficial interest** in the UP **should be acquired** by the SPV. * The **SPV's liquidity** and **credit quality** should remain **sufficient**. * **Comprehensive security** and **guarantees** should be **held on behalf of the Bondholders**. Textbook -- P. 759. These criteria form the grounds of Credit Rating Agencies' (CRAs) assessments of an asset-backed Bond Issuance.

Answer 11

The Agency's, "opinion of the **likelihood** that a particular **Obligor** or financial **obligation** will **timely repay owed principal and interest**," as based upon an, "an **in-depth credit analysis** covering **qualitative**, **quantitative**, and **legal issues**." ## Footnote Ross and Malpass, *The Role of Rating Agencies and Their Potential Exposure in the Ongoing Credit Crisis*, (2008) 7 Journal of International Banking and Financial Law [349-350]. This is neither an audit nor a due diligence exercise for legal purposes, but nevertheless acts as, "an objective standard to give investors comfort."

Answer 12

Given most **investors' lack of time and resources** to fully investigate the firms in which they invest, **they** **use credit ratings to**, "**determine the minimum return that they will accept** on a given investment." ## Footnote Steven L. Schwarcz, *The Alchemy of Asset Securitization*, 1 Stanford Journal of Law, Business & Finance [136] (1994) Therefore, to raise funds at as low a cost as possible, it is critical to be assigned as strong a credit rating as possible. From this paradigm does securitization's efficiency gains derive: by raising finance against a relatively higher-rated portfolio, the Borrower is able to raise the same amount of capital at a lower cost, *ceteris paribus*.

Answer 13

By analyzing its **commercial** and **legal** **issues**.

Answer 14

* **Likelihood of default**. * **Rate of recovery** in case of default. * **Adequacy of security**. * **Size and frequency of payments**. Textbook -- P. 759. The Originator should be made to demonstrate that it honored these criteria when it incepted the loans to the relevant Debtors.

Answer 15

* **Risk of dilution**, e.g. due to set-off rights. * **Risk of re-characterization**. * **Legitimacy of** the Originator's **title**. * **Strength of** the Originator's **claim**, e.g. *Dearle v Hall*. * Existence of **early termination rights**. * Effect of **breaches of warranty**. * **Enforcement rights** and other default procedures. * Extent of **regulatory compliance**. * **Transferability** of debts, security, and other related rights.

Answer 16

In various assets, it may transpire that: * **Assignment was contractually prohibited**. * **Third Parties possess legitimate claims** in the interests therein. * **The Debtors possessed set-off rights** against the Originator, **which** now **obtain against the SPV**. Texbook -- P. 760-761

Answer 17

It may oblige the Originator to warrant that: * **No contractual restrictions exist against Assignment**. * It is **solely entitled** to the interest in the loans and **has not created any rights therein** in favor of third parties. * **Either no set-off rights exist or** that **all** set-off rights **have been disclosed**.

Answer 18

* **Re-characterization** to a form of **secured financing** which would be **voided for lack of registration**. * **Recission of contracts** under **§186 IA 1986**. * **Disclaimer of onerous property** under **§178 IA 1986**. * **Clawback** for **defrauding creditors** under **§423 IA 1986**. * **Clawback** for **transacting at undervalue** under **§238 IA 1986**. * **Clawback** for **preferentially treating a creditor** under **§239 IA 1986**. * If **sub-participation** is used, **Clawback** for **avoiding a floating charge** under **§245 IA 1986**. Textbook -- P. 761; Lecture Notes. Re-characterization is unlikely for reasons explained in the Loan Transfers Deck. It is Clawback that is the greater threat.

Answer 19

**Over-collateralization**. The Originator, to the extent that it did not receive full consideration at the time of sale, transacted at undervalue. ## Footnote Textbook -- P. 761. This is problematic because Credit Enhancement is not purposed with profiting the SPV and must be capable being returned to the Originator, but simultaneously, must be readily available to the SPV should it need to draw on additional funding.

Answer 20

If the **transaction**: * Was **within two years** of the insolvency proceedings' onset and to a **connected person**; * Was **executed** **when** the Originator was **insolvent**; or * **Sent the Originator into insolvency**. IA 1986 -- §240. The definition of 'connected person' can be found under §249 and §435. This same window applies to claims under §239.

Answer 21

**Due diligence**, e.g. audits, solvency certificates, etc., ensuring that the Originator is **sufficiently financially stable to satisfy bankruptcy remoteness criteria**. ## Footnote Lecture Notes. Ultimately, given that insolvency is a matter of fact, rather than law, there is only so much that can be done by lawyers.

Answer 22

Receiving **consideration significantly lesser in value relative** to that which was provided. ## Footnote IA 1986 -- §238(4)(b).

Answer 23

If the Court is **convinced** that: * The Originator entered into the transaction **in good faith** and to **carry on its business**; and that **at the time**, * The Originator had **reasonable grounds for believing** that the Transaction would **benefit the company**. IA 1986 -- §238(5).

Answer 24

**Unlikely**. The parties will likely have arranged to **settle the over-collateralized sum in future**, i.e. deferred consideration or a trust, thereby disarming the claim. ## Footnote Textbook -- P. 762. Penn agrees, stating that although the Originator will not receive a price equal to the UP's face value, it will receive a price that is, "calculated on the basis of the present value of the assets," which incorporates the over-collateralization discount, and therefore, escapes §238. He adds that the SPV is quite unlikely to be deemed a 'connected person', and that §238(5) is not difficult to satisfy. §423 is subject to similar analysis.

Answer 25

An agreement to **receive the remainder** (if) of the **over-collateralized sum after the SPV has settled its debt** with the Bondholders as consideration for the True Sale. ## Footnote Lecture Notes.

Answer 26

A **Trustee** would **hold legal title in the UP** in favor of both the SPV and the Originator. The **former's entitlement** will encompass **whatever is necessary to service its deb**t, and the **latter's whatever is remaining therefrom** once said debt has been discharged. ## Footnote Lecture Notes. The SPV would be obligated to transfer the UP to the Trustee pursuant to the Sale Agreement should this avenue be selected. It is critical that the parties' beneficial interests are sufficiently certain to satisfy the Three Certainties.

Answer 27

* The **Originator's financial position prior** to entering the transaction; * The **benefit**, or **reasonable expectation thereof**, **to be realized** upon entering the transaction; * The **financial**, **operating**, and **market risks undertaken** by entering into the transaction; * The **consequences of not entering into the transaction**, particularly in light of **alternative methods of financing**. * The **position of** the Originator's **existing**, **prospective**, and **contingent** creditors **before and after** the transaction. Lecture Notes.

Answer 28

The **putting of a Creditor into a better position than it would have otherwise enjoyed**, in case of the Debtor's insolvency, as a result of the **Debtor** having **deliberately done**, **failed to do**, or **suffered anything**. ## Footnote IA 1986 -- §239; Lecture Notes.

Answer 29

**Unlikely**. It is **improbable** that either the **SPV will be a Creditor of the Originator at the material time** or that the **latter** will be **motivated by a desire to improve the former's position** in insolvency. ## Footnote Lecture Notes. Under any securitization structure where the SPV can become a Creditor of the Originator, e.g. a revolving purchase structure or lending arrangements, §239 should be considered much more closely.

Answer 30

As an **entirely separate company** with **minimal organizational links** to the **Originator**. ## Footnote Textbook -- P. 758. Its share capital should therefore be held either directly, or indirectly through a trust, by someone as far removed from the Originator as possible, e.g. a charity or some other entity that cannot be run as a busienss. All of this works because of the principle of separate corporate personality under *Salomon v Salomon*.

Answer 31

* **Cashflow Insolvency**, i.e. the inability to repay liabilities as they fall due.\* * **Balance Sheet Insolvency**, i.e. when liabilities exceed assets.\*\* IA 1986 -- \*§123(1)(e), \*\*§123(2).

Answer 32

The Cashflow Test contains an **element of futurity**, i.e. is concerned with **both** **immediately and prospectively payable debts**. ## Footnote Allison -- *The Supreme Court Decision in Eurosail*, [492]; Re Cheyne Finance [2008] EWHC 2402.

Answer 33

* Without good reason to the contrary, **assets and liabilities do not have to be taken at their face values** on the balance sheet. * **§123(2) does not mechanically turn on the question of**, “**whether** **liabilities**... **exceed** its **assets**.” * **Contingent and prospective liabilities** **are accounted for by means of valuation**,\* rather than simple aggregation. * **§123(2)'s** is supplementary to §123(1)(e). It **covers cases where**, although debts are paid as they fall due, “**it is clear that it will not be able to meet its future or contingent liabilities.**” * **Audited accounts** are a **good starting point**, but **no** **be-all-end-all** as commercial considerations are still relevant. * The **more remote** a **contingent** liability and the **more distal** a **prospective** liability, the **less weighty** they become. Sidley Austin -- *Eurosail Court of Appeal Jugment*; Allison -- *The Supreme Court Decision in Eurosail*, [496]; *BNY v Eurosail* [2011] EWCA Civ 22;[2013] 1 WLR 1408; Insolvency Rules 1986 -- 4.86, 4.94, and 11.13. The definitveness of a 'Point of No Return' was floated by the Court of Appeal and rejected by the Supreme Court, describing that §123(2) can only be relied upon by future and contingent Creditors who believe that their Debtors can no longer repay their future or contingent liabilities. Rejection was grounded on confusion with §214 (wrongful trading) and complication of §238 and §239.

Answer 34

A Creditor of a debt that, "will **only become due** in an **event** which **may or may not occur**," and which is referable to, "an existing obligation." ## Footnote Walton -- *Inability to Pay Debts: Beyond the Point of No Return?*, [3]; *Stonegate Securities v Gregory* [1980] 1 Ch 576.

Answer 35

A Creditor of a debt that, "**will certainly become due in the future**,"\* and arises out of a, "a **current transaction or obligation**, not a future obligation."\*\* ## Footnote Walton -- *Inability to Pay Debts: Beyond the Point of No Return?*, [3]; \**Stonegate Securities v Gregory* [1980] 1 Ch 576; \*\**Burford Midland Properties v Marley* [1994] BCC 604 Ch D.

Answer 36

**No**. ## Footnote IA 1986 -- § 268.

Answer 37

The Creditor of an **unsecured debt of at least £750** must: * Be owed a **liquidated** debt which is **payable either immediately** **or at some future certain date**; that * The **Debtor** is **either unable to repay** the debt or **has no reasonable prospect of repaying at the material time**. Walton -- *Inability to Pay Debts: Beyond the Point of No Return?*, [4]. IA 1986 -- §267-268.

Answer 38

With the **goal of ensuring that the Bondholders are its sole Creditors**, it will be **limited to participating in the securitization** namely through its **Articles of Association** and the **Bond Issuance documentation**. ## Footnote Textbook -- P. 763. Tax neutrality will be engineered to eschew tax liabilities.

Answer 39

* **Contractually and constitutionally restrict business activities**, especially indebtedness creation. * **Independent Board of Directors** (neutralize piercing risk). * **No employees**, with all activities being performed through Agents (minimize legal exposure). * **No parent companies**, to minimize risk of substantive consolidation. * **Limit recourse against the SPV**. * **Omnilateral** use of **Non-Petition Covenants**. * Clearly **identify** and **curate** the **SPV's Creditors**. * **Regulate Creditors' priority of claims** using Inter-Creditor Agreements, subordination, etc. Lecture Notes.

Answer 40

**Either the debt cannot be accelerated or acceleration is limited to a particular asset or pool thereof**. Resultantly, the SPV's Creditors cannot claim against its entire balance sheet, and thereby, send it into insolvency. ## Footnote Lecture Notes.

Answer 41

A clause that **prohibits** whomever it binds from **pursuing action for recovery against the SPV**. It is **essential** for **drafting to elucidat**e that such action is prohibited **both before and after and EOD**. ## Footnote Lecture Notes.

Answer 42

By application for **injunctive relief**, an **equitable remedy** which the Court **discretionarily** may award. Pursuant to the Court's **purposive approach**, **drafting** and **commercial purpose** are key considerations. ## Footnote Lecture Notes; *Re Colt Telecom Group* [2002] EWHC 2815 (Ch.) at [62]; *Law Debenture Trust v Concord Trust* [2007] EWHC 2255; *Elliott International v Law Debenture Trustees* [2006] EWHC 3063. Under *Colt*, they are not contrary to public policy.

Answer 43

* **Business activities are suitably restricted**, i.e. no indebtedness creation, mergers, ownership or occupation of real property, subsidiaries, or employees. * **Independently owned and managed**, i.e. **shareholders** are **sufficiently independent from** **the transacting parties** and have **no material economic interests** in the SPV's activities. * **No chance of incurring secondary liabilities** (most relevant for multi-seller SPVs) **or tax liabilities**. * **No outstanding liabilities or Creditors from previous activities** (most relevant for multi-seller and recycled SPVs). * **All necessary licences and authorizations have been obtained**. * **Creditors** have entered into **Non-Petition Covenants**, and there is otherwise **no material probability that they will file against the SPV**. Moody's -- *Bankruptcy Remoteness Criteria for Special Purpose Entities in Global Structured Finance Transactions* [2-4].

Answer 44

* **Independently owned and managed**, i.e. **shareholders** are **sufficiently independent from the transacting parties** and have **no material economic interests** in the SPV's activities. * Not independently owned, but a **voluntary bankruptcy filing requires the vote of at least one independent director**, who is a nationally-recognized **corporate services provider**, and **owes no duty to the SPV's shareholders**. * **Shareholders and managemnt have no material incentive to file for bankruptcy**. * **No material possibility** of sufficient **financial distress** **forcing** **voluntary filing**. Moody's -- *Bankruptcy Remoteness Criteria for Special Purpose Entities in Global Structured Finance Transactions* [4-6].

Answer 45

Yes. It **impacts** the transaction's **credit rating**. ## Footnote Textbook -- P. 764.

Answer 46

**Behind its Bonds**. ## Footnote Textbook -- P. 764 At least the Senior Tranche of its Bonds.

Answer 47

A form of **Credit Enchancement** whereby **any profits** generated from the UP are **put into an account to build up a capital reserve**. ## Footnote Textbook -- P. 764.

Answer 48

A form of **Credit Enhancement** whereby an **Insurer guarantees** the SPV a **rate of return in exchange for holding a deposit for a period**. ## Footnote Textbook -- P. 764. The deposit would comprise any spare cash in the SPV's hands.

Answer 49

An Administrative Receiver: * Owes its **primary obligation to the Security Trustee**; * **Acts on its instruction**; * **Oversees** the **business** and **all security-backed assets**; * **Blocks the subsequent appointment of an Administrator**. Textbook -- P. 766-770.

Answer 50

* **Input:** Underyling portfolio and the rights therein. * **(Intermediate) Structure:** Bankruptcy insulation mechanisms and fixtures. * **Output:** Securities created and the finance raised thereby. Jonathan C. Lipson, *Re: Defining Securitization*, 85 Southern California Law Review [1233] (2012).

Answer 51

**No**. In his opinion, it **all comes down to creditworthiness**. A guarantee from a strong third-party may be significantly more value than the mortgage payments due on a subprime mortgage. ## Footnote Steven L. Schwarcz, *What is Securitization? And for What Purpose?*, 85 Southern California Law Review [1285] (2012). Schwarz further elaborates that the more pressing concern is high sensitivity to cash-flow variations in an Underlying Portfolio.

Answer 52

The **likelihood of timely repayment** and the **coupon**, i.e. interest rate. ## Footnote Steven L. Schwarcz, *What is Securitization? And for What Purpose?*, 85 Southern California Law Review [1287] (2012).

Answer 53

**Restructuring becomes a balancing act between the interests of different Bondholders**, e.g. certain changes may prejudice the interests of interest-only Bondholders against principal-only Bondholders. ## Footnote Steven L. Schwarcz, *What is Securitization? And for What Purpose?*, 85 Southern California Law Review [1290] (2012).

Answer 54

The **former** provides for **timely repayments** on issued securities, whereas the **latter bolsters solvency**. ## Footnote Steven L. Schwarcz, *The Alchemy of Asset Securitization*, 1 Stanford Journal of Law, Business & Finance [141] (1994)

Answer 55

**The Originator:** * **Selects which assets** shall comprise the UP. * **Establishes a bankruptcy-remote SPV.** * **Transfers the UP** to the SPV. * **Enters into a Servicing Agreement** with the SPV. * **Installs liquidity support** and **credit enhancement** mechanisms to bolster the SPV. **The SPV:** * **Issues debt securities** to finance the purchase of the UP.

Answer 56

* **Maturity**. * **Dilution Risk**. * **Substitution** rights. * **Early termination** rights. * Existence of **set-off** rights. * Existence of **security** or **guarantees**. * Procedures on **default** and **enforcement**. * **Size** and **frequency** of **payment**, i.e. **cashflow volatility**. Lecture Notes.

Answer 57

* **Ringfencing of the UP** while it is with the Originator. * **Ownership structure** of the SPV. * **Organizational links between** the **SPV** and **Originator**. * **Balance sheet implications** for the Originator. Lecture Notes.

Answer 58

* **Master Trust**. * **Public issue** of debt. * **Discrete issuance** of debt. * **Private placement** of debt. * **Term Loan**, whether bilateral or syndicated.

Answer 59

* **Lower cost of funding**. * **Capital adequacy relief**. * **Diversification of funding**. * **Confidentiality** (if so desired). * **Improved liquidity** (especially for revolving structures). * Maintenance of **exclusivity with Debtors**. * **Faciliation of access to international capital markets** for Borrowers who could not have otherwise accessed them. Lecture Notes.

Answer 60

* **Lower risk-weighted investment**. * **Increased Borrower** (SPV) **creditworthiness**. * **Incorporates independent credit analysis** performed by CRAs. * **Continuous review of performance** throughout. * **Higher liquidity**, due to the securities being rated and Bonds. * If self-purchasing and a bank, **capital adequacy relief** through the transformation of **banking book assets** into **trading book assets**.

Answer 61

* **High up-front costs**, both to **set up the SPV** and **over-collateralize** it. The former may be countervailed by economies of scale. * **Opportunity cost** of **over-collateralization**, i.e. inert capital. * **Increased complexity** and **document-intensity**. * The **Crown Jewels Problem** and **potential unpopularity with existing creditors**, **especially secured ones** from who consents, releases of security, or renegotiation of covenants may be necessary. Lecture Notes.

Answer 62

* **Prepayment risk**. * Securities **may be less liquid than Vanilla Bonds**. * **Familiarity** with the asset type **is necessary**. Lecture Notes.

Answer 63

* **SPV**. * **Originator**. * **Liquidity Provider**. * **Credit Enhancement Provider**. * **Guaranteed Investment Contract Provider**. * **Bond Trustee**. * **Share Trustee**. * **Underwriter**. Lecture Notes.

Answer 64

* **Sale Agreement**. * **Trust Deeds**. * **Servicing** (Administration) Agreement. * **Liquidity Support** (Facility) Agreement. * **Credit Enhancement** (Agreements and Provisions). * **Management** (of the SPV) **Agreement**. * **Security Documentation**. * **Bond Documentation**. * **Guaranteed Investment** Contract. * **Underwriting** Agreement. * **Prospectus** (Offering Circular). Lecture Notes. Optionally, derivatives may be employed, e.g. interest rate or currency swaps.

Answer 65

* **Selection of assets** comprising the UP. * **Substitution of assets** comprising the UP. * **Method(s) of transfer**. * **T&Cs**, i.e. CPs, R&Ws, EODs, Covenants, etc. * **Ring-fencing** and other **bankruptcy remoteness considerations**. Lecture Notes. Power of Attorney may well be included.

Answer 66

* A Sale **does not entitle the Seller to an Equity of Redemption**, unlike a Secured Loan. * A Sale **does not compel the Purchaser to account to the Vendor for any profits made on the resale of the subject matter**, unlike a Secured Loan (by way of mortgage). * A Sale **does not entitle the Purchaser to recover from the Vendor any losses made on the resale of the subject matter**, unlike a Secured Loan (by way of mortgage) Lectures Notes; *Re George Inglefield* [1933] Ch 1. An Equity of Redemption is the right to regain unencumbered title in an asset once the relevant secured obligation has been discharged.

Answer 67

* A Sale Agreement's **character will be determined according to** its **substance**. * There are **no objective criteria** underpinning this determination. * **Proper construction** must be applied with reference to the **whole of the agreement** and the **nature of the legal relationship the parties intended to create**. * Such terms as '**sale**', '**purchase**', and '**price**' must be construed **as they appear and are used**. * The **mere presence of provisions** which are **similar to** those used in **secured financing** is **not determinative of** **character**. *Welsh Development Agency v Export Finance* [1992] BCLC 148.

Answer 68

Lecture Notes.

Answer 69

The Originator's responsibilities, discretions, and liabilities regarding: * **Portfolio administration**; * **Information** and **financial** **covenants**; * **Cashflow management**; * **Distribution of funds** to the SPV or relevant Third Party; * **Servicing of miscellaneous fees**, e.g. various costs and expenses; * **Treatment of prepayment**; * **Minimization of interest** (repayment) **shortfalls**; and * **Succession** of itself. Lecture Notes.

Answer 70

* **T&Cs**. * **Timing**, **receipt**, and **repayment** of **Drawdowns** (particularly if Swaps are involved). * **Rating** **downgrade** of the **Provider**. Lecture Notes. Trigger Point: A special emphasis ought be put upon Purpose, Utilization, and Conditions of Utilization, given that Liquidity Support is supposed to abet timely repayment rather than bolster credit. For instance, a distinction may be made between delinquent and defaulted receivables.

Answer 71

* **Tranching provisions**. * **Subordinated debt** (term facility). * **Insurance polic(ies)**, monoline or otherwise. * **Letter(s) of credit**. * **Ranking and priority** vis-à-vis Bondholders. * **Subrogation** rights. * **Utilization** rights. Lecture Notes. Trigger Point: which party may use these tools, and when?

Answer 72

When the **debt issued** has a **different interest basis or currency** from that of the **underlying receivables**. ## Footnote Lecture Notes.

Answer 73

**Bond Trust:** * **T&Cs** of the **Bond Issuance**, i.e. classes, interest rates, entitlements, enforcement, etc.. * Trustee's rights, obligations, and liabilities. **UP Trust:** * **Use** and **transfer** of **proceeds from receivables**. * Trustee's rights, obligations, and liabilities. **Share Trust:** * **For whom** the **SPV's shares** are **held on behalf of.** * Trustee's rights, obligations, and liabilities. Lecture Notes

Answer 74

* **Nature of the security**, e.g. fixed or floating charge. * **From whom** and by **whom it is held**, and the relevant interests. * **Perfection issues**. * **Governing jurisdiction**. Lecture Notes.

Answer 75

* **T&Cs**. * **Pricing**. * **Nature of underwriting obligation**, i.e. best efforts or full underwriting. * **Force majeure**. Lecture Notes. A special emphasis on the CPs, which will extensively include the necessary collateral, credit enhancement, consents, credit ratings, and authorizations and licences necessary to issue the debt and administer the transaction.

Answer 76

**Incompletely**. **Equitable title** is **transferred to the SPV**, with l**egal title** remaining **with the Originator on trust** for the SPV. Arrangements are made for a **complete transfer under certain circumstances**, e.g. **default**. ## Footnote Lecture Notes. This is done to avoid the very expensive and time-consuming Land Registry fees.

Answer 77

* **Vulnerability to a disposition** of the assets by the Originator to a **Good Faith Purchase** who is unaware of the SPV's rights. * **Remediable by keeping custody of the Charge Certificates** with the SPV or its Agent. * **No Power of Sale prior to** the **execution** of the Deed of Transfer. * **Remediable by using Power of Attorney** to exercise the **Originator's Power of Sale**. Lecture Notes.

Answer 78

**Only if** the Receivership pertains to a **qualifying floating charge**, **unless** the transaction is a **capital markets investment** of **at least £50m**. ## Footnote IA 1986 -- §72A-§72B. A 'qualifying floating charge' is one which enables the Holder to appoint an administrative receiver under the Act without needing a court order.\* A 'capital market investment' is an investment which falls under Art. 77 of FSMA 2000 RAO 2001 and is either rated, listed, or traded.\*\* \*IA 1986 -- Sch. B1, Para. 14; \*\*Sch. 2A, Para. 2.

Answer 79

The principle that, **whether in winding up or administration**, a company's **property must be applied to satisfy its liabilities *pari passu***. ## Footnote Lecture Notes; *British Eagle v Air France* [1975] 2 All ER 390; IA 1986 -- §107 and §328(3); Insolvency Rules 1986 -- R 4.181 and 2.85.

Answer 80

**Yes**. A Creditor which **agrees to subordinate** its claim thereby **waives its entitlement to *pari passu* treatment**. ## Footnote * Re Maxwell Communications (No.2)* [1994] 1 ALL ER 737; *SSSL Realisations (2002)* [2006] EWCA Civ 7. * Maxwell* also distinguished *British Eagle* on the grounds that the debts therein were not 'mutual', presumably meaning that they did not originate from the same place. *Pari passu* disapplies in case of secured creditors, which Bondholders in these transactions are.

Answer 81

* **CRAs owe a common law duty of care** to the **Investors** of rated structured products if they **come to rely on its opinion****of the creditworthiness of the relevant Bonds**. * Objections of **indeterminate liability will not obtain** if the CRA **knew**, or **could have know**, the **potential number of Bondholders** in an Iusse and its **exposure was limited in time**. * **Vulnerability is the consequence of reasonable reliance**, not an additional requirement thereof. Reasonable reliance, however, can be difficult to prove.\* * **A lack of contractual privity does not preclude liability** if the CRA was **engaged by an ascertainable class of investors**, or representative thereof, to **communicate a rating**. *ABN AMRO Bank v Bathurst Regional Council* [2014] FCAFC 65. Australian case. \*In the judgment, it was often repeated that the Investors were not able to “second guess” the rating or undertake their own analysis of the risk of default. Whether this supports an assertion of reasonable reliance, though, is questionable given that they were sophisticated parties who would either hire an adviser or take their money elsewhere.

Answer 82

Through the imposition of a **trust** on the **Originator's relevant Collection Account** in favor of the SPV. ## Footnote Lecture Notes. Having income directly funneled from the Underlying Debtors to an account in the SPV's name is problematic because it would likely alert them to a Transfer. Likewise, transferring funds from the Originator's Collection Account thereto would take days, and therefore, leave the relevant sums subject to insolvency risk in the meanwhile.

Answer 83

On **Day 1**, an **entirely independent successor** should be set up and **enabled to inherit all of the Originator's rights and assets** insofar as they are **needed to carry on its business** should it become insolvent. ## Footnote Lecture Notes. Only very rarely will this be a consideration.

Answer 84

**To limit Creidtors' claims against the SPV to the assets that have been secured in their favor.** Alternative drafting runs the risk of disabling Creditors from ever triggering their security. ## Footnote Lecture Notes. This risk arises from the fact that security attaches to obligations, and in this case, to trigger the security, Creditors would have to claim for the full debt. Thus, prohibiting them therefrom would effectively also prohibit them from enjoying their security.