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| Financial Law Update | Back to article summary. |
| A new year's present for the structured finance industry. | ||
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| After another record year for structured financing in Ireland in 2006, Garry Ferguson looks at recent changes to Irish law which will further facilitate the structuring of securitisations through Ireland. Ferguson's says the 2006 Act is further indication of the aligned interests of practitioners, regulators and government in creating an investor friendly environment. and that the Act should constitute an additional and useful marketing tool for those interested in securing Ireland as a premier location for the establishment of securitisation SPVs. | ||
It may be more appropriate for the title of this article to refer to a Christmas present rather than a new year's present. This is because it was on 24 December 2006 when most of us were, no doubt, relaxing into the festive season, that the Investment Funds, Companies and Miscellaneous Provisions Act 2006 (the 2006 Act) became effective under Irish law. The fact that 24 December happened to fall on a Saturday last year did not deter those responsible from having the 2006 Act passed into law on time for Christmas!
The 2006 Act contains several provisions which will facilitate the structuring of securitisation transactions in Ireland. It enhances an already robust and highly regarded legal and taxation regime for structured financing and it demonstrates again how responsive the regulatory authorities and government can be to the concerns of those operating in the industry. Issuers may now be set up as private companies Perhaps the most significant development from a structured financing perspective is that the 2006 Act enables Irish special purpose vehicles (SPVs) involved in the issuing of debt securities to be set up as private companies. This has the following two benefits: 1. an upfront transaction cost saving of €40,000 - prior to the passing of the 2006 Act an arranger structuring a CDO, ABS or other securitisation transaction in Ireland had an upfront cost of around €40,000 in order to satisfy a minimum capitalisation requirement of public companies - there is no such requirement for private companies 2. a time saving of almost two weeks - it takes just short of three weeks from the date of filing incorporation papers to date of issuance of a certificate of commencement to trade for public companies. Private companies can be up and running in five days The changes to Irish law enabling the use of private companies as SPVs for structured finance transactions are fairly technical and involve the interpretation of several provisions of pre-existing company law and prospectus law. Prior to the 2006 Act, section 33 of the Companies Act 1963 (Section 33) stipulated that a private company must, under its articles of association: (i) restrict the right to transfer its shares, (ii) limit its members to 50 and (iii) prohibit any invitation to the public to subscribe for any of its shares or debentures. 'Debentures' in this regard includes debt securities such as notes issued as quoted Eurobonds by securitisation SPVs. Prior to the implementation of the Prospectus Directive (PD) Section 33 worked fine and did not prevent private companies from engaging in traditional private placements. The law which transposed the PD into Irish law requires the publication of a Prospectus by any company which (i) offers securities to the public or (ii) seeks to list its securities on a regulated market such as the official list of the Irish Stock Exchange. The meaning of 'offer of shares to the public' is extremely broadly defined - it catches all communications by issuers of securities in any form and by any means to any person so as to enable that person to decide whether to purchase the securities. The combination of this very broad definition and the pre-existing provisions under Section 33 (particularly that which prohibited any invitation to the public to subscribe for any of its debentures) meant that all Irish SPVs engaged in what was traditionally regarded as private placements, in most cases, had to be incorporated as public companies. The 2006 Act makes several changes to Section 33. The most significant change for Irish SPVs is that the issuance of the type of securities that such vehicles generally issue will no longer be regarded as falling within the prohibited activities of private companies. The most common securities issued by an Irish SPV is quoted Eurobonds with a minimum denomination of at least €50,000 - the 2006 Act provides specifically for private companies to be permitted to issue such securities. Some structuring issues The fact that it is likely that many securitisation SPVs will now be private companies will require some planning when the transaction is being structured. There maximum number of directorships which a person may hold in a private company is 25. While there are exceptions to this rule there may be scope to increase this cap in future legislation. For the moment it will be important to check that a director has not exceeded the 25 limit before appointing them to the board of an SPV. Another point to consider at the outset is how the SPV will fund its winding up expenses. The funding used to capitalise public companies was often set aside to defray against winding up costs of the SPV. Since there will be effectively no capitalisation funds for SPVs established as private companies, corporate services providers and directors will be concerned that liquidation costs are adequately provided for in the transaction documents. Good news for wrapped transactions The legislation implementing the PD in Ireland made guarantors responsible in certain circumstances for the contents of a Prospectus. An unintended consequence of this was that monoline insurers feared that they would be held liable for any untrue statements or omissions from a Prospectus. As a result many wrapped transactions (ie transactions in which the SPVs credit rating is enhanced by a monoline insurance policy) which would have been structured through Ireland went elsewhere. Following the enactment of the 2006 Act monoline insurers may only be responsible for the parts of a Prospectus which relate specifically to the monoline insurer itself or the insurance policy provided by such insurer. Hopefully the result of this change will be to reverse the trend of wrapped transactions being structured in Ireland's competitor locations. Expert reports The 2006 Act has also clarified some uncertainty regarding the requirement to obtain the consent of experts to the inclusion in a Prospectus of reports prepared by such experts. For example, it should now no longer be necessary under Irish law to obtain the consent of an auditor to the inclusion of historical financial information in a Prospectus where such information was not prepared for the purpose of inclusion in the Prospectus. Dematerialisation One feature of the 2006 Act which may have an impact on the structured finance industry is the provision which anticipates dematerialisation of securities issued by public companies. Dematerialisation entails issuing securities in electronic rather than in physical form. The 2006 Act inserts a provision into section 239 of the Companies Act 1990 (Section 239) which entitles the Minister for Enterprise, Trade and Employment to publish regulations providing for dematerialisation. When the regulations are passed title to shares in listed companies will no longer be evidenced by way of a share certificate but by way of an electronic register and transfers of such shares will also be recorded electronically. The amendment made by 2006 Act will render the dematerialisation rules mandatory for all affected securities. While Section 239 is clearly intended to capture shares in public listed companies, as currently drafted, it also captures listed debt securities issued by SPVs. Unfortunately, from time to time investors in SPVs require the notes to be issued in physical form. It is understood that the regulations will not be published for some time - one would hope that debt securities issued by SPVs are excluded from the dematerialisation rules in advance of the regulations becoming effective. Other changes As its full title suggests the 2006 Act impacts a miscellany of areas under Irish law. For example section 6 of the 2006 Act tidies up some issues as regards the swearing of statutory declarations abroad. In addition, Part 3 of the Act contains provisions to implement the Transparency Directive (TD) in Ireland including provisions to enable the Financial Regulator to make rules in relation to the TD and provisions on civil and criminal sanctions. These sanctions are in line with those set out in the Prospectus Directive and Market Abuse Directive. However, Ireland has not met the implementation deadline of 20 January 2007 but it is expected the Regulations issued for this purpose will be as close as possible to the TD. The TD establishes requirements in relation to the disclosure of periodic and ongoing information about issuers whose securities are already admitted to trading on a regulated market situated or operating within EU Member States. One final change worth noting is that Part 2 of the 2006 Act provides for an increase in turnover (to €7.3 million) and balance sheet thresholds (to €3.65 million) used to determine whether a company may be excluded from the requirement to conduct an audit. The increases will enable more companies to avail of the audit exemption and will bring Irish legislation into compliance with the thresholds permitted within the EU. Overall, from the point of view of the structured finance industry, the 2006 Act is further indication of the aligned interests of practitioners, regulators and government in creating an investor friendly environment. It should constitute an additional and useful marketing tool for those interested in securing Ireland as a premier location for the establishment of securitisation SPVs. |
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Garry Ferguson is a member of the Structured Finance Group at Matheson Ormsby Prentice. He can be contacted by phone: +353 1 619 9000 or by email: garry.ferguson@mop.ie |
