The fifteen years since the completion of the first securitisation of Irish mortgage assets have seen innovative legislative changes in the areas of company and tax law in Ireland which, together with a market-leading stock exchange and regime for listing debt securities, have resulted in Ireland establishing itself as a favoured location for structured finance transactions, in particular securitisations. The enactment of section 110 of the Taxes Consolidation Act 1997 (enabling securitisation structures to operate as tax neutral) and more recently the ability to issue debt securities out of private limited companies have enhanced the legal environment in Ireland from the perspective of structured finance transaction managers.
However, in late 2007, the global 'credit crunch' triggered by the sub-prime crisis and compounded by the subsequent collapse of Lehman Brothers has seen a dramatic collapse in confidence in relation to mortgaged back securities and other securitisation products, as investors feared that such products might be infected by poor-performing US sub-prime loans. The impact of the credit crunch was felt across world markets, with the aggregate of issuances in relation to European assets falling from a high of €711.3 billion in 2008 to €414.1 billion in 2009. In Ireland, this was reflected in the aggregate amount of issuances in respect of Irish assets falling from €40.7 bn in 2008 to €13.9 bn in 2009 .
As a result originators and issuers were presented with the grim realisation that the public securitisation market was closed. The only option in such an environment was to avail of the emergency liquidity support provided by the European Central Bank (“ECB”) through its Eurosystem monetary operations and comparable support operations from other central banks. This mechanism permits an originator to purchase securities issued by the issuer and to then sell these to the ECB, at the same time agreeing a time and price at which the originator would repurchase the securities back from the ECB. This ‘repo’ facility (together with a similar mechanism provided by the Bank of England) has provided an outlet for originators and issuers of securitisation products in Europe. In 2009, the majority of issuances across Europe were not marketed to investors on the open market but rather were retained by originators and utilised for ECB and Bank of England repo purposes.
However, in November 2009, the ECB announced a tightening of its eligibility criteria in relation to its repo operations. This reflected an intention of the ECB to reduce the reliance of Eurozone issuers on this source of funding and to encourage issuers to seek to source investors in relation to their securitisation products from the market. The ECB have indicated that the purpose of such actions is to make a further contribution to restoring the proper functioning of the asset backed securities market.
A return to the levels of global securitisation activity, which were evident pre-credit crunch, is unlikely in the short to medium term. However shoots of recovery are starting to appear, with reports from rating agencies of increases in the numbers of deals they are being asked to rate. In addition, credit institutions whose business model relies on the ability to securitise their mortgage portfolios on an ongoing basis, may, in light of recent developments regarding the ECB repo facility, have no option other than to go back to the market, albeit with appropriate pricing. It is likely that in the short-term at least activity in the primary markets will be focussed on the traditional asset classes (e.g. mortgages and trade receivables).
The first few months of 2010 has seen an up-turn in structured finance activity in Ireland, although not necessarily in traditional asset classes. For example, many Russian credit institutions have utilised the section 110 regime as a method of raising capital. There has also been a recent increase in ‘private securitisations’ involving the restructuring of investment funds by the transfer of certain assets from the fund to a securitisation vehicle which in turn issues profit participating notes to fund participants.
In a relatively recent development in Ireland, the Irish Financial Services Regulatory Authority has approved a number of collateralised debt obligation (“CDO”) type investment funds. One of the main reasons for structuring a CDO in this manner is that investors typically have more liquidity in a fund (having the ability not only to transfer their shares in the fund but also having the right to redeem their shares on request). As part of the CDO structure the fund may incorporate a subsidiary company through which it can acquire the portfolio of assets relating to the CDO. By ensuring that such a subsidiary qualifies as a section 110 company, it may be possible for the subsidiary to avail of certain double taxation treaty benefits which would not otherwise be available to a fund and thereby avoiding tax leakage in the CDO structure.
The introduction of legislation and guidance facilitating alternative financing structures (including Sharia compliant structures) may lead to an increased use of Ireland for such deals. Also it raises the possibility of a wider variety of structural options for Irish deals.
In the coming years and months we would expect substantial activity in the market arising from the refinancing of existing structured finance deals in particular property based transactions (e.g. RMBS and CMBS), including those that involved participation in ECB repo transactions which have been ‘unwound’. We would be of the view that it is likely that international securitisation structures, of one form or another, will have an important role in any such refinancing transactions.
Is should also be noted that the Irish Stock Exchange remains one of the most adaptable and pro-active exchanges in Europe. Its dynamic nature, commercial perspective and ‘very positive reputation will ensure that the Irish Stock Exchange remains a leading exchange for the listing of debt securities in the future.
This approach taken by the Irish Stock Exchange, together with the existing legislative basis for structured finance transactions, in particular the flexible nature of the provisions of section 110, will mean that Ireland will be well placed to benefit from the continued upswing in the structured finance markets in the future.