Securitisation 2012 - Latham & Watkins

Abu DhabiBarcelonaBeijingBostonBrusselsChicagoDohaDubaiFrankfurtHamburgHong Kong

HoustonLondonLos AngelesMadridMilanMoscowMunichNew JerseyNew YorkOrange CountyParis

Riyadh*RomeSan DiegoSan FranciscoShanghaiSilicon ValleySingaporeTokyoWashington, D.C.

LW.com

* In association with the Law Office of Mohammed A. Al-Sheikh

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. © Copyright 2012 Latham & Watkins. All Rights Reserved.

Published by Global Legal Group, in association with:

The International Com

parative Legal Guide to: S

ecuritisation 2012

The International Comparative Legal Guide to:

Securitisation 2012

www.ICLG.co.uk

DisclaimerThis publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice.

Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication.

This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified

professional when dealing with specific situations.

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Contributing Editor

Mark Nicolaides,

Latham & Watkins LLP

Account ManagersDror Levy, Maria Lopez,

Florjan Osmani, Oliver

Smith, Rory Smith, Toni

Wyatt

Sub EditorFiona Canning

Editor Suzie Kidd

Senior EditorPenny Smale

Managing EditorAlan Falach

Group PublisherRichard Firth

Published byGlobal Legal Group Ltd.

59 Tanner Street

London SE1 3PL, UK

Tel: +44 20 7367 0720

Fax: +44 20 7407 5255

Email: [email protected]

URL: www.glgroup.co.uk

GLG Cover DesignF&F Studio Design

GLG Cover Image SourceiStock Photo

Printed byAshford Colour Press Ltd.

April 2012

Copyright © 2012Global Legal Group Ltd. All rights reservedNo photocopying

ISBN 978-1-908070-25-8

ISSN 1745-7661

Strategic Partners

The International Comparative Legal Guide to: Securitisation 2012General Chapters:1 Documenting Receivables Financings in Leveraged Finance and High-Yield Transactions –

Dan Maze & Rupert Hall, Latham & Watkins LLP 1

2 The Evolution of a Global Asset Class: The Securitisation of Trade Receivables – Past, Present and

Future – Mark D. O’Keefe, Rabobank International 8

3 New Structural Features for Collateralised Loan Obligations – Craig Stein & Paul N. Watterson, Jr.,

Schulte Roth & Zabel LLP 13

4 EU and US Securitisation Risk Retention and Disclosure Rules – A Comparison – Tom Parachini &

Erik Klingenberg, SNR Denton 18

5 US Taxation of Non-US Investors in Securitisation Transactions – David Z. Nirenberg, Ashurst LLP 24

Country Question and Answer Chapters:6 Argentina Estudio Beccar Varela: Damián F. Beccar Varela & Roberto A. Fortunati 35

7 Australia Ashurst: Paul Jenkins & Jamie Ng 44

8 Austria Fellner Wratzfeld & Partners: Markus Fellner 54

9 Brazil Levy & Salomão Advogados: Ana Cecília Giorgi Manente & Fernando de Azevedo Peraçoli 62

10 Canada Torys LLP: Michael Feldman & Jim Hong 72

11 China FenXun Partners: Fred Chang & Xusheng Yang 82

12 Czech Republic TGC Corporate Lawyers: Jana Jesenská & Andrea Majerčíková 92

13 Denmark Accura Advokatpartnerselskab: Kim Toftgaard & Christian Sahlertz 101

14 England & Wales Weil, Gotshal & Manges: Jacky Kelly & Rupert Wall 110

15 Estonia Attorneys at law Borenius: Indrek Minka & Aivar Taro 121

16 Finland Roschier, Attorneys Ltd.: Helena Viita & Tatu Simula 130

17 France Freshfields Bruckhaus Deringer LLP: Hervé Touraine & Laureen Gauriot 140

18 Germany Cleary Gottlieb Steen & Hamilton LLP: Werner Meier & Michael Kern 151

19 Greece KGDI Law Firm: Christina Papanikolopoulou & Athina Diamanti 164

20 Hong Kong Bingham McCutchen LLP: Vincent Sum & Laurence Isaacson 173

21 Hungary Gárdos Füredi Mosonyi Tomori: István Gárdos & Erika Tomori 185

22 India Dave & Girish & Co.: Mona Bhide 194

23 Italy CDP Studio Legale Associato: Giuseppe Schiavello & Stefano Agnoli 204

24 Japan Nishimura & Asahi: Hajime Ueno 213

25 Korea Kim & Chang: Yong-Ho Kim & Hoin Lee 226

26 Mexico Cervantes Sainz, S.C.: Diego Martinez & Alejandro Sainz 238

27 Netherlands Loyens & Loeff N.V.: Mariëtte van 't Westeinde & Jan Bart Schober 247

28 New Zealand Chapman Tripp: Dermot Ross & John Sproat 260

29 Poland TGC Corporate Lawyers: Marcin Gruszko & Grzegorz Witczak 269

30 Portugal Vieira de Almeida & Associados: Paula Gomes Freire & Benedita Aires 278

31 Saudi Arabia King & Spalding LLP: Nabil A. Issa & Martin P. Forster-Jones 290

32 Scotland Brodies LLP: Bruce Stephen & Marion MacInnes 298

33 Singapore Drew & Napier LLC: Petrus Huang & Ron Cheng 306

34 South Africa Werksmans Attorneys: Richard Roothman & Tracy-Lee Janse van Rensburg 317

35 Spain Uría Menéndez Abogados, S.L.P.: Ramiro Rivera Romero & Pedro Ravina Martín 330

36 Switzerland Pestalozzi Attorneys at Law Ltd: Oliver Widmer & Urs Kloeti 343

37 Taiwan Lee and Li, Attorneys-at-Law: Abe Sung & Hsin-Lan Hsu 354

38 UAE King & Spalding LLP: Rizwan H. Kanji & Martin P. Forster-Jones 364

39 USA Latham & Watkins LLP: Lawrence Safran & Kevin T. Fingeret 372

WWW.ICLG.CO.UKICLG TO: SECURITISATION 2012© Published and reproduced with kind permission by Global Legal Group Ltd, London

Chapter 1


Documenting ReceivablesFinancings in LeveragedFinance and High-YieldTransactions

Introduction

Including a receivables securitisation tranche when financing (and

refinancing) highly leveraged businesses that generate trade

receivables has become popular for several reasons. First, and

foremost, securitisation financings can generally be obtained at

lower, and in some cases much lower, overall cost to the corporate

group. Second, securitisation financings can be incurred by the

target operating companies directly, and do not need to be “pushed

down” from the acquisition vehicle (as is sometimes the case with

leveraged financings), thus providing immediate working capital

for the group. Third, securitisation financings generally do not

impose as extensive a package of operational restrictions on the

group compared with leveraged finance documentation or even

incurrence covenants found in high-yield bond and senior secured

note indentures. Finally, many companies engaged in securitisation

transactions claim that it helps them improve the efficiency of their

underlying business by focussing management attention on the

actual performance of customer relationships (e.g., invoice payment

speed and volume of post-sale adjustments). In this chapter, the

term “high-yield” refers to both traditional unsecured high-yield

bonds as well as senior secured notes that are an increasingly

important part of the capital structure.

In leveraged finance facility agreements and bond indentures,

affirmative and negative covenants restrict the operations of the

Borrower / bond issuer, and all or certain of its significant (i.e.

“restricted”) subsidiaries, in a complex and wide-ranging manner.

We set out below the manner in which such covenants would need

to be modified in order for a Borrower / Issuer to be able to enter

into a receivables securitisation without needing to obtain specific

lender or bondholder consent (often a costly and a challenging

process). Although this chapter describes one set of modifications,

there are of course various means of achieving the same objectives

and the transaction documentation must be analysed carefully in

each case to determine what exactly is required. This chapter also

discusses some of the key negotiating issues involved in negotiating

and documenting such covenant modifications.

Once appropriate covenant carve-outs permitting a trade

receivables securitisation have been agreed, the securitisation itself

can then be structured and documented. Each of the country

chapters in the latter part of this guide provides a summary of the

issues involved in executing a securitisation in that country.

Typical Transaction Structure

Trade receivables are non-interest bearing corporate obligations

typically payable 60 to 90 days following invoicing. They arise

following the delivery of goods or the rendering of services by a

company to its customers. As long as a receivable is legally

enforceable and not subject to set-off, and satisfies certain other

eligibility criteria specific to each transaction, the company to

which the receivable is owing can raise financing against it.

One popular form of receivables financing, asset-based lending

(ABL), is structured as a loan to a company secured by the

receivables. ABL transactions, although popular, have the

drawback of exposing ABL lenders to all of the risks of the

borrowing company’s business – risks which may lead to the

company’s insolvency and (at least) delays in repayment of the

ABL lenders.

An alternative form of receivables financing, discussed below, is a

“securitisation” of the receivables. A securitisation involves the

outright sale of receivables by a company to a special purpose

“vehicle” (SPV), usually a company but also possibly a partnership

or other legal entity, which exists for no other business than to

acquire the receivables. The purchase price of receivables will

generally equal the face amount of the receivables minus (in most

cases, but depending on the tax laws of the relevant selling

company’s jurisdiction) a small discount to cover expected losses

on the purchased receivables and financing and other costs of the

SPV. The purchase price will typically be paid in two parts: a non-

refundable cash component paid at the time of purchase with

financing provided to the SPV by senior lenders or commercial

paper investors; and a deferred component payable out of

collections on the receivables. In some jurisdictions, the deferred

component may need to be paid up front (e.g., to accomplish a “true

sale” under local law), in which case the SPV must incur

subordinated financing, usually from a member of the selling

company’s group, to pay that portion of the purchase price up front.

The SPV will grant security over the receivables it acquires and all

of its other assets to secure repayment of the financing incurred by

it to fund receivables purchases.

The SPV will be structured to have no activities and no liabilities

other than what is incidental to owning and distributing the

proceeds of collections of the receivables. The SPV will have no

employees or offices of its own; instead, the SPV will outsource all

of its activities to third parties pursuant to contracts in which the

third parties agree not to make claims against the SPV. While the

SPV purchaser will often be established as an “orphan company”,

with the shares in the company held in a charitable trust, rather than

by a member of the target group, in certain jurisdictions and

depending on the particular deal structure, it may be necessary to

establish an initial purchaser of receivables that is incorporated as a

member of the group (which may then on-sell the receivables to an

“orphan” SPV).

Rupert Hall

Dan Maze

1

Latham & Watkins LLP Documenting Receivables Financings

ICLG TO: SECURITISATION 2012WWW.ICLG.CO.UK© Published and reproduced with kind permission by Global Legal Group Ltd, London

Collection of the receivables will generally be handled by the

selling company or its parent pursuant to an outsourcing contract

until agreed trigger events occur, at which point a third party

servicer can be activated. By these and other contractual

provisions, the SPV is rendered “bankruptcy remote” and investors

in the securitisation are as a result less likely to suffer the risks of

the insolvency of the Borrower of the securitisation debt.

From collections, the SPV will pay various commitment fees,

administration fees and interest to its third party suppliers and

finance providers. All payments are made pursuant to payment

priority “waterfalls” that govern which parties are paid first, which

next, and which last. Typically, there is one waterfall for

distributions made prior to enforcement and one for distributions

made after enforcement commences.

The structure of a typical trade receivables securitisation transaction

looks like the following:

Documentation Provisions

In light of the foregoing, we describe below the documentation

provisions necessary to permit a trade receivables securitisation. In

summary, the relevant documentation will need to include several

framework definitions describing the general terms of the

anticipated securitisation transaction and several carve-outs from

the restrictive covenants to which the relevant Borrower / Issuer

would otherwise be subject. We address each in turn below.

Descriptive Definitions

The following descriptive definitions will need to be added to the

relevant transaction documents to describe what is permitted and

thus to provide reference points for the covenant carve-outs which

follow. The definitions below are tailored for a high-yield indenture

(in part by referring to an “Issuer”), but they can easily be modified

for a senior facility agreement if desired.

The definitions below contain various limitations designed to strike

a balance between the interests of the owners of the Borrower /

Issuer, on the one hand, who desire to secure the receivables

financing on the best possible terms, and the interests of the senior

lenders / bondholders, on the other hand, who do not want the terms

of the securitisation financing to disrupt the Borrower’s ability to

repay their (usually much larger) leveraged loans or bonds in

accordance with their terms. The definitions below are of course

negotiable, and the exact scope of the definitions and related

provisions will depend on the circumstances of the particular

transaction and the needs of the particular group. In particular,

where a business is contemplating alternate structures to a trade

receivables securitisation, such as a factoring transaction, certain

slight modifications may be necessary to one or more of the

definitions and related provisions described below.

“Qualified Receivables Financing” means any ReceivablesFinancing of a Receivables Subsidiary that meets thefollowing conditions:(a) an Officer or the Board of Directors of the Issuer shall

have determined in good faith that such QualifiedReceivables Financing (including financing terms,covenants, termination events and other provisions) isin the aggregate economically fair and reasonable tothe Issuer and the Receivables Subsidiary;

(b) all sales of accounts receivable and related assets tothe Receivables Subsidiary are made at fair marketvalue (being the value that would be paid by a willingbuyer to an unaffiliated willing seller in a transactionnot involving distress of either party, as determined ingood faith by the responsible accounting or financialoffice of the Issuer); and

(c) the financing terms, covenants, termination eventsand other provisions thereof shall be on market terms(as determined in good faith by the Issuer) and mayinclude Standard Securitisation Undertakings.

The grant of a security interest in any accounts receivable ofthe Issuer or any of its Restricted Subsidiaries (other than aReceivables Subsidiary) to secure Indebtedness under aCredit Facility or Indebtedness in respect of the Notes shallnot be deemed a Qualified Receivables Financing.“Receivable” means a right to receive payment arising froma sale or lease of goods or services by a Person pursuant toan arrangement with another Person pursuant to which suchother Person is obligated to pay for goods or services underterms that permit the purchase of such goods and services oncredit, as determined on the basis of applicable generallyaccepted accounting principles. “Receivables Assets” means any assets that are or will be thesubject of a Qualified Receivables Financing.“Receivables Fees” means distributions or payments madedirectly or by means of discounts with respect to anyparticipation interest issued or sold in connection with, andother fees paid to a Person that is not a Restricted Subsidiaryin connection with, any Receivables Financing.“Receivables Financing” means any transaction or series oftransactions that may be entered into by the Issuer or any ofits Subsidiaries pursuant to which the Issuer or any of itsSubsidiaries may sell, convey or otherwise transfer to (a) aReceivables Subsidiary (in the case of a transfer by theIssuer or any of its Subsidiaries), or (b) any other Person (inthe case of a transfer by a Receivables Subsidiary), or maygrant a security interest in, any accounts receivable (whethernow existing or arising in the future) of the Issuer or any ofits Subsidiaries, and any assets related thereto, including allcollateral securing such accounts receivable, all contractsand all guarantees or other obligations in respect of suchaccounts receivable, proceeds of such accounts receivableand other assets which are customarily transferred or inrespect of which security interest are customarily granted inconnection with asset securitisation transactions involvingaccounts receivable and any Hedging Obligations enteredinto by the Issuer or any such Subsidiary in connection withsuch accounts receivable.“Receivables Repurchase Obligation” means any obligationof a seller of receivables in a Qualified ReceivablesFinancing to repurchase receivables arising as a result of abreach of a representation, warranty or covenant orotherwise, including as a result of a receivable or portionthereof becoming subject to any asserted defense, dispute,off-set or counterclaim of any kind as a result of any actiontaken by, any failure to take action by or any other eventrelating to the seller. “Receivables Subsidiary” means a SPV Subsidiary or a

2

WWW.ICLG.CO.UK


ICLG TO: SECURITISATION 2012© Published and reproduced with kind permission by Global Legal Group Ltd, London

wholly-owned Subsidiary of the Issuer which is designatedby the Board of Directors of the Issuer as a ReceivablesSubsidiary:(a) no portion of the Indebtedness or any other

obligations (contingent or otherwise) of which (i) isguaranteed by the Issuer or any other RestrictedSubsidiary of the Issuer (excluding guarantees ofobligations (other than the principal of, and intereston, Indebtedness) pursuant to Standard SecuritisationUndertakings), (ii) is subject to terms that aresubstantially equivalent in effect to a guarantee of anylosses on securitised or sold receivables by the Issueror any other Restricted Subsidiary of the Issuer, (iii) isrecourse to or obligates the Issuer or any otherRestricted Subsidiary of the Issuer in any way otherthan pursuant to Standard SecuritisationUndertakings, or (iv) subjects any property or asset ofthe Issuer or any other Restricted Subsidiary of theIssuer, directly or indirectly, contingently orotherwise, to the satisfaction thereof, other thanpursuant to Standard Securitisation Undertakings;

(b) with which neither the Issuer nor any other RestrictedSubsidiary of the Issuer has any contract, agreement,arrangement or understanding other than on termswhich the Issuer reasonably believes to be no lessfavourable to the Issuer or such Restricted Subsidiarythan those that might be obtained at the time fromPersons that are not Affiliates of the Issuer; and

(c) to which neither the Issuer nor any other RestrictedSubsidiary of the Issuer has any obligation tomaintain or preserve such entity’s financial conditionor cause such entity to achieve certain levels ofoperating results.

Any such designation by the Board of Directors of the Issuershall be evidenced to the Trustee by filing with the Trustee acopy of the resolution of the Board of Directors of the Issuergiving effect to such designation and an Officer’s Certificatecertifying that such designation complied with the foregoingconditions.“SPV Subsidiary” means any Person formed for thepurposes of engaging in a Qualified Receivables Financingwith the Issuer in which the Issuer or any Subsidiary of theIssuer makes an Investment and to which the Issuer or anySubsidiary of the Issuer transfers accounts receivable andrelated assets) which engages in no activities other than inconnection with the financing of accounts receivable of theIssuer and its Subsidiaries, all proceeds thereof and allrights (contractual or other), collateral and other assetsrelating thereto, and any business or activities incidental orrelated to such business;“Standard Securitisation Undertakings” meansrepresentations, warranties, covenants, indemnities andguarantees of performance entered into by the Issuer or anySubsidiary of the Issuer which the Issuer has determined ingood faith to be customary in a Receivables Financing,including those relating to the servicing of the assets of aReceivables Subsidiary, it being understood that anyReceivables Repurchase Obligation shall be deemed to be aStandard Securitisation Undertaking.

Qualified Receivables Financing Criteria

In addition to the descriptive definitions above, the documentation

may also set out certain criteria which the Qualified Receivables

Financing would have to meet in order to be permitted. These

criteria will often be transaction specific or relate to certain

commercial terms, in which case they may not be needed in

addition to the requirements for market or customary provisions

already incorporated into the descriptive definitions above (see

“Key Issues” below). However, if required, these may include:

minimum credit ratings (for underlying debt or the securities

issued pursuant to the securitisation);

conditions as to who may arrange the securitisation;

notification obligations in respect of the main commercial

terms;

requirement to ensure representations, warranties,

undertakings and events of defaults / early amortisation

events are no more onerous than the senior financing; and/or

other economic terms.

Covenant Carve-outs

In a typical senior facility agreement or high-yield indenture, the

securitisation transaction must be carved out of several covenants,

described in further detail below. In summary, carve-outs will need

to be created for the following restrictive covenants:

Asset sales / disposals.

Indebtedness.

Liens / negative pledge.

Restricted payments.

Limitations on certain payments by Restricted Subsidiaries.

Affiliate transactions / arm’s length terms.

Financial covenants (in the case of facility debt only).

Limitation on Asset Sales / DisposalsTypically in a leveraged facility agreement, the relevant Borrower

may not, and may not permit any of its subsidiaries to, sell, lease,

transfer or otherwise dispose of assets (other than up to a certain

permitted value), except in the ordinary of course of trading or

subject to certain other limited exceptions. Similarly, in a typical

high-yield indenture, the Issuer may not, and may not permit any of

its Restricted Subsidiaries to make any direct or indirect sale, lease

(other than an operating lease entered into in the ordinary course of

business), transfer, issuance or other disposition, of shares of capital

stock of a subsidiary (other than directors’ qualifying shares),

property or other assets (referred to collectively as an “Asset

Disposition”), unless the proceeds of such disposition are applied in

accordance with the indenture (which will regulate how much of the

net disposal proceeds must be offered to purchase, prepay or

redeem the high-yield bonds).

However, in connection with a Qualified Receivables Transaction

the relevant Borrower and its Restricted Subsidiaries will clearly be

selling Receivables to the Receivables Subsidiary and those sales

will be caught by such a restriction. Thus, the relevant

documentation should contain an explicit carve-out, typically in the

case of a high-yield indenture from the definition of “Asset

Disposition”, along the following lines:

(___) sales or dispositions of receivables in connectionwith any Qualified Receivables Financing;

A similar carve-out can be included in the restrictive covenant

relating to disposals in a loan facility agreement, or in the definition

of “Permitted Disposal” or “Permitted Transaction”, where

applicable.

Limitation on IndebtednessTypically, in a leveraged facility agreement the relevant Borrower

group is greatly restricted in its ability to incur third party financial

indebtedness other than in the ordinary course of its trade (again

often subject to a permitted debt basket and certain other limited

exceptions). In a high-yield indenture, the Issuer and its Restricted

Subsidiaries are typically restricted from incurring Indebtedness

3



other than “ratio debt” (e.g. when the fixed charge or leverage ratio

of the group is at or below a specified level), subject to limited

exceptions. In a high-yield indenture, the term “Indebtedness”

typically covers a wide variety of obligations, including (without

limitation) with respect to any entity: (1) principal of indebtedness

for borrowed money; (2) principal of obligations evidenced by

bonds, debentures, notes or other similar instruments; (3) all

reimbursement obligations in respect of letters of credit, bankers’

acceptances or other similar instruments; (4) the principal

component of all obligations to pay the deferred and unpaid

purchase price of property (except trade payables), which purchase

price is due more than one year after the date of placing such

property in service or taking final delivery and title thereto; (5)

capitalised lease obligations; (6) the principal component of all

obligations, or liquidation preference, with respect to any Preferred

Stock; (7) the principal component of all indebtedness of third

parties secured by a Lien on any asset of such entity, whether or not

such indebtedness is assumed by such entity; (8) guarantees by such

entity of the principal component of indebtedness of third parties;

(9) net obligations under currency hedges and interest rate hedges.

However, a Receivables Subsidiary in connection with a Qualified

Receivables Transaction will incur various payment obligations that

will be caught by such a restriction, particularly if the financing is

raised in the form of a secured loan made to the Receivables

Subsidiary. Thus, if a Borrower / Issuer desires to retain the ability

to continue to obtain funding under a receivables securitisation even

if the leverage of the group is too high to permit the incurrence of

third party financings (or if the permitted debt basket is

insufficient), the relevant documentation should contain an explicit

carve-out from the indebtedness restrictive covenant along the

following lines:

(___) indebtedness incurred by a Receivables Subsidiaryin a Qualified Receivables Financing;

It is of course also possible to exclude the securitisation transaction

from the definition of “Indebtedness” directly and there is nothing

wrong with having both carve-outs in the documents:

The term “Indebtedness” shall not include . . . (___)

obligations and contingent obligations under or in respect ofQualified Receivables Financings.

However, it should be noted that an exclusion from “Indebtedness”

may have an impact on other provisions such as cross defaults or

financial covenants so it should therefore be considered carefully in

the different contexts in which it would apply (see also “Financial

Covenants” below).

Subject to the same considerations, a similar carve-out can be

included in the restrictive covenant relating to the incurrence of

Financial Indebtedness in a loan facility agreement, or in the

definition of “Permitted Financial Indebtedness” or “Permitted

Transaction”, where applicable.

Mandatory Prepayment of Other Debt from the Proceeds ofSecuritisationsThe carve-outs from disposals covenants and “Indebtedness” described

above may be subject to a cap, above which any such amounts are

either prohibited absolutely or subject to mandatory prepayment of

other debt. Whether, and to what extent, the proceeds of securitisations

should be used to prepay other debt can often be heavily negotiated,

particularly in the leveraged loan market. The business may wish to

use such proceeds for general working capital purposes while lenders

would be concerned at the additional indebtedness incurred by a

Borrower group which may already be highly leveraged.

If some form of mandatory prepayment is agreed, this will often be

limited to the initial proceeds of the securitisation so that the

Borrower is not required to keep prepaying as new receivables

replace existing receivables. A simple way to incorporate this into

the loan documentation would be to carve out ongoing proceeds

from the proceeds which are required to be prepaid:

“Excluded Qualified Receivables Financing Proceeds”means any proceeds of a Qualified Receivables Financing tothe extent such proceeds arise in relation to receivableswhich replace maturing receivables under that or anotherQualified Receivables Financing; “Qualified Receivables Financing Proceeds” means theproceeds of any Qualified Receivables Financing received byany member of the Group except for Excluded QualifiedReceivables Financing Proceeds and after deducting:(a) fees, costs and expenses in relation to such Qualified

Receivables Financing which are incurred by anymember of the Group to persons who are not membersof the Group; and

(b) any Tax incurred or required to be paid by anymember of the Group in connection with suchQualified Receivables Financing (as reasonablydetermined by the relevant member of the Group, onthe basis of existing rates and taking into account ofavailable credit, deduction or allowance) or thetransfer thereof intra-Group,

to the extent they exceed, in aggregate for the Group, (___)

in any financial year.Limitation on Liens / Negative PledgeTypically, in a leveraged facility agreement, a Borrower may not,

and may not permit any of its subsidiaries to, create or permit to

subsist any security interest over any of its assets, other than as

arising by operation of law or in the ordinary course of trade (again

often subject to a permitted security basket and certain other limited

exceptions). Similarly, in a typical high-yield indenture, an Issuer

may not, and may not permit any of its Restricted Subsidiaries to,

incur or suffer to exist, directly or indirectly, any mortgage, pledge,

security interest, encumbrance, lien or charge of any kind

(including any conditional sale or other title retention agreement or

lease in the nature thereof) upon any of its property or assets,

whenever acquired, or any interest therein or any income or profits

therefrom (referred to collectively as “Liens”), unless such Liens

also secure the high-yield debt (either on a senior or equal basis,

depending on the nature of the other secured debt). As with

leveraged loan facilities, typically, there is a carve-out for

“Permitted Liens” that provide certain limited exceptions.


Receivables Transaction will grant or incur various Liens in favour

of the providers of the securitisation financing that will be caught

by the restriction, particularly if the financing is raised in the form

of a secured loan made to the Receivables Subsidiary. Thus, the

relevant documentation should contain an explicit carve-out from

the Lien restriction, along the lines of one or more paragraphs added

to the definition of “Permitted Lien”:

(___) Liens on Receivables Assets Incurred in connectionwith a Qualified Receivables Financing;

(___) Liens securing Indebtedness or other obligationsof a Receivables Subsidiary;

A similar carve-out can be included in the negative pledge in a loan

facility agreement, or in the definition of “Permitted Security” or

“Permitted Transaction”, where applicable.

Limitation on Restricted Payments Typically, in a leveraged facility agreement, the Borrower and its

subsidiaries may not make payments and distributions out of the

restricted group to the equity holders or in respect of subordinated

shareholder debt. Similarly, in a typical high-yield indenture, an

Issuer may not, and may not permit any of its restricted subsidiaries

4

WWW.ICLG.CO.UK



to, make various payments to its equity holders, including any

dividends or distributions on or in respect of capital stock, or

purchases, redemptions, retirements or other acquisitions for value

of any capital stock, or principal payments on, or purchases,

repurchases, redemptions, defeasances or other acquisitions or

retirements for value of, prior to scheduled maturity, scheduled

repayments or scheduled sinking fund payments, any subordinated

indebtedness (as such term may be defined).


Receivables Financing will need to pay various fees that may be

caught by this restriction. Thus, the relevant documentation should

contain an explicit carve-out from the restricted payment restrictive

covenant, along the following lines:

(___) payment of any Receivables Fees and purchases ofReceivables Assets pursuant to a Receivables RepurchaseObligation in connection with a Qualified ReceivablesFinancing;

A similar carve-out can be included in the restrictive covenants

relating to dividends and restricted payments in a loan facility

agreement, or in the definition of “Permitted Distribution” or

“Permitted Transaction”, where applicable.

Limitation on Restrictions on Distributions from RestrictedSubsidiariesIn some documentation, a Borrower / Issuer may not permit any of

its restricted subsidiaries to create or otherwise cause or permit to

exist or to become effective any consensual encumbrance or

consensual restriction on the ability of any restricted subsidiary to

make various restricted payments, make loans, and otherwise make

transfers of assets or property to such Borrower / Issuer.


Receivables Financing will have restrictions placed on its ability to

distribute cash to parties in the form of payment priority

“waterfalls” that will usually be caught by such a restriction. Thus,

the relevant document should contain an explicit carve-out from the

limitation on restrictions on distributions, etc., along the following

lines:

(___) restrictions effected in connection with a QualifiedReceivables Financing that, in the good faith determinationof an Officer or the Board of Directors of the Issuer, arenecessary or advisable to effect such Qualified ReceivablesFinancing;

Limitation on Affiliate Transactions / Arm’s Length TermsTypically, in a leveraged facility agreement, the Borrower and its

subsidiaries will not be allowed to enter into transactions other than

on an arm’s length basis. Similarly, in a typical high-yield

indenture, an Issuer may not, and may not permit any of its

restricted subsidiaries to, enter into or conduct any transaction or

series of related transactions (including the purchase, sale, lease or

exchange of any property or the rendering of any service) with any

affiliate unless such transaction is on arm’s length terms.

Depending on the value of such transaction, an Issuer may be

required to get a “fairness opinion” from an independent financial

adviser or similar evidencing that the terms are not materially less

favourable to the Issuer (or to the relevant restricted subsidiary) as

would be achieved on an arm’s length transaction with a third party.

A Receivables Subsidiary in connection with a Qualified

Receivables Transaction will need to engage in multiple affiliate

transactions because it will purchase Receivables from other

members of the Group on an on-going basis and a variety of

contractual obligations will arise in connection with such

purchases. While the terms of such financing may be structured to

qualify as a true sale, and be on arm’s length terms, the potential

requirement to obtain a “fairness opinion” from an independent

financial adviser in connection with each such transaction is an

additional burden that the business will want to avoid, and the

indenture will therefore need to contain an explicit carve-out from

the restriction on affiliate transactions, along the following lines:

(___) any transaction between or among the Issuer andany Restricted Subsidiary (or entity that becomes aRestricted Subsidiary as a result of such transaction), orbetween or among Restricted Subsidiaries or anyReceivables Subsidiary, effected as part of a QualifiedReceivables Financing;

A similar carve-out can be included in the restrictive covenant

relating to arm’s length transactions in a loan facility agreement, or

in the definition of “Permitted Transaction”, where applicable.

Financial CovenantsIn addition to the carve-outs described above, the parties will also

need to consider carefully whether the activities of the Borrower

and its subsidiaries in connection with Qualified Receivables

Financings may impact the testing of financial covenants. Although

high-yield indentures will typically not contain maintenance

covenants in the same way, the testing of financial ratios is still

important for the purposes of determining whether a particular

action may be taken by an Issuer or a restricted subsidiary under the

high-yield indenture at a particular time, or indeed to determine

whether a subsidiary must be designated as a Restricted

Subsidiaries in the first place.

In a high-yield indenture, important carve-outs can be

accomplished by excluding the effects of the securitisation

financing from two key definitions:

“Consolidated EBITDA” for any period means, withoutduplication, the Consolidated Net Income for such period,plus the following to the extent deducted in calculating suchConsolidated Net Income (1) Consolidated Interest Expenseand Receivables Fees; (___) . . .

“Consolidated Interest Expense” means, for any period (ineach case, determined on the basis of UK GAAP), theconsolidated net interest income/expense of the Issuer and itsRestricted Subsidiaries, whether paid or accrued, plus orincluding (without duplication) . . .. Notwithstanding any ofthe foregoing, Consolidated Interest Expense shall notinclude (i) . . . (____) any commissions, discounts, yield andother fees and charges related to a Qualified ReceivablesFinancing.

The treatment of financial covenant definitions in a leveraged

facility agreement is potentially more complex, and care should be

taken to ensure that the treatment of receivables securitisations in

the various related definitions is consistent with the base case model

used to set the financial covenant levels and with the applicable

accounting treatments. Examples of definitions which should

incorporate receivables securitisations might include, in the case of

leveraged loan facility agreements, the definitions of “Borrowings”,

“Finance Charges” and “Debt Service”.

Key Issues

Should an early amortisation of the securitisation facility constitutea cross-acceleration or cross-default to the leveraged financefacility or high-yield bonds?Leveraged finance facility agreements and high-yield bond

indentures typically contain a clause providing that the leveraged

loans or bonds, as applicable, can be declared to be repayable

immediately should an event of default occur, with respect to some

third party debt, or should such third party debt become payable

before its scheduled maturity. A receivables securitisation

financing can be structured so that there is no debt, and therefore no

5



events of default or acceleration can occur. Instead, Receivables

Financings enter into so-called early amortisation pursuant to which

the receivables collections that would normally have been paid to

the Borrower’s group to acquire new receivables is paid instead to

the provider of the Receivables Financing.

The commercial risk to lenders and bondholders should an early

amortisation event occur is that the cut-off of funds cause a sudden

and severe liquidity crisis at the Borrower’s group. Thus, subject to

a materiality threshold below which the parties agree that the

sudden loss of liquidity is not material, cross-default and cross-

acceleration triggers in leveraged finance facilities and high-yield

bond indentures should be tripped if an early amortisation event

occurs under a Receivables Financing facility.

How might the non-renewal of the securitisation programme affectthe leveraged loans and the high-yield bonds?For historical reasons, most securitisation facilities must be

renewed every year by the receivables funding providers. The

leveraged loans and high-yield bonds, on the other hand, have far

longer maturities. The non-renewal of a securitisation facility prior

to the maturity of the leveraged loans and high-yield bonds can

cause a liquidity crisis at the Borrower’s group in the same manner

as any early amortisation event, and should be picked up in the

leveraged finance and high-yield documentation in a comparable

manner.

Should there be any limits to the size of the securitisation facility?If so, how should those limits be defined?By its nature, a securitisation financing removes the most liquid

assets of a Borrower group –the short term cash payments owing to

the group from its customers – from the reach of the leveraged

lenders and high-yield bondholders. Moreover, the amount of new

Receivables Financing raised will never equal the full face value of

the receivables sold, because the receivables financing providers

will advance funds on the basis of some “advance rate” or subject

to certain “reserves” which result in the new funding equalling 75%

to 80% of the full face value of the receivables at best. On the other

hand, a Receivables Financing delivers to the Borrower group, the

lenders and bondholders alike the benefits of lower-cost funding

and liquidity. Where the balance between these two competing

factors should be struck is for negotiation among the parties, but

some balance in the form of a limit to the overall size of the

receivables facility seems appropriate.

Should a limit be agreed, the residual question is how that limit

should be defined. There are two main options. The limit can be

defined by reference to the total outstanding value at any point in

time of receivables sold, or it can be defined by reference to the

total Receivables Financing raised. The disadvantage of the latter

approach is that it rewards Receivables Financings with poor

advance rates. If a Receivables Financing has an advance rate of

80%, £500 million face value of receivables is needed to raise £400

million of financing. On the other hand, if a receivables financing

has an advance rate of only 50%, £800 million face value of

receivables is needed to raise the same £400 million of financing.

In the latter example, the leverage lenders and high-yield

bondholders lose more receivables for little or no additional cost or

liquidity benefit.

Should “ineligible” receivables be sold?This issue functions commercially in much the same manner as the

advance rate issue discussed immediately above. As summarised at

the beginning of this chapter, Receivables Funding providers only

advance funds against receivables that satisfy certain specified

eligibility standards. That requirement, however, does not mean

that the “ineligible” receivables are any less likely to be paid or that

they have actual payment rates that are any less sound compared

with eligible receivables. However, the advance rate against an

ineligible receivable is 0% and, as a result, including them in the

pool of sold receivables will reduce the effective overall advance

rate against the pool, with the adverse impact for lenders and

bondholders described above. Accordingly, if ineligible receivables

constitute any meaningful percentage of a group’s total receivables,

it makes sense to require that ineligible receivables be excluded

from the receivables financing.

Should proceeds raised under the securitisation facility be used torepay debt?The required and permitted use of proceeds of a securitisation

financing is always a key point of negotiation. The outcome of

those negotiations will depend upon many diverse factors,

including whether the group’s liquidity needs are met by one of the

leveraged loan facilities and whether the Borrower’s group can bear

the higher overall debt burden should no debt repayment be

required.

Should the lenders/bondholders regulate the specific terms of thesecuritisation?Sponsors prefer that the receivables financing carve-outs permits

any programme which a responsible officer of the Borrower

determines in good faith are “on market terms” which are “in the

aggregate economically fair and reasonable” to the Borrower /

Issuer and the group. This approach is, in general, the correct one.

As indicated above, however, certain issues are sufficiently

important for the parties to agree upon in advance. Beyond these

and possibly a handful of additional issues, neither lenders nor

bondholders should have the right specifically to approve the

documentation of the receivables financing facility.

Conclusion

In summary, with very little modification to the standard leveraged

loan or high-yield documentation, a trade receivables securitisation

financing can easily be added as part of a leveraged buy-out

financing or refinancing, thereby providing financing directly to the

relevant corporate group on comparatively favourable terms.

6

Documenting Receivables Financings

WWW.ICLG.CO.UK



Rupert Hall

Latham & Watkins LLP99 Bishopsgate London EC2M 3XF United Kingdom

Tel: +44 20 7710 1000Fax: +44 20 7374 4460Email: [email protected]: www.lw.com

Dan Maze is a Finance partner in the London office of Latham &Watkins. He has a wide range of experience in leveraged financetransactions, investment-grade acquisition facilities, restructuringsand workouts and emerging markets financings.

Dan Maze

Latham & Watkins LLP99 Bishopsgate London EC2M 3XF United Kingdom

Tel: +44 20 7710 1000Fax: +44 20 7374 4460Email: [email protected]: www.lw.com

Rupert Hall is an associate in the London office of Latham &Watkins and is a member of the finance department. Rupertspecialises in banking and leveraged finance, with a particularfocus on cross-border acquisitions.

Latham & Watkins LLP is a global law firm with approximately 2,000 attorneys in 31 offices, including Abu Dhabi, Barcelona,Beijing, Boston, Brussels, Chicago, Doha, Dubai, Frankfurt, Hamburg, Hong Kong, Houston, London, Los Angeles, Madrid, Milan,Moscow, Munich, New Jersey, New York, Orange County, Paris, Riyadh, Rome, San Diego, San Francisco, Shanghai, SiliconValley, Singapore, Tokyo and Washington, D.C. For more information on Latham & Watkins, please visit the Website atwww.lw.com.

7

Abu DhabiBarcelonaBeijingBostonBrusselsChicagoDohaDubaiFrankfurtHamburgHong Kong

HoustonLondonLos AngelesMadridMilanMoscowMunichNew JerseyNew YorkOrange CountyParis

Riyadh*RomeSan DiegoSan FranciscoShanghaiSilicon ValleySingaporeTokyoWashington, D.C.

LW.com

* In association with the Law Office of Mohammed A. Al-Sheikh

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. © Copyright 2012 Latham & Watkins. All Rights Reserved.

Published by Global Legal Group, in association with:

The International Com

parative Legal Guide to: S

ecuritisation 2012

The International Comparative Legal Guide to:

Securitisation 2012

Documents

Securitisation 2012 - Latham & Watkins