The UAE Securities and Commodities Authority (SCA) has recently issued Regulation No. 22/RM of 2023, which regulates securitisation and all parties involved in securitisation transactions or operations in the UAE (the “Regulations”).
The Regulations have introduced a detailed framework governing onshore securitisations and confirmed the true sale of the assets to be securitised (the “Assets”) by the originator (the “Originator”) to the securitisation entity (the “SPV”). This puts an end to prospective claw back and strengthens the segregation of the Assets.
The developments below highlight additional relevant issues which, in our opinion, determine the success of onshore securitisations.
The relevant provisions of the Regulations
The Regulations describe securitisation as the process of transferring the Assets from a private or public joint stock company listed with SCA to the SPV which is either a company, or a fund (as detailed below). The SPV will issue units (the “Units”). The income stream generated from the Assets (e.g., the rental stream if the Assets are leased) will serve to the payment of revenues to the holders of the Units (the “Unitholders”) in proportion to their investment.
The Regulations clearly state that the Assets transferred will be held in a portfolio segregated from the assets of the Originator and the custodian (the “Custodian”).
Articles 10 and 12 of the Regulations further strengthen the segregation concept.
These articles provide that:
the amounts connected with the Assets (the “Amounts”) shall be deposited in a separate account (the “Account”) open in the name of either the SPV (if the SPV is an entity which has the legal personality), or the entity managing the SPV (the “SPV Manager”) (if the SPV is a fund and has not legal personality).
in the event of the insolvency, bankruptcy or liquidation of the Originator or the SPV Manager, only the SPV will be eligible to claim amounts recovered in respect of the Assets (the “Recovered Amounts”). The Originator and/or SPV Manager’s creditors will have no rights in respect of the Recovered Amounts despite any claims an appointed liquidator may lodge.
In light of the above, the Regulations seems to recognise the fiduciary property where the Assets are registered in the name of the SPV or the SPV Manager, but for the benefit of the Unitholders.
In the absence of a common law trust formation, it is necessary to implement the fiducie in the UAE as part of the global legal framework including bankruptcy law. Indeed, the exact nature of the relationship between the Custodian and the Unitholders needs to fall within a legal/regulated framework.
The fiducie should be recognised in the UAE as a tool creating a “diminished and temporary property” where the fiduciaire holds title to the fiduciary portfolio of Assets for the benefit of the beneficiaries of the fiducie (i.e., the Unitholders).
Despite the fact that Articles 10 and 12 of the Regulations provide that the Custodian or the SPV Manager acts on a fiduciary basis for the benefit of the Unitholders, the recognition of the fiduciary ownership by on shore UAE courts may be currently questioned on the grounds of the concept of ownership as known in all civil law jurisdictions, i.e., only one person can hold title to an asset without the possibility to split the ownership in legal title and beneficial/equitable title as in the Anglo-Saxon systems.
In light of the above, the fiduciary property needs to be recognised not only in the Regulations, but in the general UAE legal framework, to ascertain that the securitisation entity is bankruptcy remote.
Pending the implementation of the fiduciary property as part of the UAE legal framework, the transfer of the Assets to a Custodian located in a jurisdiction where the trust/fiducie concepts are recognised would be advisable to mitigate any recharacterisation an onshore court would order.
The nature of the SPV and the Unitholders’ rights
Federal Decree Law No. 32 of 2021, Title 1, Chapter 1, Article 1 (Definitions) defines an SPV as “the company established with the aim of separating the obligations and assets associated with a particular financing operation from the obligations and assets of the person who incorporated it, and used in credit operations, borrowing, securitisation, issuance of bonds, and transfer of risks associated with insurance, reinsurance, and derivatives operations, in accordance with the provisions of the decision issued by the Authority to regulate this activity.”
The Regulations provide in the definitions section that the SPV is the special purpose company or the securitisation fund in accordance with the Authority’s decisions.
The Regulations therefore recognise that the SPV may be either:
a company which has a legal personality. In this case, an onshore judge may consider that an SPV-company is subject to insolvency proceedings as any other company; or
a fund which does not have a legal capacity; as such, the SPV will not fall under the laws and regulations governing companies and will not be subject to bankruptcy-insolvency laws. The Unitholders’ protection may nonetheless be at risk in a jurisdiction where fiduciary arrangements are not part of the general legal framework as previously stated.
On the basis of their current wording, the Regulations appear to to authorise the possibility for one SPV to hold more than one portfolio of Assets. Indeed, Article 12, paragraph 5 of the Regulations provides that the Custodian shall dedicate separate accounts to each Originator and shall refrain from mixing (i) the SPV’s accounts with the Custodian’s own accounts, (ii) the accounts of the portfolios under the SPV among each other, and (iii) the accounts of the portfolios under the SPV with any other accounts.
It is necessary to ascertain that the segregation as sought by the Regulations, is not affected in the event that a debt of one of the portfolios held by the SPV is unpaid. This payment default should not affect the other portfolios held by the same SPV.
The examples of the Cayman Islands and the Kingdom of Saudi Arabia should be considered to make relevant amendments to the Regulations in their current version.
The Cayman Islands
The matter of Obelisk Fund SPC and Obelisk Global Focus Fund (the “Obelisk Case”) examined by the Grand Court of the Cayman Islands on the 21st of August 2021 is relevant as to the consequences of having the SPV in the form of a company holding several portfolios of assets.
Pursuant to the Cayman Islands regulations, an SPV is a company which may hold a series of portfolios regarding several securitisations, provided that the portfolios are segregated (i) among each other, and (ii) from the SPV’s assets as well.
The Obelisk Case relates to a segregated portfolio (“Obelisk Global Gold Focus Fund” (the “Obelisk Portfolio”)) of an SPV (“Obelisk Global Fund SPC”), i.e., a Cayman Islands special purpose company (the “SPC”). In the Obelisk Case, the Court had to examine whether a debt of Obelisk Portfolio held by the SPC can have an impact on the SPC and consequently, on the other portfolios held by the SPC.
In the Obelisk Case, the SPC was indebted pursuant to a loan agreement and defaulted in the repayment of the borrowed amount. A petition was filed seeking the appointment of receivers over the SPC’s assets. In addition, the SPC’s insolvency was requested. The case was settled before a judgement was issued in respect of the impact of the insolvency on the other portfolios held by the SPC.
Without delving too deep, the Obelisk Case highlights the uncertainty as to how the concept of segregated portfolios held by one single company would be treated in an onshore insolvency/bankruptcy.
The Kingdom of Saudi Arabia
Pursuant to the Saudi Capital Market Authority (“CMA”) in respect of Real Estate Investment Funds (the “REIFs”), SPVs are launched as a limited liability company, or a limited partnership licensed by CMA. The principles governing REIFs seem to apply to SPVs in securitisation transactions.
In KSA, SPVs are “ultimately owned” by their members. Indeed, CMA regulations provide that the Custodian shall hold the shares of the SPV in its own name but for the benefit of the Unitholders who appear to be the beneficial owners of the SPVs. The Custodian will segregate the SPV’s account from its own accounts and as such, would be acting as the Unitholders’ fiduciary agent/trustee.
The commingling scenario of the Obelisk Case may occur as it is possible for one single SPV to hold more than one portfolio of assets. The nature of the fiduciary relationship between the Unitholders and the Custodian may be questioned by local courts since KSA bankruptcy law does not expressly exclude fiduciary arrangements from its framework.
The commingling risk may be addressed in the Regulations. The Luxembourg securitisation law of the 22nd of March 2004 as amended on the 25th February 2022 (the “Luxembourg Law”) is relevant. The Luxembourg Law provides for the possibility to create segregated compartments within an SPV, each representing a distinct part of the assets and liabilities of the SPV. Such assets are by law, ring-fenced on a compartment-by-compartment basis, including in case of insolvency. The Luxembourg Law expressly provides that the recourse of the relevant investors and creditors is limited to the assets of the considered compartment, i.e., among investors, each compartment is treated as a separate entity, unless otherwise provided in the constitution documents of the SPV. Each compartment can be liquidated separately without the liquidation of the other compartments of the SPV.
In the current UAE context where the Regulations do not provide for such compartmentation, it would be advisable to have one SPV exclusively dedicated to one single portfolio of Assets.
The Unitholders’ protection in an onshore UAE securitisation depends, to a large extent, on the following issues being properly addressed:
A. To efficiently deal with the commingling risk.
B. To adopt the concept of the fiduciary propriety not only in the Regulations, but in the general UAE legal framework, including bankruptcy law.
C. To clearly describe the structure of the SPV-fund. The Luxembourg and the French models are relevant in this respect.
Under the Luxembourg model, securitisation funds can be structured either:
as a co-ownership of assets; in this case, the investors in the SPV will have a right in rem in relation to the underlying securitized assets; or
as a fiduciary estate in the sense of the Luxembourg law of 27 July 2003 on trusts and fiduciary contracts; in this case, the management company will hold the securitised assets as fiduciary property, segregated from the management company’s own assets.
In France, the securitisation law as revised on the 7th of June 2023 provides that an ad hoc pool of assets will be created, the “Fonds Commun de Titrisation or FCT”. The FCT is a co-ownership among the Unitholders and not a company. The assets constituting the FCT and all recovered amounts in connection with these assets will be deposited in a dedicated fiduciary account (the “Fiduciary Account”) open with a custodian. A credit institution of the Organisation for Economic Cooperation and Development will manage the Fiduciary Account. The Fiduciary Account will be off the custodian’s balance sheet pursuant to the general principles governing the fiducie and all amounts deposited in the Fiduciary Account will be segregated from the custodian’s assets. Under no circumstances would the creditors of the custodian have a recourse against the Fiduciary Account (including in the event of the custodian’s insolvency, bankruptcy or liquidation).
D. To validate the bankruptcy remoteness of the SPV (whether the SPV is a company or a fund).
For these purposes:
the Regulations should expressly recognise the validity of the contractual tools customarily used in securitisation transactions to achieve the bankruptcy remoteness of the SPV;
companies and bankruptcy laws shall expressly provide that they do not apply to securitisation entities; and
legal advisors should always take measures to strengthen the segregation of the Assets such as:
the provision of restrictions on the corporate object and activities in the articles of association of the SPV-company and in the issuance documents to ensure that the SPV will not engage in any transactions other than the securitisation transaction;
the provision of debt limitation clauses in the issuance documents;
to give the Unitholders priority over the security interests granted over the Assets vis-à-vis other creditors;
to eliminate any corporate connection with the Originator; and
to have the shares in the SPV-company held by an orphan vehicle such as an Anglo-American charitable trust in order to avoid a potential consolidation for the purpose of any bankruptcy.
This material is provided for general information only. It does not constitute legal or other professional advice. For more information contact Michele El Khoury, Principal: email@example.com