Structured finance and securitisation in South Africa: overview

A Q&A guide to structured finance and securitisation law in South Africa.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.

This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.

Anina Boshoff and Karin Krisch, Hogan Lovells (South Africa): incorporated as Routledge Modise Inc.
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

Issuance volumes in the South African securitisation market reached a level of ZAR7.8 billion in 2014, with ZAR3.53 billion issued in the first four months of 2015. The market is relatively small and illiquid, but remains the main market for securitisation on the African continent.

As in other jurisdictions, the market experienced a downturn due to the international financial crisis in 2008, when the annual issuance level reached a low of approximately ZAR5 billion, recovering to ZAR23.02 billion in 2011. Levels have been more subdued since 2011, although established market participants continue to execute deals. Recent transactions include:

  • Greenhouse Funding III (RF) Ltd ZAR2,155,000,000 Residential Mortgage Backed Securities Programme, established in April 2015.

  • Transsec (RF) Ltd ZAR4,000,000,000 Asset Backed Note Programme, established in June 2014. The assets securitised in this transaction are instalment sale agreements in respect of minibus taxis. While vehicle financing receivables have been securitised in the past, these assets essentially constitute small business loans as the vehicles are operated as taxis.

There are currently no central bank programmes in South Africa that have impacted the securitisation market.

Bank originators have initiated most issuances, with residential mortgage-backed home loans constituting a prominent asset class. Other asset classes include commercial mortgages, vehicle finance receivables, consumer receivables and equipment leases. In theory it is possible to securitise a wide range of asset classes in South Africa, however, the market remains focused on a fairly narrow selection.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

Regulations to the Banks Act 94 of 1990

Securitisations in the South African market are governed by the regulations issued under the Banks Act of 1990 published in Government Notice 2, Government Gazette 30628 of 1 January 2008 (Securitisation Regulations). The Securitisation Regulations exempt an issuer SPV from the obligation to register as a bank, provided that the transaction is implemented in accordance with the requisite conditions. These include conditions for the disposal of assets from the originator to the issuer SPV (that is, true sale requirements), as well as conditions relating to credit enhancement facilities, liquidity facilities and ownership and control of the issuer SPV.

Financial Markets Act 19 of 2012

The regulation and supervision of South African financial markets is governed by the Financial Markets Act 19 of 2012, which provides for the licensing and functioning of financial exchanges such as the JSE and provides conditions for trading and sets out standards for market infrastructure generally.

Currency and Exchanges Act 9 of 1933 (Currency and Exchanges Act)

In terms of the Exchange Control Regulations published under the Currency and Exchanges Act, if the securities are issued to investors who are non-residents of the Republic of South Africa, the approval of the Financial Surveillance Department of the SARB must be obtained before issuance if both of the following apply:

  • Those non-resident investors are not related parties to the issuer SPV (which is likely to be the case, given that the shares in the SPV are owned by an independent trust).

  • The securities are issued in South African Rand and bear interest at a rate which exceeds the South African Prime Rate plus 3%, or the securities are issued in another currency and bear interest at a rate which exceeds the relevant base rate for such currency as published by the South African Reserve Bank (SARB) plus 2%.

Other legislation

The Companies Act 71 of 2008 applies to companies generally and regulates the establishment and governance of the SPV.

Consumer protection legislation such as the National Credit Act 34 of 2005 and the Consumer Protection Act 68 of 2008 may also be applicable to the SPV by virtue of their application to the underlying assets or obligors.

The Debt Listings Requirements of the JSE are applicable in respect of listed issuances.

The Insolvency Act 24 of 1936 (Insolvency Act) governs the proceedings on insolvency of persons in South Africa. Certain provisions of the Insolvency Act regarding the disposition of property are particularly relevant to securitisations (see Question 17).

Regulatory authority

The Registrar of Banks is the regulatory authority overseeing the securitisation market. In terms of section 14(1)(b)(ii) of the Securitisation Regulations, the written authorisation of the Registrar must be obtained before the issue of securities under a securitisation scheme.

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

Usual reasons for securitisation

Balance sheet benefits are the main reason for conducting securitisations in South Africa.

Accounting practices

The application of IFRS is common in South Africa.

Capital adequacy

South Africa has enacted regulations to the Banks Act in line with the Basel III framework, with the aim of addressing both bank-specific and systemic risks by:

  • Raising the quality of capital, with a focus on common equity and the quantity of capital to ensure banks are better able to absorb losses.

  • Enhancing the risk coverage of the regulatory framework, including exposures related to counterparty credit risk.

  • Introducing capital buffers which should be built up in prosperous times so that they can be drawn down during periods of stress.

  • Introducing a leverage ratio to serve as a backstop to the risk-based capital requirement and to prevent the build-up of excessive leverage in the financial system.

  • Raising standards for supervision and risk management, and public disclosures.

  • Introducing the monitoring of proposed minimum liquidity standards to improve banks' resilience to acute short-term stress and to improve longer-term funding.

  • Introducing additional capital buffers for the most systemically important institutions.

The implementation period for several Basel III requirements began on 1 January 2013 and includes transitional arrangements which will be phased in until 1 January 2019.

Currently no risk retention requirements are applicable in the South African market.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

The SPV usually takes the form of a ring-fenced public or private company. If the notes are to be listed on the JSE, the SPV must take the form of a public company in terms of section 8(2) of the Companies Act 71 of 2008. The SPV is established by registering a memorandum of incorporation with the Companies and Intellectual Property Commission.

The SPV is a separate legal entity capable of owning its own assets, suing and being sued in its own name.

The shares in the SPV are owned by an independent owner trust. In terms of section 4(2)(p)(i)(A) of the Securitisation Regulations, the originator in a securitisation scheme may not directly or indirectly hold more than 20% of the issued share capital of the issuer SPV.

In addition, the originator may not maintain effective or indirect control over the assets once they have been transferred to the SPV.

The memorandum of incorporation of the SPV incorporates restrictive conditions as referred to in section 15(2)(b) of the Companies Act 71 of 2008, thereby limiting the powers of the SPV to those powers necessary for purposes of the securitisation scheme.

No specific regulatory requirements apply to the SPV, however in instances where the National Credit Act 34 of 2005 applies in respect of the underlying receivables the SPV must be registered as a credit provider. If the securities are to be listed, the SPV must comply with the Debt Listings Requirements of the JSE.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

The SPV is established in South Africa as the originator, the securitised assets and the investors are usually located in South Africa. If the parties or assets are located offshore, it may be appropriate to establish the SPV in another jurisdiction. Where the issuer is incorporated or domiciled in a foreign jurisdiction, the approval of the Financial Surveillance Department of the SARB is required.

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

Limiting the powers of the issuer SPV in its constitutional documents is one method of achieving insolvency-remoteness. The relevant ring-fencing provisions are included in the issuer SPV's memorandum of incorporation. In many cases the SPV is only empowered to undertake those transactions that are necessary for purposes of the securitisation scheme. In most cases the SPV lacks the corporate power to undertake any other business or incur indebtedness to third party creditors outside of the scheme.

It is common for transaction creditors to enter into subordination, limited recourse and non-petition undertakings, whereby they agree to the subordination of their claims in favour of senior creditors in the cash flow waterfall set out in the transaction documents. In most cases creditors acknowledge that their claims are limited to the amount actually recovered by the issuer SPV pursuant to the security arrangements, and undertake not to commence or vote in favour of any steps for the winding-up, liquidation, de-registration or business rescue proceedings in respect of the SPV.

There has been no recent erosion of the ability of the issuer SPV to achieve insolvency remoteness in the South African context.

South African courts will generally give effect to non-petition clauses (so-called pacta de non petendo), viewing them as a waiver of a right under a contract.

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

As the SPV is incorporated as a separate legal entity, its assets are not generally treated as those of the originator. The Securitisation Regulations (section 4(2)(b)) provide that the assets of the SPV will not be subject to the claims of a liquidator of the originator, provided that the transfer of assets in terms of the sale agreement complies with the true sale requirements.

The sale of assets from the originator to the issuer SPV may be set aside by a liquidator in certain circumstances if, for example, the sale is found to be a disposition without value or an undue preference. These circumstances are set out in the Insolvency Act (see Question 17).

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

Securities may be issued publicly or privately, depending on the intended investors in the securities, the timing of the issuance and the structure of the transaction.

In terms of section 14(1)(b) of the Securitisation Regulations, the securities will be issued or transferred in minimum denominations of ZAR1,000,000.00 unless they are any of the following:

  • Listed on a licensed financial exchange.

  • Endorsed by a bank.

  • Issued for a period exceeding five years.

  • Backed by an explicit national government guarantee.

Most issuances are listed on the JSE as this affords greater liquidity and transparency.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

The securities are normally listed on the JSE, a regulated exchange in South Africa under the FMA.

The main documents required for listing are set out in section 8.3 of the Debt Listings Requirements of the JSE, including:

  • A copy of the placing document (section 8.3(a)).

  • A certified copy of the certificate of registration and certificate of incorporation of the issuer (section 8.3(b).

  • A copy of the memorandum of incorporation of the applicant issuer (section 8.3(d)).

  • A copy of the board resolution(s) of the issuer authorising the establishment of the programme memorandum or issue of debt securities (section 8.3(c)).

  • The annual financial statements of the issuer SPV and/or the guarantor in respect of the period of three years before the date of issue (or such shorter period as may be agreed to by the JSE in terms of section 5.4 of the Debt Listings Requirements) (section 8.3(o)).

  • In terms of section 4(2)(p) of the Securitisation Regulations, an institution acting in a primary role (that is, an originator, remote originator, sponsor or repackager) will not, where the issuer SPV is a company, directly or indirectly acquire or hold any equity share capital in the issuer SPV of which the nominal value represents 20% or more of the nominal value of all the issued equity share capital in the issuer SPV.

  • The JSE is usually chosen, as it is currently the only licensed securities exchange in South Africa.

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

While the trust concept is recognised in South African law, the securities are normally constituted under the terms and conditions set out in the placing documents, together with the constitutional documents of the issuer SPV.

Listed securities are issued in uncertificated form and are held by and settled through Strate Ltd, currently the only central securities depository in South Africa, as the registered holder of the securities. Beneficial interests are registered in the names of the relevant investors.

Physical debenture certificates can be issued to individual investors, but these cannot be listed on the JSE or settled through the central securities depository.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

Residential mortgages are the dominant asset class in the South African securitisation market. Other asset classes include vehicle finance receivables, equipment leases, commercial property receivables and consumer loan receivables.

Transferring receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

The receivables are transferred in terms of an agreement of sale whereby the originator cedes and assigns all its right, title and interest in and to the incorporeal rights constituting the receivables to the issuer SPV. The purchase price is paid by the issuer SPV from the proceeds of the issuance of securities. The sale is perfected upon payment of the purchase price by the issuer SPV from the proceeds of the securities, against the delivery by the originator of closing lists which identify each asset transferred.

In terms of section 69(4) of the National Credit Act 34 of 2005, if a person transfers the rights of a credit provider under a credit agreement to another person, the transferor must report the particulars of the transfer to the national register and the transferee must satisfy any subsequent obligations of the credit provider. Therefore, when the originator in a securitisation transfers its rights under receivables that are subject to the National Credit Act 34 of 2005 to the issuer SPV, the issuer SPV must also register as a credit provider.

It may not be necessary to notify obligors of the sale in cases where the National Credit Act 34 of 2005 is not applicable, as the documentation constituting the underlying receivable often includes the upfront consent of the obligor to the sale and transfer of the receivables from the originator to a third party.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

A wide range of receivables can be securitised under South African law, although future receivables can be problematic as an asset must be clearly identifiable in order to form the subject matter of a valid sale. Identification is also required to pass effective security over an asset.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

In terms of the sale agreement, the originator transfers the receivables together with the security it holds over them, to the SPV. The requirements for perfection of the cession of security rights depend on the type of asset and the security being transferred. In the case of mortgage-backed home loans, the security takes the form of mortgage bonds which are transferred by registration in the name of the SPV at the relevant Deeds Registry Office. Where the security takes the form of incorporeal rights, they may be transferred by means of a cession.

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

Contractual restrictions

The terms and conditions of the securities usually contain a negative pledge whereby the SPV undertakes not to dispose of or encumber the receivables other than in accordance with the transaction documents. The negative pledge is a contractual obligation creating personal rights in favour of the noteholders.

Legislative restrictions

In terms of the National Credit Act 34 of 2005, the definition of a credit provider includes a person who acquires the rights of a credit provider under a credit agreement. Therefore, the SPV is required to register as a credit provider in terms of the National Credit Act 34 of 2005 if the originator was required to do so.

The Protection of Personal Information Act 4 of 2013 (POPI Act), though not yet fully in force, will place obligations on issuer SPV's to adhere to the Act's requirements in relation to the collection, processing, retention and transmission of consumer data.

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

In terms of the Securitisation Regulations, the transfer of assets totally divests the transferor of its rights and obligations relating to, and of the risks associated with, the underlying transactions. True sale legal opinions are delivered as required in terms of section 4(2)(b)(i) of the Securitisation Regulations, confirming compliance of the sale with the relevant conditions in section 4(2). Therefore, the risk of the transfer being re-characterised is remote.

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

In the event of the insolvency of the originator, the liquidator may set aside the sale of receivables in the following circumstances set out in the Insolvency Act:

  • In terms of section 26 of the Insolvency Act, a disposition of property may be set aside by a liquidator if the sale is found to be a disposition without value. Every disposition of property not made for value may be set aside by the court if such disposition was made by an insolvent:

    • more than two years before liquidation and it is proved that, immediately after the disposition was made, the liabilities of the insolvent exceeded its assets; or

    • within two years of the liquidation of the insolvent and the person claiming under or benefited by the disposition (in this case, the issuer SPV) is unable to prove that, immediately after the disposition was made, the assets of the insolvent exceeded its liabilities:

If it is proved that the liabilities of the insolvent at any time after the making of the disposition exceeded its assets by less than the value of the property disposed of, it may be set aside only to the extent of such excess.

  • In terms of section 29 of the Insolvency Act, every disposition of property made by a debtor not more than six months before liquidation which has had the effect of preferring one of its creditors above another, may be set aside by the court if immediately after the making of such disposition, the liabilities of the debtor exceeded the value of its assets, unless the person in whose favour the disposition was made proves that the disposition was made in the ordinary course of business and that it was not intended thereby to prefer one creditor above another.

  • In terms of section 30 of the Insolvency Act, if a debtor made a disposition of property at a time when its liabilities exceeded its assets, with the intention of preferring one creditor above another, and its estate is liquidated thereafter, the court may set aside the disposition.

  • In terms of section 31 of the Insolvency Act, after the liquidation of a debtor's estate, the court may set aside any transaction entered into by the debtor before the liquidation, whereby the debtor, in collusion with another person, disposed of property belonging to it in a manner which had the effect of prejudicing its creditors or of preferring one creditor above another.

  • In terms of section 46 of the Insolvency Act, if two persons have entered into a transaction the result whereof is a set-off, wholly or in part, of debts which they owe one another and the estate of one of them is liquidated within a period of six months after the set-off, then the liquidator of the estate may elect to abide by the set-off or he may, if the set-off was not effected in the ordinary course of business, disregard it and call upon the person concerned to pay to the estate the debt which he would owe it but for the set-off. That person is then obliged to pay that debt and may prove his claim against the estate as if no set-off had taken place.

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

Securitisations in South Africa are typically governed by local law however the parties are free to choose the governing law applicable to the scheme. The courts will generally recognise the parties' choice of law unless it is contrary to public policy, illegal, or was deliberately chosen to evade South African law.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

The rights of the SPV to the receivables can be employed as security for the benefit of the transaction creditors. The issuer SPV can, by means of a cession in security (a cession in securitatem debiti), cede its rights to the receivables as security for the debts owed to its creditors, until those debts have been discharged. In practice, the SPV often cedes these rights to a security SPV, which holds the cession for the benefit of the transaction creditors. The security SPV may not recover performance nor alienate the receivables in the ordinary course, but is only permitted to act on its claim if the issuer SPV defaults. There are no legislative requirements to give effect to a cession under South African law.

There is some ambiguity around whether such cessions should be construed as out-and-out cessions or, alternatively, as security cessions more akin to a pledge. Previously, the courts have expressed the view that the only manner in which a right of action (whether secured or unsecured) could be furnished as security for a debt was by out-and-out cession, that is, a transaction whereby the cedent is divested of its rights and those rights vest in the cessionary. According to this view, the cessionary would be required to cede the subject matter of the cession back to the cedent on the discharge of the obligation.

In other decisions the courts have expressed the view that a personal right could be pledged, that is, dealt with in such a way that it vests only a security interest in the cessionary with the cedent retaining his position as creditor vis-à-vis the debtor. The pledge construction has since been adopted in a number of court decisions and is, in our view, correct.

The arrangement between the cedent and the cessionary does not create a real right, unless some additional security creating a real right (such as a mortgage bond) is passed. Where a cession has been notified to the obligor, payment to the cedent thereafter does not constitute good discharge of the obligor's debts.

In addition to the cession of the underlying receivables, mortgage bonds over immovable property are registered in the Deeds Registries Office in cases where the securitised assets are home loans or commercial property loans.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

While the trust concept is recognised under South African law, a security SPV is usually established to hold security for the benefit of transaction creditors. The security SPV takes the form of a limited liability company. Typically, the following security structure is utilised as follows:

  • The security SPV issues a guarantee to transaction creditors, guaranteeing the issuer SPV's obligations under the notes and other transaction documents.

  • The security SPV guarantee is backed by an indemnity from the issuer SPV to the security SPV, indemnifying the security SPV from and against the claims of transaction creditors arising under the guarantee.

  • The issuer SPV secures its obligations under the indemnity by means of a security cession over the receivables, and mortgage bonds (if applicable) in favour of the security SPV, thereby giving the security SPV access to the assets in the event of a default by the issuer SPV.

  • If the issuer SPV defaults in its obligations to transaction creditors, the security SPV will claim under the indemnity and enforce its rights under the security cession. The proceeds of enforcement are distributed to transaction creditors in accordance with the payments waterfall set out in the terms and conditions of the transaction.

The shares in the security SPV are held by an independent owner trust. In South African trust law, a trustee may be called upon to provide security for the performance of its duties. However, this requirement is usually waived in respect of the trustees of the issuer owner trust and security SPV owner trust.

In many cases the issuer owner trust also grants a suretyship to the security SPV for the issuer SPV's obligations, and pledges its shares in the issuer SPV to the security SPV as security for that suretyship.

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation (Guide)?

Credit enhancement can take a variety of forms in the South African market. Section 6 of the Securitisation Regulations describes a credit enhancement facility as any facility or arrangement in terms of which the provider of the facility provides added credit protection to other parties involved in the scheme. The purpose of credit enhancement facilities is to protect investors from losses occurring in the pool of assets or, in the case of a synthetic securitisation, from risk exposures acquired by the issuer SPV.

A bank or other institution within a banking group may provide a credit enhancement facility in respect of a securitisation scheme, subject to the conditions set out in section 6 of the Securitisation Regulations, including that:

  • There is no recourse to the bank or other institution within a banking group beyond a fixed contractual obligation specified in the facility.

  • The credit enhancement facility has a specified maturity date, being the date on which the assets or notes are redeemed, or such earlier date as may be agreed between the parties.

  • The credit enhancement facility must be contracted on market-related terms and conditions, including as to matters related to price and fee.

  • The credit enhancement facility must be subject to normal credit approval and review processes.

  • The details of the credit enhancement facility must be disclosed in the disclosure document issued in respect of the scheme.

In addition to a credit enhancement facility, other forms of credit enhancement utilised in the South African market include:

  • The issuance of subordinated tranches of notes, in which case amounts due under the junior notes are paid only after the senior tranches. The junior tranches carry a greater risk of non-payment, thereby absorbing losses before they affect the senior noteholders.

  • The establishment of a reserve account, allowing the issuer SPV to retain any surplus funds if the amounts received under the assets exceed the amounts payable under the notes.

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

Liquidity facilities are provided for in section 7 of the Securitisation Regulations, enabling the issuer SPV to make timely payments of principal and interest to investors despite market disruptions or timing mismatches between the receipt of amounts from the pool of assets, and the issuer SPV's payment obligations under the senior notes.

The conditions relating to liquidity facilities include that:

  • The liquidity facility should not be associated with the credit risk of the underlying or reference asset.

  • The liquidity facility must have a specified maturity date.

  • The facility must contain a reasonable asset quality test to ensure that the utilisation of the facility does not cover deteriorated or defaulted assets.

  • The debts of the issuer SPV resulting from the use of the liquidity facility will not be subordinated to the interests of investors in the securitisation scheme, however the debts resulting from the utilisation of the liquidity facility may be subordinated to the debts resulting from the utilisation of other liquidity facilities whenever multiple liquidity facilities are provided to the scheme.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

The Guide reflects the typical cash flow structure for securitisations in the South African market.

It is not unusual in South Africa for payments to a swap counterparty that is in default to be provided for lower down in the cash flow waterfall than other payments due under a derivative contract. South African courts aim to give effect to the intention of the parties as expressed in a contract. Therefore, in the absence of fraud, duress or bad faith there is no reason why the courts would not give effect to these provisions, as they are agreed to by the transaction parties (including the derivative counterparty) and clearly documented at the outset of the transaction.

However, if one of the parties to the swap is liquidated, section 35B of the Insolvency Act will apply. This section provides that:

  • All unperformed obligations arising out of one or more master agreements between the parties will terminate automatically at the date of liquidation of one of those parties.

  • The values of those obligations will be calculated at market value as at that date.

  • The values so calculated will be netted and the net amount will be payable.

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

The Guide reflects the methods of profit extraction utilised in the South African market. Profits are often extracted by means of a preference share held by the originator in the share capital of the issuer SPV. Payments under the preference share are deeply subordinated in the cash flow waterfall.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?
The credit rating for South Africa is currently BBB- from Standard & Poor's, Baa2 from Moody's and BBB from Fitch. Factors that influence the sovereign rating include high levels of government debt, the current account deficit, infrastructure shortfalls, labour issues and political concerns.

To assign a rating to the securities issued by the issuer SPV, rating agencies apply the relevant methodology and assumptions in assessing the credit quality of the underlying receivables and the various risks posed to the transaction. The assessment may include:

  • Conducting credit and cash flow analyses on the underlying receivables, including an assessment of the portfolio's historical performance.

  • Considering the bankruptcy-remoteness of the issuer SPV.

  • Seeking legal comfort that the sale of the receivables to the issuer SPV would survive if the originator were to become insolvent.

  • Analysing the operational risk in the transaction, for example, the risk posed by a disruption in the servicer's ability to perform its duties or the risk of an inability to replace the servicer.

  • Assessing the cash flow mechanics and payment structure of the transaction.

  • Identifying and assessing counterparty risk to the transaction, such as the risk posed by the issuer SPV's bank account provider or servicer.

  • Considering the commingling risk in the transaction that is, the risk that amounts collected on behalf of the issuer SPV may be commingled with amounts belonging to the collection account provider. The risk is that such commingled amounts may fall into the insolvent estate of the collection account provider should such collection account provider be liquidated.

The Credit Rating Service Act 24 of 2012 applies to all credit rating services carried out in South Africa, with the object of ensuring responsibility and accountability among credit rating agencies and reducing systemic risk.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

The sale of goods or services is normally subject to VAT at a rate of 14%, however the sale of receivables is an exempt financial service, therefore, this tax does not apply to the sale of receivables from the originator to the issuer SPV. Where the originator transfers the receivables to the issuer SPV at a gain or loss (a price that differs from the capital amount of the receivables), the originator will have to determine the nature of the proceeds in its hands, that is, revenue or capital.

A withholding tax of 15% is payable on interest payments made to or for the benefit of foreign persons from a South African source on or after 1 March 2015. However, such interest payments are exempt from the withholding tax if the securities are listed on a recognised exchange (such as the JSE). The amount of withholding tax may be reduced or eliminated pursuant to applicable double-taxation treaties between South Africa and the relevant foreign jurisdiction, or where the foreign person has a permanent establishment in South Africa (for example, a branch or representative office) and the debt claim in respect of which the interest is paid is effectively connected to the permanent establishment.

No securities transfer tax is payable under the Securities Transfer Tax Act of 2007 on the issue, cancellation, redemption or transfer of notes or on the transfer of the receivables from the originator to the issuer SPV.

The South African government has entered into a Model 1 intergovernmental agreement with the US government in relation to FATCA compliance, which was published in Government Notice 93, Government Gazette 38466 of 13 February 2015 and came into effect on 28 October 2014. Accordingly, transaction parties that qualify as Reporting South African Financial Institutions must comply with the reporting requirements in respect of US Reportable Accounts, and payments to certain Non-Participating Financial Institutions.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

Banks Amendment Act

The Banks Amendment Act, 3 of 2015 was passed as a result of African Bank Ltd being placed under curatorship and extends the powers of a curator of a bank to deal with the bank's assets under curatorship, subject to the consent of the Minister of Finance or Registrar of Banks, as the case may be.

The Act facilitates the transfer, under curatorship, of all or part of a bank's business to a successor entity. To achieve this, the Act extends of the curator's existing power to dispose of the bank's assets under section 69(2C) of the Banks Act, to include the power to transfer its liabilities as well. The curator would also be empowered to make decisions on behalf of the bank's shareholders, including corporate shareholders.

In addition, the Act empowers the Minister of Finance to enable the curator to raise funding from the SARB, or any entity controlled by the SARB, and to pass security over the assets of the bank in respect of such funding. If a person sustains losses or damages as a result of the creation of such security, then such person may bring a claim against the bank after the expiry of a period of one year from the date the security was provided.

While it is difficult to predict the effect that these amendments to the Banks Act will have on the securitisation market, it is possible that the extensive powers granted to the curator of a bank, particularly the power to encumber the bank's assets, may have the effect of rendering securitised assets more attractive to investors. This is because a securitised pool of receivables is effectively placed beyond the reach of a potential curator, and should not be subject to his wide-ranging powers. In this regard the element of true sale from a bank originator to the issuer SPV is critical, as the bank must be completely divested of the assets if a potential curator is to be prevented from dealing with them.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

Synthetic securitisations are provided for in the Securitisation Regulations and are used in the South African market.

Multi-issuer programmes and multi-seller programmes are also utilised.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

There are currently no reform proposals aimed at the securitisation market locally, therefore, we do not foresee any material changes in the structuring of transactions in the near future.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

The South African securitisation market has recovered somewhat after the international financial crisis of 2008, but has not attained pre-crisis levels and remains relatively illiquid.

 

Online resources

Official website of the Government of South Africa

W www.gov.za

Description. This website offers free access to up-to-date legislation and parliamentary documents. Legislation is available in English and the English-language version is binding. However, where legislation has been enacted in more than one language, the text signed by the President takes precedence in the event of a conflict.

Official website of the South African Reserve Bank

W www.resbank.co.za/

Description. This website is a source of regulatory and economic data as well as general information about the SARB.

Website of the Johannesburg Stock Exchange

W www.jse.co.za/

Description. This website is a source of information on listed financial products, issuers, listing requirements and market regulation.



Contributor profiles

Anina Boshoff, Partner

Hogan Lovells (South Africa): incorporated as Routledge Modise Inc.

T +27 11 286 6900
F +27 11 286 6901
E Anina.Boshoff@hoganlovells.com
W www.hoganlovells.com

Professional qualifications. Attorney of High Court of South Africa, 2001; England and Wales, Solicitor, 2008

Areas of practice. Banking; debt capital markets; securitisation; structured finance; project finance.

Professional associations/memberships. Law Society of the Northern Provinces; Law Society of England and Wales.

Karin Krisch, Senior Associate

Hogan Lovells (South Africa): incorporated as Routledge Modise Inc.

T +27 11 286 6900
F +27 11 286 6901
E Karin.Krisch@hoganlovells.com
W www.hoganlovells.com

Professional qualifications. Attorney of the High Court of South Africa, 2009

Areas of practice. Banking and finance; debt capital markets; securitisation.

Professional associations/memberships. Law Society of the Northern Provinces.


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