3.4 Management of Working Capital 63transaction can be interpreted in an adverse way. This recharacterisation can lead
to a material adverse change for the parties.
Particular Legal Questions
Some of the legal questions that the originator will particularly focus on include
questions of bankruptcy remoteness, true sale, priority, credit enhancements, and
covenants.
Bankruptcy remoteness. Every securitisation structure must satisfy the essential
condition of bankruptcy remoteness if it is to achieve the underlying objective of
releasing capital and providing funding at lower cost.
Buyers of asset-backed securities try to obtain security which is wholly
insulated from the fortunes of the originator itself. The originator should not -
directly or indirectly – be liable as a borrower of the amount lent to the SPV.^149
For this reason: (a) the value of asset-backed securities should not be capable of
being affected by the originator’s insolvency; (b) the security should not be
dependent upon any promise by the originator to repay the lending; and (c) there
should not be any requirement for the originator to underwrite the repayment of
the lending.
Limited recourse. Because of that essential condition, one of the things
characteristic of securitisation is limited recourse. On one hand, the originator tries
to make sure that the creditors of the SPV have no recourse to the originator in the
insolvency of the SPV. The SPV is incorporated as a separate company not owned
by the originator, and the originator tries to avoid or minimise the organisational
links between the two entities. On the other, the separate legal personality of those
two entities works both ways. It makes it difficult for creditors of the originator to
make successful claims on the assets of the SPV should the originator become
insolvent.
Because of limited recourse, both the quality (rating) of receivables sold to the
SPV and the quality (rating) of bonds issued by the SPV play a central role in the
pricing of the bonds by investors. The originator and the SPV can also put in place
credit enhancement measures at the time of the deal to obtain a better rating (see
below).
True sale and enforceability of the sale. Sometimes the sale is not enforcable.
In particular, the sale might sometimes be regarded as an (unenforceable)
assignment by way of security rather than a (normal and enforceable) sale.
According to the English way of thinking, the assignment of receivables is
subject to what is known as recharacterisation risk. Recharacterisation risk means
that parties with competing interests in the receivables will say that the transaction
was not a sale at all, but rather a secured financing arrangement that was not
properly perfected. Achieving a “true sale” means that the transfer of receivables
will survive the insolvency of the originator and that the assets cannot be clawed
back by means of recharacterisation.
(^149) MBNA Europe Bank Ltd v HM Revenue & Customs [2006] EWHC 2326 (Ch).