sale level of assurance is required. The “would be” opinion is the highest level of as-
surance an attorney can give. In addition, the opinion should indicate that the SPE
would not be consolidated with the transferor by a bankruptcy court.
(ii) Right to Pledge or Exchange. In assessing whether this criteria for sales treatment
under FAS 140 has been met, the first question that should be addressed is whether
the transferee (or the beneficial interest holders of a QSPE) is constrained from
pledging or exchanging its purchased assets (or the beneficial interests) in such a way
as to keep it from obtaining all or most of the cash inflows associated with its own-
ership. In implementing FAS 125, issues arose concerning the types of constraints on
the transferee’s right to pledge or exchange transferred assets which preclude sale ac-
counting and whether a transferee must obtain either the right to pledge transferred
assets or the right to exchange them or whether a transferee must obtain both rights
for the transfer to qualify for sale accounting. This issue was resolved in FAS 140 as
the emphasis is on providing the transferee with the ability to obtain all or most of
the cash flows, not on the method of doing so (i.e., whether it can either exchange or
pledge).
The second question that should be addressed if one concludes that the transferee
or the holder of a QSPE’s beneficial interest is constrained is whether or not the con-
straint provides more than a trivial benefit to the transferor/originator.
The following is a list of examples of provisions that would typically be consid-
ered constraining:
- A prohibition on the transferee’s subsequent sale of its interests
- A prohibition on the sale to a competitor, if that competitor would be the only
willing buyer for the type of asset concerned - A right for the transferor/originator to buy back the transferred assets that are
“deep in the money” at the time of transfer
Some conditions do not constrain a transferee (or beneficial interest holders) from
pledging or exchanging the assets (or beneficial interests) and therefore do not pre-
clude a transfer subject to such a condition from being accounted for as a sale. For
example, a transferor/originator’s right of first refusal on the occurrence of a bona
fide offer to the transferee or beneficial interest holder from a third party presump-
tively would not constrain a transferee, because that right in itself does not enable the
transferor/originator to compel the transferee to sell the assets and the transferee
would be in a position to receive the sum offered by exchanging the asset, albeit pos-
sibly from the transferor/originator rather than the third party. However, a trans-
feror’s right of first refusal when the transferor holds the residual interest in the trans-
ferred assets is a constraint that provides more than a trivial benefit to the transferor
and would preclude sale treatment. Further examples of conditions that presump-
tively would not constrain a transferee (or beneficial interest holder) include:
- A requirement to obtain the transferor/originator’s permission to sell or pledge
that is not to be unreasonably withheld - A prohibition on sale to the transferor/originator’s competitor if other potential
willing buyers exist - A regulatory limitation such as on the number or nature of eligible transferees
21 • 10 ASSET SECURITIZATION