3.4 Management of Working Capital 69Both securitisation structures will require covenants to be undertaken by the
parent company, the subsidiary that acts as the operating company, and the
subsidiary company that holds title to the revenue generating assets.
Such covenants include financial covenants (for example, undertakings that restrict the
level of indebtedness of the group and undertakings that restrict the level of dividend
payments by the parent) and operational covenants (for example, undertakings that restrict
the business operations of the operating company).
The investors typically want to restrict the level of debt that the group as a whole could
incur to a certain fixed percentage of its consolidated income. Investors also want
restrictions on the level of dividend payments made by the parent, and a debt service
reserve to be created by the asset holding subsidiary company to protect them from
payment defaults. Other standard terms would include covenants promising to conduct the
business in a proper and efficient manner, and not to make any changes to the nature of the
business without the approval of the bondholders. In addition, there is often an obligation to
furnish copies of audited accounts and also non-audited quarterly or half-yearly accounts to
the trustee for the bondholders.
Synthetic securitisation. In a traditional “real” securitisation, the parties try to
achieve a true sale of assets to the SPV and payments to investors depend on the
performance of the underlying assets. A synthetic securitisation is different.
A synthetic securitisation provides for at least part of the economic substance
of a standard securitisation, but without the actual transfer of any assets. Payments
to investors depend on the performance of the underlying assets, but what is
transferred is credit risk relating to the underlying assets.
A synthetic securitisation means that the owner of assets (the protection buyer)
transfers the credit risk of a portfolio of assets (a reference portfolio of reference
obligations) to another entity (the protection seller) or directly to the capital
markets. Although the credit risk of the reference portfolio is transferred, actual
ownership of the reference obligations remains with the protection buyer.^163
The main objective of a synthetic securitisation is transfer of the originator’s
credit risk exposure to the capital market. This form of securitisation is almost
exclusively used by banks that need to manage their regulatory capital.^164 As there
does not have to be any true sale, many of the usual risks can be avoided. Credit
risk will be transferred from the originator to the SPV through credit derivatives,
in particular through credit default swaps.
The transfer of credit risk may be accomplished in many ways by using credit
derivatives or guarantees that serve to hedge the credit risk of the portfolio. The
transfer of risk can be funded (for example, through the use of credit-linked notes)
or unfunded (for example, through the use of credit default swaps).^165
(^163) Uwaifo E, Greenberg MI (Sidley Austin Brown & Wood), Key issues in structuring a
synthetic securitisation transaction. In: Preston A (ed), Europe Securitisation and Struc-
tured Finance Guide 2001, London (2001) p 139–140.
(^164) See Kroll MJ, Bürgi JA, Sauter UC, Securitisation in der Schweiz, IFF Forum für
Steuerrecht 2002 pp 262–264.
(^165) See paragraphs 539 and 540 of the Basel II Accord.