The interface between securitization law and insolvency law is the central legal concern in designing securitization transactions. The complex structure of these transactions under the Securitization Act of 2004 should be understood within a specific legal context: the possible bankruptcy, insolvency, or liquidation of the “originator” (i.e. the entity requiring securitization financing), which may jeopardize the claims of asset-backed security investors. It is a solution to the risk that security holders with claim to specific assets may end up being subordinated to the interest of preferred creditors and ranked pari passu with, or even lower than, unsecured creditors in a rehabilitation or liquidation proceeding. Under present law, this risk may arise through the “substantive consolidation” and “clawback” provisions of the Financial Rehabilitation and Insolvency Act (FRIA) of 2010. This risk is mitigated through the creation of a bankruptcy remote vehicle and true sale of receivables, and it is the lawyer’s principal role in the securitization process to isolate or ring-fence assets beyond the reach of creditors, and making them an exclusive claim of investors. How this works in theory and practice is the subject of this paper.
If the inline PDF is not rendering correctly, you can download the PDF file here.
1. Ashcraft Adam B. and Schuermann Til Understanding the Securitization of Subprime Mortgage Credit (March 2008). Wharton Financial Institutions Center Working Paper No. 07-43; FRB of New York Staff Report No. 318.
2. Committee on Bankruptcy and Corporate Reorganization of the Association of the Bar of the City of New York Structured Financing Techniques 50 The Business Lawyer 2 (1995)
3. Coval Joshua D. and Jurek Jakub W. and Stafford Erik The Economics of Structured Finance (October 20 2008). Harvard Business School Finance Working Paper No. 09-060.
4. Financial Rehabilitation and Insolvency Act of 2010 (Republic Act No. 10142)
5. Gorton Gary B. and Souleles Nicholas S. Special Purpose Vehicles and Securitization (September 1 2005). FRB Philadelphia Working Paper No. 05-21.
6. Jobst Andreas (Andy) A Primer on Structured Finance. Journal of Derivatives and Hedge Funds Vol. 13 No. 3; ICFAI Journal of Risk Management 2007.
7. Securitization Act of 2004 (Republic Act 9267)
8. Singh Arun and Kumar Anil Securitization of Non-Performing Assets in Banking Law (November 1 2014). Available at SSRN: https://ssrn.com/abstract=2552481