Cyprus has enacted legislation which completes its framework regulating the purchase and sale, as well as the securitisation of credit facilities. This note covers securitisations, with our parallel update covering the acquisition and sale of loans.
Securitisation involves transactions that enable a lender or a creditor – typically a credit institution or a corporation – to refinance a set of loans, exposures or receivables, by transforming them into tradable securities accessible by investors.
By enacting the Securitisation of Credit Facilities or Other Forms of Claims or Exposures Law, L. 88(I)/2018 (the Law), Cyprus has established a framework for securitisation of credit facilities in Cyprus. It is envisaged that the Law will facilitate the secondary market for loans which may consequently enhance efforts to reduce non-performing loans. The scope of the Law is limited to the securitisation of credit facilities or other forms of receivables and/or exposures originated or acquired by credit institutions, financial institutions or credit acquiring companies, provided they are subject to supervision by a competent authority.
Only credit institutions, financial institutions and credit acquiring companies can act as originators for the purposes of the Law. A securitisation special purpose entity (SSPE) means a corporation, trust or other entity, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective. The SSPE should be structured so as to isolate the obligations of the SSPE from those of the originator.
An SSPE shall appoint a servicer for the day-to-day management of the securitised exposures under the terms of a management agreement. A servicer can either be limited company authorised as such by the CBC pursuant to the provisions of the Law, an entity duly authorised in another EU member state, credit institutions, and – where their respective licensing so allows – credit acquiring companies and financial institutions.
The Law contains provisions on the true sale of the exposures to the SSPE. In particular, it provides that the method of transfer of exposures is to be agreed between the originator and the SSPE and that the transfer becomes final, irrevocable and binding once the terms of such an agreement have been satisfied. The Law also enables originators to transfer the exposures using a trust and clarifies that an insolvency procedure against the originator will have no impact on an SSPE, its rights or exposures.
Originators are required to notify the transfer of exposures to an SSPE at least 30 days in advance, with certain mandatory contents prescribed in the Law, through either:
(a) a written notice to the underlying debtors, collateral providers and guarantors
(b) publication of a notice in 3 daily newspapers.
The Law grants SSPEs both the right to borrow under credit facilities and the right to issue financial instruments. The financial instruments may be offered to professional clients or admitted to trading on a regulated market or on a multilateral trading facility. An SSPE can only commence its activities as a securitisation vehicle, on the originator notifying the CBC of its intention to carry out one or more securitisation transactions.