A Q&A guide to structured finance and securitisation law in New Zealand.
This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured Finance and Securitisation Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.
How active and/or developed is the market and what notable transactions and new structures have taken place recently?
To what extent have central bank liquidity schemes assisted the securitisation market in your jurisdiction? Were retained securitisations common in the last 12 months?
Is securitisation particularly concentrated in certain industry sectors?
In New Zealand, the market for securitised products has always been relatively small compared with that of the UK, US, Australia and many Asian jurisdictions. Activity has been limited in recent times, with many of the traditional commercial paper markets being effectively closed. There have been no new domestic public asset-backed securities transactions completed in New Zealand in the year to date. There have been several issues of mortgage-backed bonds but these have largely been limited to registered banks securitising their mortgage books to create rated "repo-eligible" paper, that is used as security for the Reserve Bank of New Zealand's (Reserve Bank) liquidity arrangements.
New Zealand has some non-bank mortgage lenders funded by the issue of residential mortgage-backed securities (RMBS), similar to Australia and other jurisdictions, but these issuers have not been actively growing their programmes in recent times.
The Reserve Bank's support schemes have not greatly affected the securitisation markets in the last 12 months (other than the major banks establishing new RMBS programmes, due to the change to the classes of securities eligible for participation in the Reserve Bank's liquidity facilities).
The securitisation market in New Zealand is greatly influenced by Australia, as most of the registered banks in New Zealand are owned by Australian entities. Therefore, New Zealand registered banks are indirectly subject to Australian Prudential Regulation Authority rules. A significant number of investors are also based in Australia.
Factors often quoted as contributing to the restricted growth of the securitisation markets in New Zealand include:
A lack of depth in the local capital markets.
A lack of good quality asset pools which can be securitised.
The competitive bank market and the availability of relatively cheap bank funding (until recent times).
What are the main laws governing securitisations?
Is there a regulatory authority?
There are no specific regulatory requirements governing securitisations in New Zealand. The key regulatory provisions are found in general law, including the:
Companies Act 1993.
Personal Property Securities Act 1999 (in relation to security issues).
Property Law Act 2007.
Trustee Act 1956 (in relation to the formation of trust structures).
Financial Transactions Reporting Act 1996.
Securities Act 1978 (in relation to securities issued by the SPV to the public).
Privacy Act 1993 (in relation to the collection, use and dissemination of data).
Credit Contracts and Consumer Finance Act 2003.
Income Tax Act 2007.
The Reserve Bank is responsible for supervising financial institutions in New Zealand. Its regulatory framework is relatively light, and is based on detailed disclosure obligations rather than prescribing activities of financial institutions. Financial institutions must disclose information about securitisation activities and maintain capital adequacy ratios based on Basel II principles (see Question 3).
The issue of debt securities is governed by the Securities Act and is monitored by the Securities Commission.
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy (such as the Basel International Convergence of Capital Measurement and Capital Standards: a Revised Framework (Basel II Accord) or the Capital Requirements Directive)? What authority in your jurisdiction regulates capital adequacy requirements?
Providing a lower overall cost of funds.
Providing financing when other options are unavailable and diversifying lending sources.
Providing off-balance sheet treatment.
Developing an investor base.
Matching the terms of assets and liabilities.
There is no specific standard governing the appropriate accounting treatment for New Zealand securitisations. However, IFRS have been adopted in New Zealand and IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) generally applies. A number of factors are evaluated in determining whether and to what extent the securitisation can be treated as a sale rather than a financing transaction, and given off-balance sheet treatment.
Under IAS 39, a transaction should achieve off-balance sheet treatment if:
The transfer of the assets by the originator is non-recourse.
The risk and rewards of ownership of the assets are transferred.
The originator immediately passes on any cash received from the assets.
The assets are derecognised.
A gain or loss on the disposal is recognised.
If the originator has retained the risk and rewards of ownership, the assets remain on-balance sheet and the proceeds are recognised as a loan for accounting purposes.
Registered banks are subject to minimum capital requirements in line with the Basel II Accord and a limit on lending to connected parties. Registered banks must take into account off-balance sheet and on-balance sheet credit risks and exposures. The Reserve Bank will require a registered bank to fully consolidate the assets of an SPV for measuring capital adequacy where one of the following applies:
There is insufficient separation between a registered bank and its securitisation activities.
The registered bank provides credit enhancement to an SPV.
The bank retains funding risk as a result of the securitisation.
Non-bank deposit takers have also recently come under the supervision of the Reserve Bank, and are subject to minimum capital and rating requirements.
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How is the SPV usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
An SPV is usually structured as a bankruptcy remote trust or incorporated entity. In both cases, the ownership in the assets to be securitised can be freely transferred to the entity. Where the SPV is a trust it is typical for a professional trust company to act as the trustee of the trust. The trust manager, who is responsible for the day to day activities of the trust, is often related to the originator.
Where the SPV is a corporate entity, the SPV is usually established by the originator, but to ensure off-balance sheet treatment the shares in the SPV are held by someone other than the originator, typically a charitable trust.
There are no particular regulatory requirements that apply to SPVs other than general law.
The SPV is generally established in New Zealand.
It is possible to limit the risk of the SPV becoming insolvent by using standard securitisation techniques to:
Strictly limit the activities of the SPV to the purchase and ownership of the relevant receivables.
Include limited recourse provisions in all transaction documents.
Subordinate certain liabilities.
Enforce strict cash flow waterfalls.
Implement hedging arrangements that match income with liabilities.
Create cash reserves.
It is possible to make the SPV remote from the originator's insolvency. For this to happen:
The SPV cannot be a related entity of or controlled by the originator.
There must be a true sale of the receivables from the originator, so that it does not retain any right, title or interest in the transferred receivables.
If this is not structured correctly, there is a residual risk of the SPV being affected by the originator's insolvency, particularly in the case of statutory management under the Corporations (Investigation and Management) Act 1989.
The securities issued by the SPV can be publicly or privately issued. They are usually privately issued, due to the listed debt market being mainly a retail investor market.
If publicly issued, the securities are usually only issued to wholesale investors, to avoid the need to comply with Securities Act requirements relating to disclosure documents and appointing a trustee to act on behalf of the security holders (see Question 9).
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please briefly summarise the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
If the securities are publicly issued and listed on an exchange, they will be listed on the New Zealand Stock Exchange (NZX). However, this only occurs in a limited number of cases. Normally, issues of asset-backed securities are offered to wholesale investors and are not listed on an exchange. An application to list debt securities on the NZX must comply with the requirements in the Securities Act and the NZX Listing Rules. The main documents required are a registered prospectus and an investment statement.
For listed debt security issues, the NZX is chosen over a regulated exchange in another jurisdiction. It is unusual to have a New Zealand dollar denominated debt security listed on an offshore market, due to the lack of demand for New Zealand dollar denominated debt securities in foreign markets.
The trust concept is recognised in New Zealand. All offers of debt securities to the public under the Securities Act must have a trustee corporation appointed to act as trustee. It is common to also appoint a trustee for wholesale issues of debt securities.
Types of assets that have been securitised in the New Zealand market include:
Residential mortgages, prime, non-conforming and equity release.
Auto loan receivables.
Auto lease receivables.
Equipment finance receivables.
Credit card receivables.
Collateralised debt obligations.
Hire purchase and finance lease receivables.
Traditionally, most activity in the market has centred on equipment and auto finance receivables, and residential mortgage-backed transactions. The main constraint in the market is the lack of volume in the securitisation pools.
To create an effective legal assignment, the assignment must be both:
Absolute and not conditional or by way of charge only.
In writing and signed by the assignor (originator).
Under the Property Law Act, there has been a change in the requirements for a legal assignment of things in action. Written notice of the assignment is no longer required to be given to the underlying debtor, nor is valuable consideration required from the assignee (although in relation to personal property, see below). Future property can also be validly assigned in the same way.
Generally, assignments of receivables under a securitisation structure are therefore legal assignments (previously, they were usually equitable assignments, with a right to perfect the legal transfer by giving notice to the debtors following a default).
Assignments of receivables give rise to a deemed security interest, under section 17(1)(b) of the Personal Property Securities Act 1999 (PPSA). Under this section, certain interests are deemed to be security interests, regardless of whether they secure payment or performance of an obligation (that is, even if transferred under a legal assignment). Accordingly, to preserve the priority of the SPV's claim:
The assignment must be signed or assented to by the originator, and contain an adequate description of the receivables assigned.
The deemed security interest must "attach" for the purposes of the PPSA, through the SPV giving value and the originator having rights relating to the receivables.
The deemed security interest must be perfected by either:
registration on the Personal Property Securities Register;
the SPV being in possession of the receivables (which is possible when assigning certain receivables such as finance lease or hire purchase agreements, which are chattel paper under the PPSA).
There are no receivables that cannot be securitised in New Zealand due to legal or regulatory issues. An assignment of an amount that will or may be payable in the future is treated as an assignment of a thing in action (Property Law Act) (see Question 12). However, it is not practical to securitise many types of receivables in New Zealand due to the:
Limited size of the asset pools.
Competitive bank market.
Limited number of investors in asset-backed securities in the market.
See Question 12. Rights to security granted by debtors to secure the receivables can be transferred in the same manner as the underlying receivables. Normally, no formal steps are taken to transfer the security or give notice to the security providers until after a default.
If the SPV wishes to take control of the receivables following a default, a supporting security interest relating to personal property can be transferred to the SPV by registering a financing change statement on the Personal Property Securities Register.
In the case of receivables secured by mortgages of land registered under the Land Transfer Act 1952, the mortgage can be transferred to the SPV by registering a memorandum of transfer. The SPV or the security trustee usually holds a power of attorney entitling it to take all steps and undertake all registrations necessary to transfer the security interests.
As a matter of common law, it is not possible to transfer a contract for personal services without the underlying debtor's consent. There are no specific regulatory restrictions on the transfer of receivables.
A contractual restriction on selling a receivable can be effective, depending on the wording of the particular restriction and (among other things) whether the term is considered essential or not.
A transfer of rights in breach of a prohibition against the transfer can be held to be ineffective to vest the relevant rights in the transferee, on the basis that otherwise the legitimate expectations of the parties to the original contract would be defeated.
The Contractual Remedies Act 1979 also allows cancellation of a contract for breach of a term if that term is essential to the non-breaching party, or the breach substantially increases the burden or reduces the benefit of the contract to the non-breaching party.
Accordingly, depending on the circumstances and the relevant contractual restriction, a purported transfer can be ineffective, so that either:
The transferee does not acquire title to the relevant asset (while not necessarily invalidating the underlying contract).
The transfer in breach of the restriction may permit the other party to the receivable to cancel the underlying contract (though the transfer itself may not necessarily be invalid).
There are no legislative restrictions on transferring receivables. However, a buyer of receivables must comply with various consumer protection laws, which may be relevant to the enforcement of the underlying receivables and transactions that gave rise to that receivable, including the:
Credit Contracts and Consumer Finance Act 2003.
Credit (Repossession) Act 1997.
Consumer Guarantees Act 1993.
Fair Trading Act 1986.
Depending on the circumstances of a transfer, there is a risk that it may be re-characterised as a loan with security. The common law and accounting concepts of the true sale are relevant and need to be addressed by considering whether the originator has:
Retained control of the assets (although simply retaining control of collection as servicer of the underlying assets would not generally give rise to re-characterisation).
Retained other risks and rewards of ownership.
The intention of the parties is critical, and a court will look to see whether there was an intention to transfer the receivables absolutely. A court may consider whether the interest granted to the SPV "in substance" secures payment or performance of an obligation (reflecting the definition of security interest under the PPSA).
The risk of re-characterisation can be minimised by ensuring that in both the form and substance of the transaction, most factors indicate that the transaction is a sale, and by ensuring that the parties' intentions on this point are clear.
Failing to effect a true sale may (among other things):
Increase the likelihood that the relevant assets are affected by any insolvency proceedings against the originator (and available to the originator's creditors).
Give rise to unwanted tax or accounting consequences for the parties.
However, the risk of parties failing to fulfil the formalities for effectiveness of security are usually avoided due to the PPSA. The PPSA deems all transfers of receivables from the originator to the issuer as security interests, which can be perfected on the Personal Property Securities Register (see Question 12).
Accordingly, this measure is generally taken, regardless of whether (as is usual in a securitisation) the parties intend the transfer to take place as an outright sale. The one exception is that the PPSA does not deal with interests in land. These security interests continue to be governed by the Land Transfer Act and the Property Law Act.
A transaction by a company when it was unable to pay its due debts can be set aside in both the following circumstances:
If the transaction enabled another person to receive more towards the satisfaction of a debt owed by the company than the person would otherwise have received in a liquidation of the company (that is, the transaction has preferential effect), and was made within two years of the company being placed in liquidation (section 292, Companies Act).
If the transaction is a charge over property of a company in liquidation, and the charge was given within the two-year period before liquidation, unless the charge secured money actually advanced or paid or, immediately after the charge was given, the company was able to pay its due debts or the charge replaced a charge given before the specified period (section 293, Companies Act).
A liquidator of a company can also recover from a person the difference between the value that person received from the company under a transaction to which the company was party, and the value that the company received from that person under the transaction (transactions at an undervalue), if both (section 297, Companies Act):
The transaction was entered into in the two years before liquidation.
The company was unable to pay its due debts when it entered the transaction, or became unable to pay its due debts as a result of entering into the transaction.
Choice of law clauses are generally recognised and enforced, provided that the choice of law is bona fide and is not contrary to public policy. Generally, New Zealand law is chosen by the parties to govern the transaction documents. There are several statutes that affect the normal choice of law rules. For example, section 26 of the PPSA provides that despite the choice of law in a contract, the validity and perfection of a security interest in chattel paper, an investment security, money, a negotiable title document, or a negotiable instrument, is governed by New Zealand law if one of the following applies:
At the time the security interest attaches to the collateral, the collateral is situated in New Zealand.
At the time the security interest attaches to the collateral, the collateral is situated outside New Zealand but the secured party knows that it is intended to move the collateral to New Zealand.
The security agreement provides that New Zealand law is the law governing the transaction.
In any other case, New Zealand law applies (although in practice, the jurisdiction with control over the relevant collateral may apply, despite section 26 of the PPSA).
A typical security package relating to the SPV's assets consists of a:
General security agreement.
Specific assignment by way of security of the SPV's rights under all receivables and related security documents.
The PPSA governs perfection of the security (see Question 12). This requires the security to:
Be signed (or otherwise assented to) by the SPV.
Contain an adequate description of the assets secured (which is a fairly minimal requirement under the PPSA).
"Attach" through the security holder giving value and the SPV having rights in the assets.
The security should also be perfected by either:
Registration of a financing statement relating to the security interest in the Personal Property Securities Register.
Taking possession in the case of security over certain receivables, such as chattel paper (finance leases or hire purchase agreements), which may provide additional protection.
The PPSA does not extend to security over land. Mortgages over land are registered under the Land Transfer Act in favour of the mortgagee.
For further information on taking security over assets in New Zealand, see PLC Cross-border Finance Handbook, Country Q&A, New Zealand.
Generally, security granted by the SPV is held for investors by an independent security trustee (usually a professional trustee company). There is no requirement for the security trustee to provide consideration for the trust to be effective. Foreign trusts are recognised in New Zealand (with foreign law opinions normally required in relation to their constitution and standing).
Methods of credit enhancement commonly used in New Zealand are:
Cash collateral accounts.
Subordinated tranches of securities.
Insurance, at the bond, pool or loan level.
Letters of credit.
Derivatives (interest rate swaps, caps and so on).
There are no specific issues or variations that apply to the credit enhancement techniques in the Model Guide (see Model Guide: Credit enhancement).
The most common forms of liquidity support in New Zealand securitisations are:
A standby credit facility provided by a third party bank to the SPV (who will usually share in the security package held for investors by the security trustee).
A cash fund to be available to the SPV to draw on.
There are no specific issues or variations that apply to the provision of liquidity support as set out in the Model Guide (see Model Guide: Liquidity support).
There are no material variations, other than to note that payments in a pre-default situation are normally managed by the servicer or SPV manager, rather than the Paying Agent (see Model Guide, box, Cash flow index).
The principal methods of profit extraction are:
The originator charging fees by acting as servicer of the asset portfolio.
Receipt of excess income from the asset pool as a residual beneficiary of or shareholder in the SPV.
New Zealand's long-term foreign currency rating has fluctuated between AAA and AA-/Aa3 over the past three decades. As at 30 November 2009, New Zealand's long-term foreign currency rating from Moody's Investors Service was Aaa with a stable outlook, and from Standard and Poor's was AA+ with a stable outlook. As at 16 July 2009, Fitch downgraded the outlook for New Zealand's AA+ sovereign credit rating to negative.
The rating agencies in New Zealand, when rating securities issued by an SPV, typically first perform a feasibility analysis, which looks at factors such as:
The quality of the receivables pool.
A review of the servicer and originator.
A review of the legal structure.
They then perform a detailed cash flow analysis, focusing on the financial structure and the levels of credit enhancement required.
There are no specific political or legal risks in New Zealand that adversely affect ratings of securities issued by SPVs generally. The rating agencies focus on legal issues such as whether the assets have been isolated from the insolvency risk of any participants in the transaction through a true sale to a bankruptcy remote SPV. They expect to see opinions on the:
Enforceability of the documents.
Effectiveness of the transfer of assets and the security provisions in place.
Effect of insolvency laws.
Tax neutrality issues.
As all of these issues can be adequately addressed under New Zealand law and supported by detailed legal opinions, the rating ultimately depends on the quality of the assets being securitised and the transaction structure.
What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
Some of the key tax issues are set out below.
The assignment of receivables can crystallise any unrealised gains or losses in the financial instruments assigned. In some cases it can result in an income tax liability for the originator in the year of transfer, under New Zealand financial arrangements rules. New Zealand currently has a flat corporate tax rate of 30%. Different tax rates apply to other types of entities, including 33% for trustees of a trust (other than a unit trust, which is treated as a company for New Zealand tax purposes, or a non-complying trust).
The financial arrangement rules generally only apply to:
New Zealand residents.
Non-residents, to the extent a non-resident is a party to a financial arrangement for the purpose of a business carried on by the non-resident through a fixed establishment in New Zealand.
Certain types of financial instruments (for example, operating lease receivables) are also not subject to the financial arrangements rules.
Where the financial arrangements rules do not apply, the transfer of receivables can still result in taxable income for the originator. This may be the case where the financial arrangements transferred are regarded as revenue account property of the originator.
Generally, a transfer of receivables should not give rise to a liability in relation to other tax types, including goods and services tax (GST). New Zealand does not currently impose stamp duty or other documentary or transfer taxes on the sale of receivables.
New Zealand withholding tax applies to any payment received by the transferee if the payment is interest. A payment is treated as interest for withholding tax purposes where it is a payment in relation to money lent (other than a repayment of the money lent, but including a redemption payment). It is not necessary for the amount to be paid to the person from whom the money was lent in order to be interest for withholding tax purposes.
Interest paid to a resident, or a non-resident who engages business in New Zealand through a fixed establishment in New Zealand is subject to resident withholding tax (RWT), unless the recipient holds a current exemption certificate (several categories of persons are eligible for an exemption certificate, including those whose annual turnover exceeds NZ$2 million (about US$1.43 million)). Any RWT withheld gives rise to a tax credit to offset the recipient's income tax liability.
New Zealand sourced interest paid to a non-resident (who does not engage in business in New Zealand through a fixed establishment in New Zealand) is subject to non-resident withholding tax (NRWT) (generally at the rate of 15%, however a lower withholding tax rate may be available where a double tax agreement applies, and in most cases that lower rate is 10%). This is generally the final tax when the payer and the recipient are not associated for New Zealand tax purposes. NRWT liabilities can be minimised where the parties elect to pay approved issuer levy (AIL) at the rate of 2% of the amount of the gross interest paid. The effect of electing under the AIL regime is that the NRWT rate is reduced to zero. AIL is only available where the payer and the recipient are not associated, and certain other administrative requirements are met. AIL is a levy, instead of a tax, and therefore may not give rise to a tax credit which the recipient can use to offset against their tax liability in their home jurisdiction. However, AIL is generally deductible.
Withholding obligations can also arise if any component of a payment consists of royalty and dividend. The application of the withholding regime can differ from that set out above, depending on the nature of the payment.
Consideration should also be given to the deductibility of securitisation costs for income tax purposes. In most cases, the securitisation vehicle is structured to ensure that it is tax neutral.
Care should also be given to the ability of the securitisation vehicle to claim GST input credits for costs incurred by it.
Synthetic securitisations are possible in New Zealand but not common (particularly since the recent economic downturn).
Single and multiple issue structures are commonly used. Master Trust and multi-seller conduits are also well-known structures often used in New Zealand. SIVs are possible but are not widely used (see Model Guide: Other securitisation structures).
There are no major regulatory reforms proposed that relate directly to securitisation. However, recent changes in the way in which non-bank deposit takers are regulated may lead to consolidation in that sector, and consequently, a revisiting of securitisation as a funding mechanism for those entities.
The Reserve Bank has indicated that it is prepared to allow New Zealand banks to issue covered bonds (bonds in which a holder has a claim both against a specific pool of assets on the issuer's balance sheet, as well as a general claim against the issuer), subject to adequate disclosure and limits on the proportion of the bank's total liabilities which is made up of covered bonds. This may be a new product that will come onto the market in the near future.
The Reserve Bank is continuing to review the capital adequacy rules for various exposures including securitisation as part of its Basel II implementation. Any changes may give rise to changes in securitisation structures for regulated institutions.
Areas of practice/expertise. Peter Owles is a senior partner in the finance team of Buddle Findlay. Peter has extensive experience locally and internationally in all aspects of banking and structured finance transactions. He advises banks and corporate clients on all financing issues, specialising in securitisation, project and structured finance, merger and acquisition financing, capital markets and major financing transactions. Peter is a member and past chair of the Banking, Finance and Securities Committee of the Inter Pacific Bar Association, and has been a regular speaker on financing and infrastructure at seminars both in New Zealand and internationally. He is listed as a recognised expert in various international publications, including Law Business Research International Who's Who Legal, Chambers Global, IFLR and others.