UK Law and Practice Contributed by: Guy O’Keefe, Richard Jones, Oliver Wicker and Kate Patane, Slaughter and May
European Union Where a transaction involves assets relating to a jurisdiction in the EU, or where the securiti - sation transaction is intended to constitute an STS securitisation for the purposes of the EU Securitisation Regulations, an SPE is typically established in the EU, with the following jurisdic - tions being the most popular: • Luxembourg is a particularly favoured juris - diction due to its flexibility in corporate struc - turing and its favourable tax regime; and • Ireland is frequently chosen for its favourable tax treaties and English-speaking environ - ment. Other Jurisdictions SPEs are occasionally established in Jersey, Guernsey or the Cayman Islands, although this is happening less frequently (although these jurisdictions remain popular as listing venues). 1.5 Material Forms of Credit Enhancement Four primary forms of credit enhancement are commonly used to improve the creditworthiness of the debt issued. • Over-collateralisation involves holding a larger pool of assets than the securities issued, which provides a buffer against asset defaults. • Subordination uses a tiered structure where junior tranches absorb losses before senior tranches, thereby protecting senior inves - tors. It is common for the junior tranches to be held by the originator (or affiliates) to both retain risk and provide confidence to inves - tors. • Reserve accounts, such as cash reserves or liquidity facilities, are set up to cover potential shortfalls in the cash flow from the asset pool.
• Although this is less common after the finan - cial crisis, guarantees and similar external credit enhancement can be provided by a highly rated entity, offering additional assur - ance of payment to investors in case the underlying assets fail to generate expected cash flows. 2. Roles and Responsibilities of the Parties 2.1 Issuers The issuer typically takes the form of a bank - ruptcy-remote SPE, which is a legally distinct entity created solely to carry out the securitisa - tion transaction. The role of the issuer is typically to acquire or hold an economic interest in the pool of assets to be securitised and issue the securitised debt to investors. The issuer’s key obligations are to make payments of principal and interest as required by the transaction docu - ments, to the extent that cash – derived from collections on the receivables – is available for it to do so. 2.2 Sponsors Securitisation transactions sometimes, but not always, have a “sponsor”. This is a financial insti - tution that establishes the transaction and plays a role in its ongoing operation. The sponsor is often involved in structuring the transaction and selecting the portfolio of assets, and may han - dle or oversee the servicing of the assets post- securitisation. Sponsors can also provide credit enhancement or liquidity facilities to the transac - tion, or retain risk in the transaction. An entity that acts as sponsor is subject to regu - latory requirements under the UK Securitisation Regulations Framework (or the EU Securitisation Regulations, as applicable).
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