USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
1.4 Special Purpose Entity (SPE) Jurisdiction Delaware is the most common organisational jurisdiction for onshore SPEs, due to: • its market familiarity as a leading corporate jurisdiction; • ease and low cost of SPE formation and maintenance; • established body of organisational law; • stable and predictable legal environment and experienced and sophisticated judicial system; • deep bench of experienced law firms and legal practitioners, and legislature that is gen - erally responsive to market developments; • contractual freedom; • management flexibility; • ability to utilise different limited liability struc - tures such as statutory trusts and LLCs; • tax advantages; and • special bankruptcy remoteness features, such as the ability to contractually restrict fiduciary duties in the SPE’s organisational documents. The most common organisational jurisdictions for offshore SPEs, which are often used in the fund finance and CLO space, are the Cayman Islands, and to a lesser extent, Bermuda. The primary advantages of Cayman and Bermuda include: • ease and low cost of SPE formation and maintenance; • their established body of organisational law; • their stable and predictable legal environ - ment; • a deep bench of experienced law firms and legal practitioners who may also act as inde - pendent directors; and • tax advantages, including:
(a) the ability for US-owned SPEs to avoid entity-level taxation; and (b) the ability to comply with FATCA disclo - sure and reporting rules and so avoid FATCA withholding taxes. 1.5 Material Forms of Credit Enhancement The most typical credit enhancements include over-collateralisation, subordination of junior tranches, cash reserves and excess yield on the underlying assets compared to what is need - ed to service the asset-backed fixed-income securities. The exact levels and types of credit enhancement will depend on the ratings require - ments relating to the desired ratings levels, in addition to commercial constraints on the secu - ritisation. Some securitisations also include liquidity facili - ties that can be used to service the outstanding securities during periods of liquidity shortfalls. These can be provided by third-party liquidity providers or as part of the servicing rights and obligations. 2. Roles and Responsibilities of the Parties 2.1 Issuers Issuers are typically SPEs that are restricted from engaging in activities unrelated to securitisation. 2.2 Sponsors Sponsors are typically in the business that gen - erates the relevant underlying receivables or other financial assets, and will typically organ - ise and initiate the ABS transaction and engage in selection of the relevant assets. The sponsor is responsible for compliance with risk retention and other relevant regulatory requirements.
468 CHAMBERS.COM
Powered by FlippingBook