Securitisation in Finland

By Gunnar Westerlund, Dimitrios Himonas and Samu Palkonen

This article first appeared in Global Securitisation and Structured Finance 2003, published by Globe White Page in association with Deutsche Bank. http://www.globalsecuritisation.com/

Over the recent years, the use of securitisation has become increasingly common in Finland. Despite this the transaction volume has, however, remained low compared to many other European jurisdictions. Not surprisingly, the market has been dominated by trade receivables securitisations. Typically, the Finnish leg of a securitisation transaction is part of a multi-jurisdictional exercise with group companies domiciled in different jurisdictions participating as originators. In addition to trade receivables, lease receivables and credit card receivables have also been securitised. Until 2002 the landmark public transaction in Finland was, however, the so-called ‘Fennica ’securitisation of housing loans by the Finnish Housing F nd first launched in 1995.To date, there have been six issuances under the Fennica programme.

In late 2002 the Finnish paper company Stora Enso Oyj closed a forest securitisation transaction involving the transfer of approximately 600,000 hectares of its Finnish forest land to a newly created special purpose vehicle (‘SPV ’),Tornator Group. The transaction is among the few whole business securitisations implemented to date in Europe outside the UK and brings a whole new asset class to such transactions. The transaction has in many instances been regarded as the most innovative securitisation in Europe in 2002 and was awarded the IFLR ‘European Securitisation Deal of the Year ’.

The Finnish legal and regulatory framework, as that in the other Nordic jurisdictions, can be regarded as fairly securitisation-friendly. In respect of most asset classes, there are no onerous legal formalities required to effect a transfer of ownership over a particular asset. In order to achieve bankruptcy remoteness from the originator, certain formalities must be complied with, such as, in the case of receivables, notifying the debtors of the receivables about the transfer.

The fact that there is virtually no case law addressing securitisation specific questions does sometimes, however, give rise to difficult legal considerations. Most importantly, there is no absolute certainty whether a Finnish court would, for civil law purposes, uphold a conventional securitisation transaction as having been entered into with the intent to transfer ownership, or whether instead the transaction would be considered to constitute secured financing. Consequently, in most securitisation transactions there remains a degree of uncertainty in this respect, although a sufficient level of comfort is normally ultimately achieved. In view of the possible re-characterisation of the transaction and to mitigate the resulting adverse consequences, certain safeguards can normally be built into the transaction documents.

Finnish accounting rules do not specifically address securitisation transactions. Accordingly, there are no detailed criteria to follow when assessing whether the transaction achieves off-balance sheet treatment. In general, Finnish accounting rules rely to a significant extent on the substance- over-form principle, as does the International Accounting Standards (‘IAS ’).In practise, when Finnish accounting statutes are silent on a particular issue, the practioners often rely on the rules and principles established within the IAS regulation. As a result, the accounting treatment under Finnish law would likely in most cases not significantly deviate from that under the IAS. Going forward, due to the EU-wide regulation, Finnish listed companies will have to apply IAS from 2005 onwards when preparing their consolidated accounts.

To date there have been no publicly placed purely domestic securitisation transactions in Finland. This is the result of an international investor base and the concerns and expectations prevailing among such investors concerning the domicile of the SPV and the structuring of the transaction. Consequently, the parties almost invariably prefer to rely on internationally established structures and documentation previously used in similar securitisation transactions.

As within most other jurisdictions, the main legal challenge under Finnish law is to ensure that the securitised assets are bankruptcy remote from the originator ’s estate, ie to achieve a true sale. In whole business transactions and other secured loan types of transactions, on the other hand, the key issue is to create a security package that meets the investors ’requirements.

As noted above, true sale, as between the parties to the transaction, is normally achieved by conclusion of the origination agreement without the requirement for further action on the part of the parties. As towards third parties, such as the creditors and the bankruptcy estate of the originator, the effectiveness of the transfer is subject to the perfection of the transfer in accordance with the rules applicable to the relevant category of asset. In the case of ordinary receivables, such as trade receivables, perfection takes place by means of serving the debtors a notice of assignment and revised payment instructions. Typically, the notice of assignment is printed on the invoices sent to the customer- debtors. Due to commercial considerations, the parties sometimes agree that the customer-debtors are not notified at the outset, but instead only upon the occurrence of a specific trigger event.

In secured loan transactions involving securitisation of a particular business, the security package is of key importance. As explained below in more detail, due to Finnish insolvency laws, a whole business securitisation normally involves, as a preliminary step, incorporation of the target business in a separate legal entity. The security would then take the form of a pledge over the shares in the target company and, to the greatest extent permissible, security over the assets of the target company. The security from the target business would normally consist of an enterprise mortgage (close equivalent to the UK floating charge)covering most categories of movable assets of the company and, additionally, fixed charges over individual assets, to the extent possible.

A whole business transaction may involve the SPV purchasing the shares in the (incorporated)target company from the originator. Such acquisition would be financed in part by contributions made by outside equity investors and, more importantly, with the proceeds from the issuance of notes by the SPV.

In receivables securitisations, the Finnish originator normally continues to service the receivables after the securitisation. In such a collection agency set-up, the customer-debtors normally continue to make payments for the receivables to a bank account held by the originator. In case of the Finnish originator ’s insolvency, the collection agency may be challenged and this could give rise to the question regarding the due separation of funds and whether the securitisation constitutes a true sale. For this reason, due attention should be given to the structuring of the collection agency.

Although, in a receivables securitisation, security arrangements do not play as significant a role as in a whole business transaction, the structures used in Finland have normally featured some type of security. The most common example is a pledge over the collection bank account held by the originator.

As briefly mentioned above, the regulatory framework in Finland rarely poses any significant challenges to a conventional securitisation transaction.

The operations of the SPV in a securitisation transaction are normally not subject to the financial supervision applicable to credit institutions. The SPV, therefore, does not normally require any banking or similar licenses in Finland. If the originator is a Finnish bank or other credit institution, then inter alia the guidelines of the Finnish Financial Supervision Authority concerning capital adequacy reliefs and banking secrecy need to be addressed.

When dealing with receivables where the debtors are individuals, data protection is an issue to address if the transaction entails transfer of personal data from the originator to the SPV. Even if the transaction would entail some transfer of customer-related data, it is normally possible to structure the transaction so that no filings or approvals with the data protection authorities are required. Prior discussions with the authorities may, however, be recommendable.

Perfection of the transfer and true sale As in most other jurisdictions, the main legal challenge under Finnish law in a securitisation transaction is to structure the transaction so that it is binding on third parties, most importantly, on the originator ’s bankruptcy estate and its creditors.

As to the effectiveness of the transfer of ownership, the most important prerequisite is that the perfection of the transfer has taken place in accordance with the general rules applicable to a transfer of ownership over the relevant category of asset. The transfer of a receivable is perfected by means of serving the debtors a notice of assignment. Typically, the notice of assignment is served by way of a legend printed on the invoices. A one-off notification given to a particular debtor at the outset of the programme would not suffice. Instead, each individual assignment needs to be separately notified to the debtors. Due to commercial considerations, the parties may sometimes feel comfortable with not notifying the customers of the transfer until the occurrence of a trigger event. The critical question then is when the trigger event occurs so as to enable timely perfection prior to insolvency. Further, such delayed notification could result in certain complications in light of Finnish regulations concerning voidable preferences.

Even if the perfection of the transfer took place prior to the originator ’s insolvency, a securitisation could nevertheless be challenged on the grounds that the legal form of the transaction did not correctly reflect the substance underlying the transaction and the intent of the parties to the transaction. Although Finnish civil law in general can be characterised as fairly legalistic, the substance-over-form doctrine is well established when assessing whether a sale of an asset should be considered as having been entered into for the purposes of creating security interest over the asset in question. In a receivables securitisation, the insolvency estate of the originator could argue that the parties did not intend to transfer ownership of the receivables but rather created a pledge type of a security over the receivables in order to secure the construed loan advanced by the purchaser to the originator. Unfortunately, Finnish case law does not clearly specify the grounds for re-characterising a particular transaction. As a matter of principle, the key question is whether the economic risks and rewards associated with ownership have, to a sufficient extent, been transferred to the purchaser. Various re- purchase obligations, excessive reserve requirements and other similar features often encountered in securitisation transactions all serve as an indication that the originator has retained economic interest in the receivables –thus, they may endanger the true sale analysis.

In the event that a receivables securitisation is re-characterised by a Finnish court upon insolvency of the originator, the transaction would most likely be treated as a loan secured by the receivables. The originator would consequently be considered the owner of the receivables. The critical question then is whether the construed security interest over the receivables would be binding on the insolvency estate or whether instead the SPV would end up being an unsecured creditor. As perfection of a pledge over a receivable is under Finnish law achieved in the same manner as perfection of a transfer –ie by way of serving a notice of assignment to the debtor –then, assuming that the transfer notice has been served prior to insolvency, the security interest would, as a rule, be binding. Accordingly, the SPV would enjoy priority ahead of the other creditors over the proceeds accruing from the receivables. As an additional hurdle, the creation of the security would be scrutinised and could possibly be challenged by virtue of the Finnish rules concerning voidable preferences.

When exploring various securitisation structures, a distinct feature of Finnish law that needs to be addressed is the fact that a transfer of ‘future ’or ‘unearned ’receivables is generally not binding upon the insolvency of the Finnish originator. Consequently, such receivables would, even after the transfer, be considered the originator ’s property. In determining whether a receivable is in existence or whether it is unearned, the decisive factor normally is whether the originator has fulfilled the contractual obligation that gives rise to the receivable. In the case of a trade receivable for instance, the assessment is made based on whether the originator has delivered the goods to the purchaser-debtor thus earning the receivable. The fact that future receivables cannot be assigned considerably reduces the potential, as an example, for using lease receivable securitisation techniques in Finland. In this type of securitisation transactions, additional security from the originator would typically be required –normally in the form of a security over the lease object.

Various collection agency arrangements often encountered in receivables transactions may cause difficulties if the originator becomes insolvent. First, the continued receipt of collections by the originator could effectively be construed as evidence that the originator has not been deprived of its control over the receivables. This could be argued to adversely affect the true sale. Second, if collections have been commingled with the originator ’s other funds, then the collection funds would be considered part of the assets of the originator ’s insolvency estate. To overcome these challenges, it is important that a separate collection account is established and collections accruing from the securitised receivables are channelled to this separate bank account. Furthermore, effective controls should be put in place to prevent the originator from dealing with the money held in the collection account. Apart from contractual undertakings to such effect, there should be a cash sweep, preferably on a daily basis, from the collection account to an originator remote transaction bank account. As an alternative, a pledge could be created over the collection account. As in the case of the customer-debtor transfer notifications, the use of a collection agency would normally involve a trigger event mechanism, whereby after a trigger event collections are directly channelled to a transaction bank account remote from the originator.

As with the transfer of ownership, any security granted in connection with a securitisation must have been perfected prior to the commencement of the originator ’s insolvency. In the case of a receivables transaction, the security package rarely plays a significant role. The opposite is true in a whole business securitisation, where the robustness of the security package is of critical importance. Depending on the type of security concerned the perfection may take the form of registration with the relevant official register (security over IP rights),registration together with the physical delivery of the registered security instruments (floating charge, real estate mortgage, charge over items that can be registered, such as vessels and aircraft),notification to the debtors (receivables),or possessory pledge of the asset in question (movable property other than items that can be registered).

In a whole business transaction, apart from the right, upon the insolvency of the originator and/or the target company, to enforce the security, the main goal of the SPV, as the secured creditor, normally is to have effective means of taking control of the target business operations upon default of the loan. This would comprise taking decisions as to whether or not the business is continued and, if continued, taking operative decisions concerning the business. To such end, in certain jurisdictions the holders of a floating charge may appoint their own administrator and such administrator would then primarily act as directed by and in the interest of the relevant secured creditor. Under Finnish law, this is not possible as the administrator is appointed by a court and, once appointed, is obliged to act in the interest of all creditors. Having said this ,the difference between the two systems should not be exaggerated. This is because the meeting of the creditors, which represents all the creditors, has the capacity to take decisions concerning the affairs of the company (along with the administrator).As the SPV would normally be the most significant individual creditor, it could exercise significant influence through the creditors ’meeting. Nevertheless ,the position of a floating charge holder under Finnish law is not as strong in this respect as in some other jurisdictions.

Incorporation of the target business into a separate legal entity and subsequent creation of a share pledge over the shares in the target company could provide a viable structural solution in aiming to ensure that the SPV can, as an alternative to realising the target assets, continue the operations of the target business on its own account. This could be accomplished by way of the SPV taking ownership of the target shares and then continuing the target operations as the owner. The fair value of the target shares would be credited towards satisfaction of the secured debt.

Experiences from the securitisation transactions so far completed in Finland have demonstrated that the Finnish legal and regulatory framework provides a sound environment for securitisation. It may be that the fairly low transaction activity in Finland is a reflection of the fact that only a limited number of Finnish companies have sufficiently extensive pools of securitisable assets, such that the transaction costs associated with various securitisation structures would be justified. It remains to be seen whether the completed Tornator transaction will pave the way for more widespread use of whole business securitisation techniques in Finland.