Will Israel finally have legislation facilitating securitization transactions?
Introduction
Although Israeli businesses are constantly looking for novel financing sources and structures as an alternative to the traditional banking financing, securitisation transactions have been quite scarce in the Israeli market. The main reason for this are:
- legal uncertainties, particularly in connection with the characterisation of the sale of receivables in a securitisation transaction as a “true sale”; and
- the validity of an assignment of future receivables.
The unclear tax treatment of these transactions adds a further layer of uncertainty.
These issues, among other obstacles, will hopefully be resolved, as the Israeli ministries of finance and justice recently published a bill of legislation, following many years of deliberation on this issue.
This bill proposes the adoption of a new law, the Law for the Regulation of Securitisation Transactions. The public is invited to submit comments on the bill by 13 September 2023.
The purpose of the bill is to introduce legal and economic certainty, which is essential for the adequate development of securitisation markets in Israel. The lack of specific regulation on this matter is perceived as the main barrier that has prevented this development so far.
It is hoped that a vibrant and developed securitisation market will increase the competition with the banking system and will contribute to a reduction in the financing costs for Israeli business borrowers.
Standard securitisation transaction
The bill follows the EU securitisation Directive (Directive 2017/2402), which sets forth a standard structure for securitisation transactions referred to as “simple, transparent and standard”.
The bill defines the precise structure and conditions of a standard securitisation transaction, and it essentially resolves the uncertainties only with respect to that structure.
This means that the legal uncertainties will remain unresolved if the parties elect to use more complex or less standard structures.
The bill describes the characteristics and the relevant players in a standard securitisation transaction as follows:
- A single purpose vehicle (SPV) is incorporated as an Israeli private company for the sole purpose of the securitisation transaction.
- The SPV issues debentures, either to the public or in a private issuance. It uses the proceeds to purchase certain defined receivables (including future receivables that are not yet created on the date of the sale) from another corporation (referred to as the “promoter”).
- The SPV may issue several series of debentures, each may be with a different degree of preference, provided that all series must be secured by the entire portfolio of receivables owned by the SPV.
- Collection of the receivables on behalf of the SPV is the duty of the “servicer”, which under certain circumstances may be the promoter itself, or may be another company appointed for this role. The servicer will be subject to certain duties, such as duty of care and refraining from conflicts of interest.
- The promoter cannot sell the rights in the receivables in their entirety but must remain the owner of a certain portion of the receivables, so as to remain exposed of the collection risk. Under the bill, the promoter must retain exposure to at least 5% of the risk, but the minister of finance will be authorised to increase this minimum percentage.
- Another player is the “organizer”, a company that initiated the transaction and acted as an intermediary between the promoter and the SPV.
True sale classification
The sale of the receivables from the promoter to the SPV will be considered a “true sale”, subject to certain conditions, thereby eliminating the currently existing risk that the sale will be considered a pledge over the assets of the promoter.
This means that the purchasers of the debentures will be exposed only to the risk associated with the value and collection of the receivables. They will not be at all exposed to any risk deriving from any other activities of the promoter, including if it enters insolvency proceedings.
The conditions are the following:
- The SPV is free and subject to no restrictions to execute any transaction in the receivables.
- All payments made under the receivables are transferred to the SPV immediately, within one business day.
- The purchase price of the receivables payable by the SPV to the promoter is fixed and not subject to adjustments over time, and it reflects the parties’ estimation of the value of the receivables.
- There is no recourse to the promoter if it eventually turns out that the value of the receivables was lower than the purchase price.
- The promoter does not generally have an option to repurchase the receivables, subject to a narrow exception regarding a “clean-up call” option relating to the last small portion of the receivables that will remain outstanding at the end of the transaction.
Sale of future receivables
The new law will eliminate another legal uncertainty as to the validity of an assignment of receivables that have not yet been created at the date of the assignment.
Such assignment will be considered as a sale of the relevant receivables on the date of their creation. This will allow the parties to agree in advance on a sale of certain pre-defined future receivables.
However, under the bill, such sale will not be recognised if the receivables are created after the issuance of an insolvency order against the promoter. It is likely that this exception will trigger comments, since its implication is that the SPV and the debenture holders do maintain some exposure to the other activities of the promoter, if the SPV pays in advance for future receivables.
Regulation of securitisation transactions
The primary regulator of securitisation transactions will be the Israeli Securities Authorities (ISA). The bill includes provisions relating to a public offering of debentures by the SPV and the liability of the various players in the event of misleading information in the prospectus under which the debentures are offered.
However, the ISA will be granted the authority to supervise also private securitisation transactions that do not involve public offering of debentures – that is if the value of the receivables exceeds a certain threshold, which is yet to be determined by the minister of finance.
Where the promoters are subject to the supervision of another regulator (eg, banks and insurance companies), these other regulators will have authority to supervise instead of the ISA. The regulators may impose certain reporting requirements on the relevant players, and the sales of receivables in securitisation transactions may be subject to registration requirements on a designated public registry to be established.
Clarity on taxation
Lack of clarity regarding the taxation of SPVs is perceived as an additional obstacle to the development of securitisations in the Israeli market. This is expected to be resolved, with the publication of a proposed amendment to the Israeli Income Tax Ordinance.
In essence, this amendment will determine an exemption to the normal rule of taxation on an annual basis. The tax payable by the SPV will be calculated and charged only at the end of the securitisation transaction, with all the gains and losses accruing during the entire lifetime of the transaction to be considered and netted.
Comment
The new proposed law, when implemented, will comprehensively regulate the various aspects of securitisation transactions, a development long waited in the Israeli market. Some details of the various arrangements are not known yet, as they are left to be completed by regulations, and a draft of these has not yet been published.
It is hoped that the market players will be active in submitting comments on the draft to further improve the legislation. It is also hoped that international financing entities, who have expertise on how these transactions work in practice, as well as interest in the Israeli financing market, will offer comments and provide valuable input.
This article was first publised in ILO. For more articles like this, visit our profile in Lexology.
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