Written by Shai Margalit, Shiri Shaham, Boaz Feinberg and Yarden Alon
Last month, a bill was submitted to the Israeli Parliament to introduce new legislation regulating securitization transactions in Israel for the first time (the “Bill”). The Bill was submitted following public comments on a draft published in July 2023.
The Bill defines what constitutes a securitization transaction under the proposed law and specifies that such transactions may only by conducted in compliance with its provisions. The Bill outlines limitations on the types of underlying assets, establishes the framework for carrying out securitization transactions, assigns responsibilities to the parties involved, and introduces regulatory oversight. This includes financial sanctions on regulated corporate entities and criminal fines for non-regulated entities that engage in securitization transactions in violation of the law.
The Bill further clarifies the legal consequences of a securitization transaction, specifying the conditions under which the transfer of underlying assets is considered a sale. This ensures that post-transfer, the underlying assets are no longer part of the assets of the company that initially owned them (referred to in the Bill as the ‘Initiator’), and that investors in the securitization transaction are not exposed to the Initiator’s insolvency risk.
Additionally, the Bill introduces amendments to other laws, including the Securities Law, to regulate securitization transactions involving public offerings, as well as amendments to the Income Tax Ordinance and the Value Added Tax Law to address the tax aspects of securitization transactions (as detailed below).
The main provisions of the Bill are as follows:
- Definition of a Securitization Transaction: A securitization transaction is defined as the transfer of two or more underlying assets to a special purpose entity (SPV), where bonds are issued in at least two different tranches. The law will not apply to transactions that do not involve the transfer of assets, such as synthetic transactions where only the credit risk is sold, nor to transactions involving the transfer of asset portfolios (loan sales) not carried out through an SPV or without different tranches, such as syndication transactions.
- Permitted Types of Underlying Assets: The Bill restricts the use of certain underlying assets in securitization transactions due to their risk profile. For example, underlying assets cannot include those derived from another securitization transaction, underlying assets that are contingent on certain obligations of the debtor in the original transaction (other than negligible obligations as defined in the Bill), and assets arising from loans whose underwriting process differs from that of similar loans provided by the creditor in the original transaction, where the right to receive repayments of those loans was not transferred as part of the securitization transaction.
- ‘Skin in the Game’: The Bill specifies that throughout the duration of the securitization transaction, the Initiator must retain part of the risk inherent in the underlying assets. This risk retention can be implemented in various ways set forth in the law, or in any other manner determined by the relevant regulators. Under the Bill, the risk retention rate must be at least 5% of the total value of the underlying assets, or a higher percentage as may be determined from time to time.
- Classification of the Transfer of Underlying Assets as a Sale: If the conditions specified in the Bill are met, the transfer of underlying assets from the Initiator to the SPV in a securitization transaction will be considered a sale.
- Mandatory Involvement of a Regulated Entity: An Initiator who is an unregulated entity must engage a regulated entity that will be responsible for planning and structuring the securitization transaction, including the establishment of the SPV, and will retain the risk inherent in the underlying assets on behalf of the Initiator.
- Loan to Finance the Purchase of Underlying Assets: The SPV may, upon entering into the securitization transaction, in addition to issuing bonds, take a loan from investors to finance the purchase of the underlying assets.
- Clean-Up Call Option: The SPV may transfer the underlying assets under a clean-up call option, allowing the Initiator to buy back the remaining underlying assets at the end of the transaction, subject to certain conditions.
- Replacement of Underlying Assets: If the underlying assets are repaid prior to the maturity date of the bonds, the Initiator may transfer other underlying assets to the SPV to replace the repaid asset, to maintain the value of the underlying assets held by the SPV.
- Transfer of Ancillary Rights: Upon a transfer of underlying assets to the SPV, all ancillary rights must also be transferred, unless they are non-transferable by law. “Ancillary rights” are defined in the Bill as any guarantees or pledges securing the transferred rights, as well as any other related rights.
- Amendments to the Income Tax Ordinance and the Value Added Tax Law: Currently, Israeli law does not provide a specific tax framework for securitization transactions, creating a significant barrier to the development of the securitization market, particularly due to income recognition timing for tax purposes. The Bill proposes adding a chapter to the Income Tax Ordinance addressing the tax treatment of securitization transactions, including the timing of taxation for the Initiator, tax treatment of the SPV, and implications forsignificant shareholders and related parties involved in securitization transactions.
- Indirect Amendments to the Securities Law: The Bill proposes amendments to the Securities Law, establishing a framework for public offerings of bonds issued by an SPV in securitization transactions, under a prospectus approved by the Israeli Securities Authority. It also sets conditions for the involvement of other parties in public securitization transactions, as well as their duties and disclosure obligations, as determined by the Israel Securities Authority.
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