Booth, Charles D.

English

bepress Legal Repository

Securitization in Emerging Markets, Including Government Promotion of Securitization: A Comment on Hill & Arner

Duke Law Scholarship Repository

BOOTH - COMMENT_FMT.DOC 06/04/02 4:06 PM533SECURITIZATION IN EMERGING MARKETS,INCLUDING GOVERNMENT PROMOTIONOF SECURITIZATIONA COMMENT ON HILL & ARNERCHARLES D. BOOTH*The articles by Professors Doug Arner and Claire Hill addresstwo aspects of securitization in emerging markets.  Professor Arner’sarticle, Emerging Market Economies and Government Promotion ofSecuritization, describes the benefits of securitization, provides anoverview of the key underlying elements that are necessary for thedevelopment of securitization in emerging markets, and stresses theneed for government leadership in the process.  Professor Hill’s arti-cle, Whole Business Securitization in Emerging Markets, focuses onthe benefits and value that could result in emerging markets frompursuing a relatively new form of securitization—the securitization ofwhole businesses.Emerging markets could indeed benefit from securitization.  Forexample, many financial institutions would not have been as ad-versely affected by the Asian financial crisis if they had been able tospread out their risk through the use of mortgage-backed securitiza-tion.  However, the establishment of securitization structures will taketime.  As Professor Arner argues, “traditional asset securitizationstructures cannot simply be ‘parachuted’ into individual financial sys-tems.”1  Rather, a “complex matrix of supporting elements, all ofwhich have a significant legal element,” must be put into place for as-set securitization to be successful.2  With regard to the traditional andmost common form of asset securitization, the securitization of mort-gages, he rightly argues that this matrix must include the followingCopyright © 2002 by Charles D. Booth* Associate Professor and Director, Asian Institute of International Financial Law(AIIFL), Faculty of Law, University of Hong Kong.1. See Douglas Arner, Emerging Market Economies and Government Promotion of Secu-ritization, 12 DUKE J. COMP. & INT’L L. 505, 506 (2002).2. Id.BOOTH - COMMENT_FMT.DOC 06/04/02  4:06 PM534 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 12:533elements: (1) a real estate-based finance market (the primary mort-gage market); (2) capital markets (including secondary mortgagemarkets and domestic bond markets); and (3) infrastructure sup-porting securitization.3  Professor Arner highlights the need for gov-ernment involvement in developing these three elements and pro-moting mortgage securitization.  Governments must pay particularattention to the development of the necessary economic and legalframework for supporting securitization.  Furthermore, ProfessorArner correctly stresses that in emerging markets, this considerationnecessitates starting with the enactment and enforcement of clear realproperty rights, efficient mechanisms for transferring these rights (in-cluding bankruptcy and foreclosure laws), and the use of real prop-erty as collateral.4  It cannot be overemphasized that anticipatedbenefits from securitization will not accrue until these basic mattersare properly addressed.Professor Arner might consider adding a fourth element into thematrix—infrastructure for cross-border securitization.  Banks in manyemerging countries, and in Asia in particular, would most likely haveto hold a regional portfolio of investments in order to achieve thesame level of diversification that U.S. banks holding a national port-folio achieve.  It is difficult enough to determine how to perfect secu-rity interests in mortgage-backed securities when focusing on the lawsof one country with developed securitization procedures in place;these determinations are more complicated in cross-border scenariosinvolving emerging markets.Professor Hill focuses on a different aspect of securitization, thebenefits that would result in emerging markets from whole businesssecuritization.5  In such a transaction, a group of creditors provides acompany’s entire debt funding through a special purpose vehicle(SPV).  The creditors agree at the time the loan is made on their re-spective rights and obligations if the company later encounters finan-cial problems.In a whole business securitization, simultaneously with the SPVmaking the loan, the corporate borrower grants the SPV fixed andfloating charges on all its corporate assets.  This is a crucial part of the3. Id. at 506–07.4. Id. at 514.5. See Claire A. Hill, Whole Business Securitization in Emerging Markets, 12 DUKE J.COMP. & INT’L L. 521 (2002).  As she notes, whole business securitization would include “notonly the firm’s receivables, but also its plant, property and equipment, intellectual property, andall its other assets.” Id.BOOTH - COMMENT_FMT.DOC 06/04/02  4:06 PM2002] COMMENT 535transaction, for as Professor Hill emphasizes, the success of wholebusiness securitization requires that the priority rights of securedcreditors are absolutely respected.  At present, this level of protectionis possible primarily in jurisdictions that have adopted the conceptsfrom U.K. company law of respecting the priority of fixed and float-ing charges in corporate insolvencies6 and, upon default, of allowingthe holder of a floating charge over all or substantially all of thedebtor’s assets to appoint an administrative receiver/receiver to man-age the company for the holder’s benefit.7  It is therefore not surpris-ing that Professor Hill notes that whole business securitization hasbeen used in Malaysia and is being considered for use in both HongKong and Singapore.Professor Hill argues that for a business to be a suitable candi-date for whole business securitization, the following factors are desir-able: fairly predictable cash flow, a stable operating history, managerswho are not indispensable, careful monitoring of the company and itscash flow, and no need for regular additional financing.8  Neverthe-less, Professor Hill acknowledges that these factors are not required,and she concedes that several of the conditions were not met in theone whole business securitization in Asia to date (of 1st Silicon (La-buan) Inc., in Malaysia in June 2001).9  Indeed, at present many com-panies in emerging markets, particularly in Asia, will have difficultycomplying with these factors for the following reasons: reliable, high quality cash flows are difficult to achieve;10 many companies in Asia (even many, large publicly-heldcompanies) are family-controlled; family members are oftenactively involved in day-to-day management and are indis-6. Preferential debts (e.g., statutory amounts payable to employees) rank in priority toany charge created as a floating charge.7. Ironically, the United Kingdom itself is in the process of cutting back the rights of se-cured creditors.  The recent White Paper, DEPT. OF TRADE & IND., INSOLVENCY–A SECONDCHANCE (Cm. 5234, July 2001), proposed to abolish administrative receivership, except in con-nection with certain transactions in the capital markets.  Although the wording is not clear, itappears that the intention is for qualifying securitization transactions to be protected.  The re-cent DTI Press Notice (P/2001/629, Nov. 9, 2001) clarified that these changes would not applyretrospectively to lending agreements in place when the legislative amendments come into op-eration.  See David Milman, The End of Administrative Receivership?, 2002 INSOLVENCYLAWYER 1, 1.8. Hill, supra note 5, at 526.9. These deficiencies were offset by a guarantee provided by the Sarawak Economic De-velopment Corp and by a letter of support from the Sarawak state government.  Id. at 526–27.It is clear that even in whole business securitization, there is an important role to be played bythe government.10. Professor Hill herself queries how many firms will satisfy this element.  Id. at 531.BOOTH - COMMENT_FMT.DOC 06/04/02  4:06 PM536 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 12:533pensable to the running of the company; companies frequently need additional financing, and it is notuncommon in Asia for companies to borrow from manylenders;11 and monitoring by banks is generally poor.12In Professor Hill’s view, the primary benefit achieved by wholebusiness securitization is the minimization of bankruptcy costs re-sulting from the agreement between the entire group of creditorswhen the loan is made concerning their respective rights and obliga-tions if financial difficulties later arise.  Additional benefits in Hill’sview are the specialization benefit (with an active trustee taking thelead in the monitoring of the company) and the enhanced ability toaccess the capital markets.However, the insolvency-related benefits in emerging marketsmay be less than Professor Hill anticipates.  Where a company subjectto a whole business securitization agreement defaults, an administra-tive receivership or receivership will frequently ensue.  The insol-vency-related cost savings that Professor Hill identifies seem morelikely to arise in jurisdictions in which developed insolvency and se-cured transactions regimes enable such receiverships to proceed effi-ciently.  It will be much more difficult for these cost savings to mate-rialize in emerging markets that lack these regimes.Overall, it seems to me, and I suspect that Professor Hill wouldagree, that frequent use of whole business securitization in emergingmarkets, especially in Asia, is at least a good decade away, if it occursat all.  In contrast, over the next ten years, as the matrix of factorsthat Professor Arner describes are put into place, the securitization ofmortgages, as well as of credit card receivables and auto loans, willbecome much more common in emerging markets.11. For background on the corporate insolvency laws and practices of eleven Asianeconomies, see Local Studies of Insolvency Law Regimes, available at http://www.insolvencyasia.com/local_studies.html (last visited Apr. 12, 2002).12. However, as Professor Hill suggests, the trustee appointed pursuant to the creditors’agreement might be able to perform this task more efficiently.  Hill, supra note 5, at 528.

https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1180&amp;context=djcil

Securitization in Emerging Markets, Including Government Promotion of Securitization: A Comment on Hill & Arner

Abstract

Similar works

Full text

Available Versions

bepress Legal Repository

Duke Law Scholarship Repository