Legislators in many jurisdictions have adopted payment moratoria as a debtor relief measure in view of the COVID 19 situation (please consult CMS Expert Guide to Coronavirus Related Loan Moratoriums
on this topic). The EBA issued guidance on the prudential treatment of assets held by banks under such moratoria (EBA/GL/2020/02) earlier this month. However, the effects that such moratoria may have on asset portfolios included in securitisation structures have largely remained unclear. As part of its statement on additional supervisory measures in the COVID-19 pandemic of 22 April 2020, the EBA has now provided some clarification on how to take account of the impact of such payment moratoria (and its related Guidelines) on existing securitisation structures and is also offering some clearly innovative and surprisingly pragmatic views on how to possibly manage the impact on the side of investors / collateral providers.
Prudential treatment of securitised assets
Relevant assets (Austria
): The EBA Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis (EBA/GL/2020/02) shall basically apply to exposure remaining on the originator bank's balance sheet (i.e. all underlying exposure under a synthetic transaction unless disposed of after inception and any exposure that has not been effectively transferred to an SPV under a traditional structure). Receivables in respect of which beneficial ownership has been transferred under a typical Austrian trust structure should be out of scope, in accordance with their off-balance sheet treatment.
Relevant assets classes (Austria)
: In accordance with the statutory payment moratorium as currently in force in Austria, loan receivables (principal and interest) towards consumers and microenterprises (Commission Recommendation 2003/361/EC) will be concerned. Typical LC, SME and leasing receivables are currently out of scope.
: According to the EBA, the entry into force of a general payment moratorium (as per EBA/GL/2020/02) should not automatically lead to the reclassification of securitised assets ("underlying exposures" in CRR terminology) as in default or in forbearance for the purposes of calculating KIRB or KSA, where those securitised exposures had not been classified as exposures in default or in forbearance prior to the date of entry into force of the relevant general payment moratorium. Deterioration in PDs (other than caused by non-payment under the moratorium as such) will continue to contribute to the calculation of expected and unexpected losses.
Prudential treatment of securitisation positions
It follows from the EBA's clarifications on assets falling within the scope of its Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis (EBA/GL/2020/02) that positions held by investors or originators in the securitisation (Art 2 (19) Securitisation Regulation) should rather continue to be treated in accordance with their CRR prudential treatment as it stands and in accordance with their terms. Moreover, in respect of securitisation positions, events of default, acceleration events, restructuring events or similar as they may have been defined under relevant documentation in connection with a general payment moratorium, shall remain unaffected.
EBA guidance on implicit support - permitted action
In the aim to bridge the gap between the treatment of underlying exposures (directly affected by relevant moratoria) and securitisation positions (proposed to largely continue to be governed by their terms and conditions as they stand), the EBA is expressly moving forward on allowing certain action that might otherwise be critical under the implicit support safeguard. According to the EBA, the following shall be permitted:
(i) Replacement of securitised assets which are subject to a general payment moratorium with assets of a similar risk profile not subject to any such moratorium;
(ii) Restructuring or amending the contractual documentation governing the securitised assets as appropriate or necessary to implement or comply with the general payment moratorium;
(iii) Not making a claim against a protection provider in a synthetic securitisation in connection with securitised assets subject to a general payment moratorium;
(iv) Liquidity support to the securitisation on a temporary basis and to address any shortfall in the securitisation that may occur as a result of a general payment moratorium, provided that the repayment of the liquidity facility is given the highest seniority in the securitisation’s priority of payments.
In respect of items (i) and (ii) above, the EBA itself insists on conformity ("where permitted") with contractual documentation. Whereas those actions are probably intended to make use of existing revolving, replenishment or replacement features in the first place, it should, so we believe, not preclude parties from making additional arrangements to existing documentation as long as this is in compliance with and remains within the scope of the new set of EBA guidance (and always bearing in mind the significant risk transfer test).
Under item (iii), originators as protection buyers may be able to navigate within the scope of the various definitions and periods as they are provided for credit events, loss determination and protection amount calculation under applicable documentation. (Older) realized loss oriented concepts will be more favourable in this regard.
Item (iv) seems to represent the highest degree of interference with existing structures. Any such feature will most likely require additional contractual arrangements.
Depending on the composition of relevant asset pools and existing documentation, the new set of EBA guidance may therefore allow for new flexible arrangements under the relevant protection and payout structure. As always in this context, careful economic and legal structuring will be required so as not to undermine the significant risk transfer test.