Securitisation – Significant Event Information Disclosure related to COVID-19

The EU Securitisation Regulation[1] requires the reporting of “significant events” which occur in respect of securitisations issued on or after 1 January 2019. The EU Securitisation Regulation continues to apply in the UK during the Brexit transition period (expiring 31 December 2020, unless extended) and will continue to apply after the transition period as on-shored retained legislation[2].

This note summarises these reporting requirements and their application to securitisation transactions affected by the COVID-19 pandemic.

The “significant event” reporting obligation

Article 7(1)(g) of the EU Securitisation Regulation requires the originator, sponsor and issuer of a securitisation[3] to make available to the holders of a securitisation position, to the relevant competent authorities and, upon request, to potential investors, information on any “significant event”, including the following:

1. a material breach of the obligations under the transaction documents, including any remedy, waiver or consent subsequently provided in relation to such a breach;
2. a change in the structural features that can materially impact the performance of the securitisation;
3. a change in the risk characteristics of the securitisation or of the underlying exposures that can materially impact the performance of the securitisation;
4. in the case of STS securitisations[4], where the securitisation ceases to meet the STS requirements or where competent authorities have taken remedial or administrative actions; and
5. any material amendment to the transaction documents.

This provision applies to securitisations falling outside the scope of the Market Abuse Regulation (“MAR”)[5] and is intended to ensure that securitisations outside the scope of MAR nevertheless have obligations to make available information relating to significant events.

Failure to disclose as required could result in material regulatory penalties, as well as causing the relevant entity to breach information disclosure and compliance undertakings in transaction documents.

What is a “significant event”?

The list of events set out in Article 7(1)(g) is non-exhaustive. In its regulatory technical standards on disclosure requirements under the EU Securitisation Regulation (the “Disclosure RTS”)[6], the EU regulatory authority ESMA provides further guidance. The Disclosure RTS define a “significant event” for these purposes as “an event that would be likely to materially impact the performance of the securitisation as well as have a significant effect on the prices of the tranches/bonds of the securitisation”[7]. As such, according to the Disclosure RTS, the test to be applied in respect of the significant event reporting requirement under the EU Securitisation Regulation is essentially the same test that applies in respect of the inside information reporting requirement under MAR.

The relevant information has to be made available “without delay” and regardless of the reporting interval for the underlying exposures and investor reports.[8]

Impact of COVID-19 measures

Measures to alleviate the impact of the COVID-19 pandemic are likely to result a rise in delinquencies and, eventually, defaults of assets backing some securitisations and other structured finance transactions.

The impact of COVID-19 on securitisations will need to be assessed on a deal-by-deal basis. Certain types of securitisations are likely to suffer a significant effect on their cashflow generation in the short-to-medium term: for instance CMBS or whole-business transactions backed by retail, hotels, pubs or other leisure assets, and securitisations backed by income streams linked to aviation or oil and gas. However, based on the performance of European securitisations in the financial crisis in 2008-9 and regulatory and structural changes since then, most market participants do not anticipate that these types of cashflow issues will lead to losses on investment-grade ABS.

Impacts on securitisations may include one or more of the following types of event:

1. Asset-level events: Article 7(1)(g)(iii) includes as a significant event "a change in the risk characteristics of the securitisation or of the underlying exposures that can materially impact the performance of the securitisation". Examples may include (for RMBS) a material increase in the loans subject to government-backed forbearance measures such as payment holidays or (for CLOs) a material increase in defaulted obligations, deferring obligations or assets rated ‘CCC’ or below.
2. Test breaches: loan-to-value and debt service coverage covenants, among others, may be breached. Waivers will often be required to avoid defaults and, in the longer term, amendment of covenant packages or equity cures for certain CMBS or whole-business transactions may be needed.
3. Cash trapping: excess spread or other residual cash otherwise payable to the originator or subordinated classes of notes may be trapped and/or applied to prepay senior debt so as to de-lever the transaction.
4. Stop purchase events: securitisation warehouses or funding facilities may include mark-to-market triggers requiring a draw-stop based on a decline in the portfolio market value, with the result that the portfolio backing the transaction becomes static.
5. Credit/liquidity reserve funding requirements: securitisations may trigger requirements to capitalise credit or liquidity reserves that have to be funded or, in the case of a liquidity facility, drawn down if certain performance tests are failed. The credit or liquidity support provider may itself be subject to liquidity or credit constraints in complying with these requirements.
6. Events of default/enforcement events: if the issuer cannot service its debt and the transaction defaults, investors may accelerate the debt and/or take enforcement action.
7. Margin/collateral calls: securitisations with derivative or margin lending components may require margin or collateral calls to be made against counterparties or mandatory prepayment requirements may be triggered.
8. Loan rescheduling: as part of the measures taken to face the economic consequences of COVID-19, the originators/servicers may suspend or reschedule instalments under securitised loans. Those measures may be imposed by law (in certain jurisdictions) or negotiated with the investors. Such suspension or rescheduling may have a significant negative impact on the payment of the senior items of the waterfall (including senior costs and interest in respect of senior notes) and require the implementation of additional cash reserves.

While some of the types of event listed above (such as default and enforcement) are clearly “significant” of themselves, events of other types will need to be assessed on a case-by-case basis to determine whether they are likely to materially impact the performance of the securitisation, as well as having a significant effect on the prices of the tranches/bonds of the securitisation.

Reporting mechanics

The originator, sponsor and issuer of a securitisation are required to designate amongst themselves one entity to fulfil the information requirements. That entity must make such information available by means of a securitisation repository or, if no securitisation repository has been registered, by means of a website that meets the requirements of Article 7(2) of the EU Securitisation Regulation.

Once the Disclosure RTS come into force, disclosure for public securitisations should be made using the templates set out in the Disclosure RTS[9]. For private securitisations there is no prescribed form of report. If periodic reports are being made available on a website, it is anticipated that significant event reporting will also be made available on that website.

Conclusion

Securitisation market participants should carefully assess whether any events or anticipated future measures in relation to securitisations to which they are a party will require disclosure as a “significant event” under the EU Securitisation Regulation.

If you would like to discuss any securitisation information disclosure issues in further detail, please contact one of the CMS contacts below.

[1] Regulation (EU) 2017/2402 of the European Parliament and of the Council (the “EU Securitisation Regulation”), Article 7(1)(g).

[2] As amended by the Securitisation (Amendment) (EU Exit) Regulations 2019.

[3] The reporting requirement applies both to a public securitisations (i.e. securitisations where a prospectus has been drawn up in compliance with the Prospectus Directive (Directive 2003/71/EC of the European Parliament and of the Council) or its successor, the Prospectus Regulation (Regulation (EU) 2017/1129)) and to private securitisations: see ESMA’s “Questions and Answers on the Securitisation Regulation”, Version 5, updated 28 May 2020 (the “ESMA Q&A”), A5.15.5.

[4] i.e. simple, transparent and standardised securitisations in accordance with the framework for such securitisations established by the EU Securitisation Regulation

[5] Regulation (EU)No. 596/2014 on insider dealing and market manipulation (“MAR”). Article 7(1)(f) of the EU Securitisation Regulation requires disclosure of inside information relating to a securitisation that the relevant originator, sponsor or issuer is obliged to make public in accordance with Article 17 of MAR.

[6]Revised draft regulatory and implementing technical standards (disclosure RTS/ ITS) on the EU Securitisation Regulation, 31 January 2019, paragraph 23: https://www.esma.europa.eu/press-news/esma-news/esma-publishes-opinion-and-qa-disclosure-technical-standards-under

[7] Ibid. “In this regard, ESMA considers that changes to the underlying exposures and investor report information constitute such an event” (presumably subject to the materiality and price impact requirements).

[8] ESMA Q&A, A5.15.6.

[9] Annex 14 (for non-ABCP securitisations) or Annex 15 (for ABCP securitisations), making use of the ‘other information’ section if necessary to fully and adequately describe the significant event.