JOINT CONFERENCE ON REMITTANCES

12-13 September 2005

ADB, Manila, Philippines

Presentation

SECURITIZATION OF REMITTANCES
(BREAK-OUT SESSION)

JAMES PATTI
Partner
Mayer, Brown, Rowe & Maw LLP

The views expressed in this paper are those of the author and do not necessarily
reflect the views and policies of the Asian Development Bank (ADB). ADB does
not guarantee the accuracy of the data presented. The country(ies) referred to in
this paper does not imply any views on ADB's part as to sovereignty or
independent status or necessarily conform to ADB's terminology.
Securitization of Remittances
Joint Conference on Remittances
(Break-out Session)

Manila, The Philippines

September 13, 2005
by Jim Patti, Partner
Mayer, Brown, Rowe & Maw LLP
(312) 701-8476
[email protected]
What is Securitization?

• Securitization is the transfer (generally as a “true sale”) of

receivables or other payment rights to a single purpose
vehicle (“SPV”), which SPV then incurs debt secured by its
ownership of these receivables/rights
• While similar in many respects to a secured financing, a
“true sale”-based securitization is distinct in various ways,
including:
ƒ Sold receivables are not owned by the bank and would
not be included in its bankruptcy estate (i.e., not subject
to claims of any other creditors or other persons)
ƒ Liability of the bank for losses by creditors may be
somewhat more limited than in straight debt issuances
(i.e., transaction need not be “full recourse” to the bank)
What is Securitization?

• Remittance securitizations can differ in some important respects

from traditional securitizations in developed markets
ƒ These transactions are “future flow” securitizations that securitize the
on-going business of the bank instead of a discrete pool of existing
receivables such as mortgages – as such, the deals rely significantly
on the strength of the bank (i.e., its ability to continue generating
sufficient remittances through the life of the transaction)
ƒ “Future flow” transactions are generally “on balance sheet”
• A primary goal of the structure is to insulate the remittances as
much as possible from sovereign-related risks
ƒ Remittances are payable in hard currencies by off-shore obligors,
which make payments directly to the SPV
ƒ SPVs are generally off-shore, such as in the Cayman Islands
Typical Remittance Securitization Structure
Bank’s Home Jurisdiction Offshore Jurisdiction
1
Remittances The SPV

US$
US$/€/¥
Notes
Bank
2
International

Creditors

1) A “true sale” to the SPV under local law of the bank’s rights in (but none
of its obligations under) the securitized remittances
2) The SPV finances its purchase of the remittances by incurring debt
secured by the remittances and their collections
Advantages of the Securitization of
Remittances
• Source of long term capital (5-10 years) not always
available to banks in emerging markets
• Establishing relationships with new creditors,
including potential for “AAA” investors if an
“wrapped” structure is used
• Alternative to funding from commercial banks
• Attractive pricing compared to unsecured bonds
• Achieve a rating higher than the host country’s
foreign currency sovereign rating (often as high as
the bank’s domestic or “survivability” rating)
Important Considerations

• Though this may be mitigated by having full or

partial recourse to the bank, the creditors take the
risk that the volume of remittances will decline or
even disappear
• As a portion of the remittance collections are
withheld from the bank and used to pay creditors,
the bank needs alternative sources of liquidity to
make its payments to the beneficiaries
• While governmental interference is intended to be
mitigated, banks remain subject to oversight and
control by local governments
Some Countries in which Remittance
Securitizations have been Closed/Started
Brazil Mexico
Ecuador (pending) Peru
Egypt (pending) Russia (pending)
El Salvador South Africa
Honduras (pending)
Turkey
Kazakhstan
Presentation Schedule

• What are “Diversified Payment Rights?”

• Securitization of DPRs
• Legal Issues
• Transaction Issues
What are “Diversified Payment Rights?”
What are “Diversified Payment Rights?”

Diversified Payment Rights

• Remittances can be of various natures – such as

credit card payments, wire remittances or check
payments
• First remittances to be secured included credit card
payments as these are relatively simple to
understand and structure for
• Most common remittances for securitizations are
currently wire transfers – generally referred to as
“diversified payment rights” or DPRs
What are “Diversified Payment Rights?”

Wire Transfer

Any jurisdiction (including bank’s Bank’s Home Jurisdiction

home jurisdiction)

Depositary Beneficiaries
Sender Bank
Bank
Local
US$/€/¥ Payment Order Currency
and US$/€/¥ or
US$/€/¥
What are “Diversified Payment Rights?”

Wire Transfer Systems

• S.W.I.F.T. – international messaging system owned

and maintained by the member banks (payment
orders only – no settlement)
ƒ MT103/103+ - This is sent by the ordering customer’s
bank to the beneficiary’s bank and is used to convey a
funds transfer instruction
• FEDWIRE – developed and maintained by the
United States Federal Reserve (payment orders and
settlement)
What are “Diversified Payment Rights?”

MT 103 and MT103+

• Examples:
ƒ Payments to local exporters (other than transactions
involving paperwork, such as “cash against documents”
or letter of credit/documentary credit export sales)
ƒ Foreign direct investment
ƒ Tourism-related payments to travel agencies
ƒ Personal wire transfers or “workers’ remittances”
ƒ Payments to local service providers
ƒ “Local Flows”
What are “Diversified Payment Rights?”

S.W.I.F.T Message and Cash Flow

Any jurisdiction (including the

bank’s home jurisdiction) Bank’s Home Jurisdiction

US$/€/¥ MT 103+
Depositary & & US$/€/¥
Sender
Payor Bank

Beneficiaries
US$/€/¥ Bank
Local
Currency
Intermediary Depositary & MT 103+ or US$/€/¥
& US$/€/¥
Bank Payor Bank

MT 103+/Fedwire
& US$/€/¥
What are “Diversified Payment Rights?”

S.W.I.F.T Message and Cash Flow

Any jurisdiction (including the

bank’s home jurisdiction) Bank’s Home Jurisdiction

US$/€/¥ MT 103+
Depositary & & US$/€/¥
Sender
Payor Bank

Beneficiaries
US$/€/¥ MT103+ Bank
Local
Currency or
Payor Depositary MT 910 US$/€/¥
& US$/€/¥
Bank Bank

MT 202/Fedwire
& US$/€/¥
What Are “Diversified Payment Rights?”
Legal Definitions
What are “Diversified Payment Rights?” – Legal Definitions

The Securitization of Wire Transfer Payments

Uses Specific, but Broad, Definitions
• “Payment Orders”
• “Diversified Payment Rights”
• “Local Flows”
What are “Diversified Payment Rights?” – Legal Definitions

Payment Orders

• An electronic or other message to instruct the bank to make a

payment to any beneficiary other than the bank, which message
may be:
ƒ An MT102+, MT103+ or any other MT100-category message under
the SWIFT message system (or, unless specifically excluded, an
MT202 payment order received by the bank for payment to another
financial institution), or
ƒ Any other type of message, including via Fedwire, CHIPS, telex or
the internet, that may be utilized to send such an instruction
• Payment Orders would also include similar instructions received
by the bank’s foreign branches from customers of such branches
(e.g., local deposit customers who request that their accounts with
the bank be debited in order to effect a payment to a beneficiary in
the bank’s home jurisdiction)
What are “Diversified Payment Rights?” – Legal Definitions

Diversified Payment Rights

• All rights (but none of the obligations) of the bank in [U.S.

Dollar]-denominated Payment Orders received (or to be
received) by the bank (including its right to receive and/or
retain for itself all payments made in connection with such
Payment Orders)
• The bank will sell its rights to:
ƒ Receive [U.S. Dollars] for “post-acceptance”
Payment Orders (i.e., funds that are received after
the bank “accepts” the Payment Order)
ƒ Retain [U.S. Dollars] for “pre-acceptance”
Payment Orders (i.e., funds that are received
before the bank “accepts” the Payment Order)
• Certain “nostro” accounts to which collections on the DPRs
are deposited will also be assigned to the SPV
What are “Diversified Payment Rights?” – Legal Definitions

Diversified Payment Rights

• Diversified Payment Rights as defined earlier do NOT include:

ƒ Payments to the bank (e.g., repayments of loans, treasury operations
and fees), including those that come to a correspondent of the bank
for the benefit of the bank via an MT202 payment order (except to the
extent to effect payment for a payment order received by the bank)
ƒ Credit card payments and check collections (which are not payment
orders instructing the bank to make a payment to a third-party
beneficiary and generally are MT202s for benefit of the bank)
ƒ Collections on “cash-against-documents” transactions (which are
advised under an MT400)
ƒ Collections on letter of credit-backed export transactions (which are
advised under an MT756)
• Any or all of the above COULD be included; however, certain of
the above are less desirable to investors and others (such as credit
cards) may be better-off done via a separate securitization as this
may bring certain benefits (such as lower debt service coverage
requirements)
What are “Diversified Payment Rights?” – Legal Definitions

Diversified Payment Rights

• It is very important to note (and have confirmed in the

bank’s jurisdiction) that payments to the bank relating
to Payment Orders ARE OWNED BY THE BANK AND
NOT THE NAMED BENEFICIARY. In other words, the
bank does not act as a trustee of these funds but the
bank is performing a service for the sending bank, gets
paid for doing so by the sending bank (and thus
becomes the owner of these flows) and incurs a
matching obligation to the beneficiary. In this regard,
such payments are similar to deposits made into a
deposit account.
What are “Diversified Payment Rights?” – Legal Definitions

Local Flows

• Many jurisdictions permit residents to make

payments in currencies other than the local
currency (e.g., make a payment in Dollars in The
Philippines)
• The related payment orders go through SWIFT or
the local banking system, though they may “settle”
in a bank in the jurisdiction of the relevant currency
(e.g., in the United States if a Dollar payment)
• Such flows are related to “Payment Orders” and are
thus included in the securitization
Securitization - Structure
Securitization—Structure

Sale of the Diversified Payment Rights

• In the securitization of Diversified Payment Rights

(or “DPRs”), a special purpose vehicle (the “SPV”) is
formed to incur debt secured by the flow of funds
arising from the DPRs
• A securitization of DPRs contemplates a sale of the
bank’s right, title and interest in and under (but none
of its obligations under) the Payment Orders to the
SPV, the purchase of which the SPV finances by
incurring debt that is secured by the SPV’s rights in
the DPRs and the proceeds thereof
Securitization—Structure

Sale of the DPRs

• The bank retains all of its obligations to make

applicable payments to the ultimate beneficiary of a
Payment Order
• The sale will be governed by local law (i.e., the law
of the bank’s home jurisdiction)
Securitization—Structure

Sale of Diversified Payment Rights

Bank’s Home Jurisdiction Offshore Jurisdiction
1
Diversified
Payment The SPV
Rights
US$/€/¥
US$/€/¥
Notes
Bank
2
International

Creditors

1) A sale of the bank’s right, title and interest in and under (but none of its
obligations under) the Diversified Payment Rights to the SPV,
2) The purchase of which the SPV finances, in part, by incurring debt
secured by the DPRs and their collections
Securitization—Structure

“Master Structure” Provides

Flexibility and Cost-savings
• The primary documents used in the structure are:
ƒ Origination Agreement
ƒ Bill of Sale
ƒ Servicing Agreement
ƒ Indenture (or Loan Agreement)
ƒ Supplement(s)
ƒ Acknowledgments
Securitization—Structure

Origination Agreement

• The Origination Agreement is between the bank

and the SPV
• Pursuant to the Origination Agreement:
ƒ The bank will acknowledge its sale of the DPRs to the SPV pursuant
to the Bill of Sale,
ƒ The bank will agree to provide funds to the SPV to redeem the debt in
full upon the occurrence of certain “Defaults,”
ƒ The bank will make certain representations and covenants,
ƒ The SPV will issue the Originator Note for payments to the bank, and
ƒ The SPV will agree to pay to the bank the proceeds of each of its debt
incurrences
• The Origination Agreement will be governed by New York law
Securitization—Structure

Originator Note

• Collections on DPRs in excess of the required debt

service are paid to the bank on a daily basis under
the Originator Note
• The Originator Note will be governed by New
York law
Securitization—Structure

Bill of Sale

• A two page agreement between the bank and the

SPV in which the bank sells the DPRs to the SPV
• Will not have any on-going obligations of either
party (i.e., will be a fully-performed document
upon its effectiveness)
• Will be governed by local laws (i.e., the law of the
bank’s home jurisdiction)
Securitization—Structure

Servicing Agreement

• The Bank will agree to service the Payment Orders pursuant to

the Servicing Agreement
• As Servicer, the bank will be responsible for:
ƒ Recording all pertinent information relating to the Payment
Orders in the same fashion that it currently handles its Payment
Order flows (sender, beneficiary and local account number,
amount, timing, etc.)
ƒ Processing the collections on the DPRs and otherwise servicing
the DPRs for the SPV
ƒ Preparing periodic reports for investors
• The Servicing Agreement will be governed by New York law
Securitization—Structure

Indenture (or Loan Agreement)

• Master agreement setting forth the general terms for the

issuance of Notes, payment mechanics, covenants and
representations of the SPV, the rights of the creditors and
amendment terms
• Fixes periodicity of interest periods (generally quarterly) and
payment dates
• Alternative structures for bank loans are possible, though we
recommend the use of a two-SPV structure in order to avoid
additional complexity in the general transaction documents
• The Indenture will be governed by New York law
Securitization—Structure

Supplement(s)

• A separate Supplement sets forth, for each series of debt, the

specific characteristics of the offering:
ƒ Tenor
ƒ Pricing
ƒ Amortization (interest-only period?)
ƒ Series-specific mandatory prepayment events (called “Early
Amortization Events” or, in some cases, additional “Defaults”)
ƒ Series allocation waterfalls
ƒ Form of the securities
ƒ Enhancements (such as “wrappers”)
• The Supplements will be governed by New York law
Securitization—Structure

“Master” Indenture Plus One or More

Supplements Provides Flexibility
• Different series can have different tenors and amortization
schedules
• Notes can be issued in multiple currencies (e.g., U.S.
Dollars, Yen, Euro, etc.), though rating agencies, enhancers
or others may restrict and/or require hedging
• Notes can bear either a fixed or floating interest rate
• Notes can be “enhanced” (e.g., supported by a financial
guarantee or “wrap”) or “unenhanced” (e.g., not supported
by a wrap)
• Notes can be offered to investors in several ways (e.g.,
publicly-registered, 144A or “pure” private placement)
Securitization—Structure

Account Agreements

• Agreements among the bank, the Indenture Trustee, the SPV

and some of the bank’s correspondent banks at which the
bank maintains deposit accounts
• Once a correspondent bank signs an Account Agreement, it
becomes a “Designated Depositary Bank”
• Each Account Agreement gives direct or beneficial
ownership of the bank’s current nostro account at the
applicable Designated Depositary Bank to the SPV and
control thereof to the Indenture Trustee (at such time the
nostro account becomes a “Collection Account”) and
contains a waiver by the Designated Depositary Bank of its
right to set-off against funds on deposit in the Collection
Account
Securitization—Structure

Account Agreements

• Once an Account Agreement becomes effective, the

bank will no longer have any claim to or control over
the Concentration Account (as such, the bank will need
to ensure that there are no payments FROM such
account in the system at the time of closing)
• Each Account Agreement will also provide that the
bank will open a new deposit account (the “New Nostro
Account”) at such Designated Depositary Bank to
replace the converted nostro account
• The bank may route to its New Nostro Accounts all
payment flows that have not been included in the
securitization
Securitization—Structure

Account Agreements

• Pursuant to each Account Agreement, each Designated

Depositary Bank will be instructed by the Indenture
Trustee to: (a) until debt service is trapped to pay the
SPV’s creditors, transfer all funds in its Collection
Account to a trust account maintained by the Indenture
Trustee (the “Concentration Account”), and (b)
thereafter, transfer all excess to the bank’s New Nostro
Account at such Designated Depositary Bank
Securitization—Structure

Account Agreements

• Any Account Agreements with U.S. banks will generally be

governed by New York law
• Any Account Agreements with non-U.S. banks will generally be
governed by the law of the correspondent bank’s jurisdiction (or
the law where the account is maintained)
• While Account Agreements have already been negotiated with
various US, German and other banks (including the larger
correspondents), the process of finalizing these documents can be
lengthy and is thus suggested to be started early in the transaction
• No such agreements have yet been signed with Asian banks
Securitization of DPRs–Structure

Notes May Be Offered in Several Ways

• Public offering
ƒ While possible, this is extremely unlikely for these
transactions as targeted investors are a limited group
of sophisticated institutions
• 144A/Regulation S (i.e., exempt from US registration
requirements)
• Traditional private placement under Section 4(2) of the
Securities Act of 1933
• Transactions can also be structured as a bank loan, though
this has been quite infrequent due to banks’ reluctance to use
their balance sheet and, when they are willing to, a conduit
transaction is more frequently used
Securitization—Cash Flow
Securitization–Cash Flow

S.W.I.F.T Message and Cash Flow prior to

Securitization
Any jurisdiction (including the
bank’s home jurisdiction) Bank’s Home Jurisdiction

US$/€/¥ MT 103+
Depositary & & US$/€/¥
Sender
Payor Bank

Beneficiaries
Bank
US$/€/¥ Local
Currency or
Depositary & MT 103+ US$/€/¥
& US$/€/¥
Payor Bank
Securitization–Cash Flow

S.W.I.F.T Message and Cash Flow after

Securitization
Any jurisdiction (including the Bank’s Home Jurisdiction
bank’s home jurisdiction) MT 103+
and
US$/€/¥ US$/€/¥
Depositary & Beneficiaries
Sender Bank
Payor Banks Local
Currency or
MT 103+ US$/€/¥

Offshore Jurisdiction International

US$/€/¥
Designated
Creditors
Depositary & The SPV
Payor Bank(s)
US$/€/¥ US$/€/¥
Term Sheet

Cash Flow After an

Early Amortization Event
Any jurisdiction (including the Bank’s Home Jurisdiction
bank’s home jurisdiction)
US$/€/¥ Depositary & Beneficiaries
Sender Payor Banks Bank
(as possible) Local
Currency
or US$/€/¥
US$/€/¥
Offshore Jurisdiction International
US$/€/¥
Designated
Creditors
Depositary & The SPV
Payor Bank(s)
US$/€/¥ US$/€/¥

In certain circumstances, a portion of the collections may continue to

be shared with the bank
Securitization–Cash Flow

Total Cash Flow to the Bank

• Assuming a $300 million offering with a 5-year life, $100

million in total interest and $2 billion annual total flows, the
bank will receive the following amount from the transaction:
ƒ $0.3 billion (initial issuance proceeds)
ƒ $9.6 billion (5-year total flows minus debt service)
ƒ $9.9 billion
• As such, the bank delivers $10 billion of flows to the SPV in
return for $9.9 billion, with the only difference being the
$100 million interest/cost of funds. Of course, even this
interest cost should be mitigated, or even eliminated, by the
profit made by the bank by investing the initial $300 million
of proceeds.
Legal Issues
“True Sale”—Approvals—Conflicts
Legal Issues

Legal Issues

• Confirming that local counsel can render a legal

opinion that the transfer of the DPRs is a “true
sale” in the bank’s home jurisdiction
• Identifying and obtaining any necessary
governmental and other approvals (e.g., Central
Bank and shareholders)
• Confirming that the DPR transaction will not
conflict with any existing contractual obligation of
the bank (e.g., any negative pledges or limitations
on asset sales)
Legal Issues

“True Sale”

• Necessary to ensure that, upon the insolvency of

the bank, the bankruptcy trustee/intervenor would
not have any claim to the DPRs
• Host jurisdiction’s insolvency/bankruptcy laws for
banks need to be reviewed closely to ensure that the
bankruptcy trustee/intervenor cannot do anything to
reverse or terminate the sale
Legal Issues

Approvals

• The bank must obtain any necessary governmental and other

approvals for the securitization of the DPRs (e.g., any
Central Bank and shareholder approvals)
• To the extent required by local law (e.g., in Brazil and
Turkey), the bank must continue to close FX contracts with
beneficiaries. As the bank will be “losing” foreign currency
in an amount equal to the debt service, it will need to use
alternate sources of liquidity in order to close the FX
contracts
• Local counsel will opine that all necessary governmental and
corporate approvals have been obtained
Legal Issues

Conflicts

• The bank must investigate whether the

securitization of the DPRs would violate any
existing agreement of the bank, such as “negative
pledge” or “non-sale” covenants in outstanding
eurobond or loan facilities
• Foreign and local counsel will opine that there are
no conflicts with existing contractual obligations of
the bank
Transaction Issues
Credit Enhancers – Rating Agencies – Accounting
Transaction Issues–Credit Enhancers

Use of a Credit Enhancer

• Can enable the bank to achieve a rating (typically “AAA”)

higher than the debt would otherwise be rated
ƒ Typically provides a financial guaranty that ensures the full and
timely payment of principal and interest on the series
ƒ Enhancers charge a “premium” for this insurance, but all-in cost is
usually improved
ƒ Notes that benefit from credit enhancement target a different (“AAA”)
investor class than “unwrapped” Notes (“BBB”)
ƒ Limited number of credit enhancers (e.g., MBIA, AMBAC, XLCA),
but other credit enhancers are testing the market (e.g., FSA, FGIC,
CIFG, AGIC, multilaterals)
Transaction Issues–Credit Enhancers

Issues Relating to the Use of a

Credit Enhancer
• Selection
• Credit enhancers typically request additional Early
Amortization Events and Defaults
ƒ Ratings downgrade tests
ƒ Precipitous drop in flows test
ƒ Financial covenant/capital adequacy tests
• Credit enhancers typically request more stringent
requirements for any further issuances of debt
• Amount of “recourse” to the bank is generally
greater
Transaction Issues–Rating Agencies

Issues Relating to Rating Agencies

• Selection (i.e., how many and which ones?)

ƒ Requirements of enhancers and investors (NAIC)?
• Transaction Costs
• Surveillance Fees
• New Issuance Requirements
Transaction Issues–Accounting

Accounting Issues

• The SPV may be consolidated with the bank (even though it

is not a subsidiary) due to “control/auto-pilot” accounting
rules. The bank should discuss with its auditors.
• The debt of the SPV in closed deals has been noted in the
unconsolidated balance sheet of the originator either: (a) as a
long-term debt or (b) as a non-debt liability, such as a
prepayment for sold items or an obligation to pay Payment
Orders to beneficiaries.
• The bank’s local accountants will need to be involved in the
structuring of the transaction to determine the appropriate
accounting under local GAAP