Professional Documents
Culture Documents
Infrastructur
e and overall
scenario of
Asset Backed
securities in
Bangladesh
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
Submitted To:
Submitted By:
Name Roll
Md. Abdul Hai 14-011
Samir Abdullah Chowdhury 14-031
Sanjida khanam 14-033
Saimoon Ahmed Moon 14-053
Muhammad Firoz Mahmud 14-089
INTRODUCTION
One of the main reasons for the success of public private partnership (PPP) projects is the
creation of a separate commercial venture named “Special Purpose Vehicle” (SPV). SPV
provides a good framework for raising funds, linking participants legally and assuring supply,
production and marketing of products. SPV brings together various parties like lenders, financial
institutions, public sector and export credit agencies, suppliers and off-takers. There is often a
lack of precedents to identify attributes of a SPV and the process is further hampered by
undeveloped financial and legal structures of a country. Thus, there is a need to establish clear
attributes for a SPV to raise the funding options of PPPs. The evidence shows that not only are
there common trends and techniques that are used for SPV development but also some unique
features to overcome financial and legal hurdles. The evidence also gives insights for using SPV
to improve financing of PPP projects.
But what is actually the SPV is? Before go to deep of the discussion of the SPV and its uses in
the financial system, we would like to give you a brief picture of what is SPV.
SPVs/SPEs are often used to make a transaction tax efficient by choosing the most favorable tax
residence for the vehicle. This is commonly done with Eurobonds so that foreign investors do
not have to pay withholding taxes in the borrower's country of residence.
SPVs are used for other transactions including securitizations and the issue of catastrophe
bonds.
More specifically we can also say that as it is also referred to as a "bankruptcy-remote entity"
whose operations are limited to the acquisition and financing of specific assets, the SPV is
usually a subsidiary company with an asset/liability structure and legal status that makes its
obligations secure even if the parent company goes bankrupt. It is also called a subsidiary
corporation designed to serve as counterparty for swaps and other credit sensitive derivative
instruments. Also called a "derivatives product company."
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Special purpose entities were one of the main tools used by executives at Enron, in order to
hide losses and fabricate earnings, resulting in the Enron scandal of 2001. They were also used
to hide losses and overstate earnings by executives at Tower Financial, which declared
bankruptcy in 1994. Several executives of the company were found guilty of securities fraud,
served prison sentences, and paid fines.
Financial tool:
A corporation can use such a vehicle to finance a large project without putting the entire firm at
risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide
debt. Essentially, it looks like the company doesn't have a liability when they really do. As we
saw with the Enron bankruptcy, if things go wrong, the results can be devastating.
In addition to reducing tax, SPVs can also remove assets or liabilities from balance sheets,
transfer risk and (in securitizations) allow the effective sale of future cash flows.
The management of an SPV will need to be structured in a way that takes account of accounting
standards that require a company controlled by another to be consolidated as a subsidiary. This
is not usually a problem as SPVs require very little in the way of management.
The effect of SPVs on accounts is obviously open to abuse. SPVs have often been used to
manipulate published accounts, most notoriously by Enron. Accounting rules have since been
tightened to make such abuses harder.
• Securitization:
SPEs are commonly used to securitize loans (or other receivables). For example, a
bank may wish to issue a mortgage-backed security whose payments come from a pool of
loans. However, to ensure that the holders of the mortgage-back securities have the first
priority right to receive payments on the loans, these loans need to be legally separated from
the other obligations of the bank. This is done by creating an SPE, and then transferring the
loans from the bank to the SPE.
• Risk sharing:
Corporate people may use SPEs to legally isolate a high risk project/asset from the
parent company and to allow other investors to take a share of the risk.
• Finance:
• Asset transfer:
Many permits required to operate certain assets (such as power plants) are either
non-transferable or difficult to transfer. By having an SPE own the asset and all the permits, the
SPE can be sold as a self-contained package, rather than attempting to assign over numerous
permits.
For example, when Intel and Hewlett-Packard started developing IA-64 (Itanium)
processor architecture, they created a special purpose entity which owned the intellectual
technology behind the processor. This was done to prevent competitors like AMD accessing the
technology through pre-existing licensing deals.[citation needed]
• Financial engineering:
SPEs are often used in financial engineering schemes which have, as their main
goal, the avoidance of tax or the manipulation of financial statements. The Enron case is
possibly the most famous example of a company using SPEs to achieve the latter goal.
• Regulatory reasons:
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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• Property investing:
Some countries have different tax rates for capital gains and gains from property
sales. For tax reasons, letting each property be owned by a separate company can be a good
thing. These companies can then be sold and bought instead of the actual properties,
effectively converting property sale gains into capital gains for tax purposes.
The SPV has an existence of its own in the eyes of law. It can sue and be sued in its name. The
SPV has to adhere to all the regulations laid down in the Companies Act.
Members of an SPV are mostly the companies and individuals sponsoring the entity. An SPV can
also be a partnership firm. This, however, is unusual and not popular.
The company, as distinguished from an SPV, may be called a general purpose vehicle. A
company may do many things which are mentioned in the memorandum of association (MoA)
or permitted by the Companies Act.
An SPV may also do the same, but its scope of operation is limited and focused. If it is not so,
the SPV had better be called a company. The MoA is quite narrow in the case of an SPV.
This is primarily to provide comfort to lenders who are concerned about their investment.
Establishment:
Like a company, an SPE must have promoter(s) or sponsor(s). Usually, a sponsoring corporation
hives off assets or activities from the rest of the company into an SPE. This isolation of assets is
important for providing comfort to investors. The assets or activities are distanced from the
parent company; hence the performance of the new entity will not be affected by the ups and
downs of the originating entity. The SPE will be subject to fewer risks and thus provide greater
comfort to the lenders. What is important here is the distance between the sponsoring
company and the SPE. In the absence of adequate distance between the sponsor and the new
entity, the latter will not be an SPE but only a subsidiary company.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
A good SPE should be able to stand on its feet, independent of the sponsoring company.
Unfortunately, this does not always happen in practice. One of the reasons for the collapse of
the Enron SPE was that it became a vehicle for furthering the ends of the parent company in
violation of the prudential norms of corporate financing and accounting.
The SPV also allows securitization of assets without disturbing the managerial relationship.
Under the arrangement, any predictable income stream generated by secure assets can be
securitized.
According to some estimates, the worldwide securitization market has increased from $1.2
billion of transactions in 1985, to $544 billion in 2003.
Accounting treatment:
Under US GAAP, a number of accounting standards apply to SPEs, most notably FIN46R that
sets out the consolidation treatment of these entities. There are a number of other standards
that apply to different transactions with SPEs.
Under International Financial Reporting Standards (IFRS), the relevant standard is IAS 27 in
connection with the interpretation of SIC12 (Consolidation—Special Purpose Entities). The IASB
published an exposure draft (ED 10) to merge both regulations.
ABS in India:
Amidst globalization Banking System in India has attained vital importance. Day by day there
has been increasing banking complexities in banking transactions, capital requirements,
liquidity, credit and risks associated with them. As such the Indian borrowers have to try new
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
international financial products like SPV to cater their needs in addition to the financial
products available through the banks in India. We focus here exclusively on SPV in India.
d) Covering any losses incurred in the underlying pool of exposures prior to a draw down.
The state has constituted a Special Purpose Vehicle (SPV) with the objective of bringing about
an Information Technology (IT) transformation in the state. The SPV was constituted as a
tripartite joint venture of state-owned Beltron, Tata Consultancy Services and Infrastructure
Leasing & Financial Services (ILFS) at an estimated cost of Rs.380 million.
The SPV is preparing a comprehensive special package for e-governance. Besides, separate e-
governance packages have been created for different departments by the joint venture
partners, based on specific requirements. The state government has already equipped
legislators with sophisticated laptop computers under the national e-governance plan of the
central government.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
The previous state government, headed by Rabri Devi had brought several departments online
and launched an official web site of the state.
Each project would be developed through a special purpose vehicle (SPV) and the two partners
would have equal say in decision-making and execution of projects. Tata Power and SN Power
would equally inject Rs 4,500 crore through equity as well as third party funding if a local
company or government is roped in.
The SPV would borrow the rest from international lenders like International Finance
Corporation (IFC) and the Asian Development Bank (ADB). The SPV may sell the electricity on a
merchant basis or by signing power purchase agreements (PPA).
"We would be able to raise financing through international lenders, which would help enhance
the status of the project," SN Power, President and Chief Executive Officer, Oistein Andresen,
said.
Hyderabad-based Madhucon Projects and IVRCL Infrastructure & Projects recently said they are
in the process of bringing their SPVs under single holding companies and listing them. Parvesh
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Some industry watchers believe a good mix of businesses is essential in listing such an entity so
that investors can minimize risks.
This will allow any two special purpose vehicles (SPVs) with a common partner having up to 25
per cent stake for bidding for the same project.
Earlier, any two SPVs in which any developer had more than 5 per cent shareholding each were
barred from bidding for the same project. It was increased to 5 per cent in July this year from
the earlier 1 per cent.
ABS in Japan:
Actually it is not special purpose vehicle in Japan; it is special purpose company there.
A special purpose company ( tokutei mokuteki kaisha, abbreviated SPC or TMK) is a type of
corporation which can be formed under Japanese law. SPCs were enacted by the Diet of Japan
in Law No. 105 of 1998.
SPCs are the only corporate entity which can make tax-free distributions under Japanese tax
law as of 2006, and are an attractive alternative to general partnerships, tokumei kumiai, trusts
or other tax-free alternatives in a number of investment transactions.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Investing in an SPC:
An SPC may issue any of five types of securities in exchange for an investment:
1. Preferred investment certificates ( yūsen shusshi shōken), equity securities similar to shares
of preferred stock, where the bearers have rights to share in the profits of the company, but
cannot participate in decision-making
5. Special bonds with subscription rights for new preferred investment certificates (shin yūsen
shusshi shōken hikiuke ken tsuke tokutei shasai)
ABS in china:
Once a foreign investor finds a good project and potential partner in China, a highly useful
option now available is the Special Purpose Vehicle (SPV). Using this option the investor may
form the overseas SPV joint venture with the partner and with it acquire and hold 100% equity
of the existing Chinese company. As a result, the Chinese company will eventually become a
wholly foreign owned enterprise, or WFOE.
Compared with directly setting up a joint venture (described below) in China, the SPV method
has these advantages:
The SPV has 100% control of the WFOE, so the foreign investor may transfer interests in
the project by selling its shares in the SPV without Chinese government approval (which
is otherwise required if the transferring target is shares in a Chinese JV).
The investor is allowed to set up the SPV as a tax haven and avoid tax related to the
transfer of SPV shares. By contrast, for China JVs, income tax is payable by the seller for
such kind of deals.
China still has control on foreign exchange, especially in sophisticated deals with a share
swap between a Chinese entity and an overseas company, so JVs are subject to strict
government approval. With an overseas SPV this problem may be avoided.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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If the SPV or its parent company goes public in an overseas market, e.g., NASDAQ, the
case will not involve Chinese government approval. By contrast, if Chinese JV seeks
listing in a foreign stock market, it must obtain approval from the China Securities
Regulatory Commission (CSRC), China’s securities watchdog.
Note, however, with SPVs the Chinese partners should obtain approval from the government
when they invest overseas to set up the SPV with the foreign investor. They are also required to
report any substantial changes and developments related to such overseas investment.
When the SPV acquires the Chinese company, a public appraisal firm must perform a
compulsory appraisal prior to the acquisition of the target shares. The Chinese partner cannot
transfer the shares at a price “significantly lower than the appraisal result”. If the Chinese
partner is State-owned, a competent government agency may also need to approve the case.
In addition, like other acquisition deals, the foreign investor should conduct careful due
diligence on the target company before entering into the final acquisition agreement.
Although SPV structures will continue to provide benefits, it may become more important than
in the past for an SPV to have some degree of economic substance.
First, the SPV may benefit from preferential withholding tax rates under the treaty on dividends
and other forms of passive income. For example, the tax treaties with Hong Kong, Singapore
and several other jurisdictions reduce the withholding tax rate on dividends from 10% to 5%.
Second, if the foreign investor wishes to dispose of the investment in China, it may sell the
shares of the SPV without paying income tax in China on the capital gain from the sale.
Typically, the jurisdiction where the SPV is established will also exempt the capital gain from
local taxation or levy tax at a low rate.
In regulations just issued, as well as in two tax cases reported at the end of 2008, the State
Administration of Taxation (SAT) has signaled an intention to scrutinize the use of SPVs and, in
some circumstances, to deny corresponding tax benefits in China. The Chinese State
Administration of Taxation (SAT) has removed tax privileges afforded under various double
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
taxation treaties to foreign investors who misuse the system of ‘special purpose vehicles’ as a
means of reducing their tax liabilities or circumventing exchange controls.
China, at present, has lower tax rates with Singapore, Hong Kong, Mauritius, Barbados and
Ireland. This circular of SAT enables the tax authorities to scrutinize not just the form but also
the substance of the ownership structures of SPVs to satisfy themselves that the investors have
bona fide residence in these countries to take advantage of the tax treaties signed by China.
This is to combat the tax evasion tactics of Chinese expatriates, who form the largest group of
foreign investors, but still maintaining their nexus within China. The proposed SAT’s
intervention is to remove SPV tax privileges in respect of those SPVs which are controlled by
Chinese expatriates, but who are deemed to be de facto PRC resident.
Hong Kong:
Hong Kong is a very favorable location in which to establish a shareholder company (usually
termed a special purpose vehicle or SPV) for investment in China. Hong Kong company usually
been used as a Special Purpose vehicle (SPV) to invest Mainland China. Hong Kong is one of the
quickest locations to incorporate a business. Although a HK company is not a legal entity in
Mainland, lots foreign investors, especially investors from Europe and North America still chose
to setting up a Hong Kong company as SPV to invest China.
Hong Kong's corporate law is strongly based on the British Legal System, the setting up of a
Hong Kong is str. Local businesses are regulated and Hong Kong regards itself as a low tax
centre rather than a tax haven. Taxes are levied on profits which is 16.5% since Financial Year
2008/2009. Under special circumstances, a Hong Kong company may even declare business
transactions as offshore which are subject o 0% tax in Hong Kong.
As Hong Kong's role as a major trading and gateway to China mainland and Asia, some
companies formed in Hong Kong are for trading purposes generally, while some use it as HQ of
its operations in China mainland.
Doesn't like other China cities, Hong Kong has no restrictions on capital transfer in/out of Hong
Kong (No Foreign Currency Control).
ABS in Malaysia:
In the question of “what legal structure should the SPV take?” the guidelines answered that
“What The ABS Guidelines are neutral on the legal form of an SPV and market participants are
free to decide the most suitable SPV form in any securitization structure. SPVs can be
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Following the release of the Guidelines on the Offering of Asset-Backed Debt Securities (ABS
Guidelines) on 11 April 2001, the Securities Commission (SC) will periodically issue responses to
FAQs to clarify and facilitate better understanding among affected parties and the public in
general in relation to securitization transactions.
The guidelines answered all the essential questions about the securitization and SPV.
As such an SPV would be considered resident in Malaysia for tax purposes as required under
the ABS Guidelines. Nevertheless, the acquisition of Ringgit assets by an entity incorporated in
Labuan and the issuance of Ringgit denominated asset-backed debt securities by it to domestic
residents, would among others, be subject to the approval of the Controller of Foreign
Exchange. Parties should also be aware that the Offshore Companies Act 1990 places some
restrictions on the activities of such offshore entities.
Recent activity:
In Dec 23, 2010 the Finance Ministry of Malaysia will set up a special purpose vehicle (SPV) to raise
funds for the RM36 billion mass rapid transit (MRT) projects in the Klang Valley. They may issue bonds or
use capital market instruments.
ABS in Pakistan:
Following the October 1999 coup, the military regime unveiled a reform driven agenda causing
an unprecedented amount of regulatory and enabling legislation in Pakistan. Law making in
Pakistan has now become a more consultative and transparent process with cluster
participation and input being a key feature. However, state policy has often defeated by
persistent bottlenecks in the administrative machinery and wherever official and lower level
corruption are endemic.
In some ways ABS is not a whole new feature in Pakistan. Indeed, corporate debt issues by
leasing companies that were secured by way of assignment of specific lease rentals had an
uncanny resemblance to ABS. However, these did not qualify as true ABS since the assignment
of lease receivables did not constitute a ‘true sale’ by way of an SPV. Assigned receivables also,
were not removed from the balance sheet of the issuer.
In what can best be called a piecemeal effort, THE COMPANIES (ASSET BACKED
SECURITIZATION) RULES, 1999 open up the securitization market in Pakistan through Statutory
Regulatory Order 1338(I)/99. Only eleven sections long, the Rules fail to cover much ground in
terms of detail but open up tremendous scope of ABS activity in their interpretation. The
skeletal law leaves therefore, tremendous room for expansion and development of ABS in
Pakistan where securitization provides a means of liquidating certain assets (normally long-term
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Aside from government owned entities, the Rules allow any Public Limited Company (SPC) or a
Trust (SPT) to register with the Securities & Exchange Commission of Pakistan (SECP) for the
purposes of becoming an SPV.
The SPC must adhere to the comprehensive provisions of the Companies Ordinance 1984 which
created the now defunct Corporate Law Authority (CLA). The CLA has since been replaced by
the SECP (created under the Securities and Exchange Commission of Pakistan Ordinance, 1997);
which now continues to be a strong regulator of Equity and Investment in Pakistan. The
Ordinance governing SPCs also covers matters of Winding up & Insolvency, Schemes for
Amalgamation and Disclosure. In addition to this, an SPC must have a paid up capital of at least
one hundred thousand rupees (approx. US$1666).
A Trust is by far the most appropriate choice of SPV to issue Asset Backed Certificates by
process of ABS which has been defined in the Rules as:
"A process whereby any SPV raises funds by issue of Term Finance Certificates (TFCs) or any
other instruments with the approval of the Commission (SECP), for such purpose and uses such
funds by making payment to the Originator and through such process acquires the title,
property or right in the receivables or other assets in the form of actionable claims"
The Pakistan Code of Good Corporate Governance, notified by the SECP in the wake of Enron’s
collapse, has no applicability to SPTs although it is a mandatory requirement to implement for
all public listed companies since early this year. Any securitization activity in Pakistan must also
be in conformity with the Islamic principles of finance and investments which prohibit interest
based lending, but encourage management of risk in expectation of profit or mark-up.
The Rules define "future receivables" to include all such receivables against which income may
accrue or arise at a future date. An inclusionary structure therefore leaves the playing field for
ABS wide open. External credit enhancement can be obtained for the securitization structure by
means of Pool & bond insurances (to cover any losses on the pool of assets), Letters of credit
from banks (to cover losses up to a certain amount) and corporate guarantees (either from a
third party or from the Originator).
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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The wheels turn slow in Pakistan, but they do turn. And where packaging the parts and selling
them leads to a value greater than the whole, Pakistan’s emergence as a lucrative ABS market
for foreign investors heralds an important stage in the evolution of its financial sector and
economy.
ABS in Philippine:
Unlike other Asian countries, the Philippines had not really had major reforms in its insolvency
procedures since the Asian crisis. About the only major changes in the Philippine legal
landscape that relate to nonperforming loans (NPLs) and corporate bankruptcies are: 1) the
transfer of jurisdiction over corporate rehabilitation cases from the Securities and Exchange
Commission (SEC), a quasi-judicial government body, to the Regional Trial Courts (RTCs) in
2000; and 2) the signing of the Special Purpose Vehicle (SPV) Act, which provides fiscal
incentives for banks to solve their NPL problems, in January 2003.
Thus while the other severely affected countries like Indonesia and Thailand had taken
advantage of the crisis to modernize their insolvency laws, the Philippines still awaits the dawn
for major legal bankruptcy reforms.
To provide relief from the huge burden of nonperforming assets, the government passed the
Special Purpose Vehicle (SPV) Law in December 2002 and signed in January 2003. The Law
provides fiscal incentives for the transfer of NPAs from banks to SPVs which, as envisioned,
would then dispose of them with greater flexibility and speed than banks. SPVs are private-
sector owned asset management companies, much like the AMCs that were set up by the four
other crisis-affected economies (i.e. KAMCO, Danaharta, IBRA, and TAMC) that purchased the
bad assets in these countries’ banking system and eventually disposed of them. Lack of
government funds and the seemingly non-systemic nature of the banking problems in the
Philippines have led to the private-sector led initiative that is encouraged by the SPV Law,
instead of the establishment of government-funded centralized AMC. India and Taipei, China
are the two other Asian countries that went by way of the private-sector owned AMCs.
Records of the BSP show that there are P520 billion of NPAs as of June 30, 2002, representing
14.9% of the banking system’s gross assets of P3.5 trillion. Of this, about P80 billion are
expected to be sold before the expiration of the current SPV Law in April 2005, roughly P30
billion of which have already been completed, while the rest are awaiting the completion of
required documents and the issuance of COEs. A total of 8 COEs have been issued to banks for
SPV transactions worth more than P20 billion, 52 COEs for dacion en Pago with loan equivalent
of P9 billion, and 82 COEs for sale to individuals worth P345 million.
There is the use of SPV in many other Asian countries, but from the above discussion we can
easily say that, though in many countries the SPV is still new to apply, but every country sees it
as a useful mechanism in financial system. Or it is better to say that to use the financial system
appropriate.
IPDC
The first ever asset securitization in the country has been launched by Industrial Promotion and
Development Company (IPDC) of Bangladesh on November 08, 2004. But the idea of
introducing asset securitization in the country developed back in 1999 when the World Bank
Group was working on the problems of non-bank financial institutions (NBFIs) in mobilizing
funds from the market. Then the World Bank team, along with the Government of Bangladesh
(GOB) designed the Financial Institutions Development Project (FIDP), which floated the idea
that NBFIs might issue asset-backed securities. With the help and cooperation from different
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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national and international bodies, the first issue of ABS in Bangladesh took place after four
stagnant years in 2004. But after the first issuance, no significant development took place in this
market though very good prospect exists. Industrial Promotion and Development Company
(IPDC) of Bangladesh opened a new era of fund mobilization especially for the NBFIs (IPDC,
2005) through the issuance of asset-backed securities. The move will obviate the dependency of
IPDC on costly bank funds and provide it funds at low cost.
Parties
SPV: Investment Corporation of Bangladesh (ICB) has been made trustee for the special
purpose entity (SPE) which issued BDT 35.9 crore worth zero coupon bonds against debt
receivables of IPDC.ICB being the trustee will be handling the transaction by receiving the
payments and forwarding these to IPDC as per agreements after certain time period.
Investor: Dhaka Bank, Jamuna Bank, Mutual Trust Bank, Southeast Bank and International
Leasing and Financial Services Ltd. have already invested in the BDT 35.9 crore IPDC asset-
backed securitized bonds in private placement arrangement.
IPDC
ICB (SPV)
BRAC
The world’s first micro credit securitization deal was closed by BRAC in September 2006.BRAC
is one of the largest MFI’s in the world with over five million borrowers, primarily women.
Average loan size is approximately $ 162 and the rate of repayment is 99.27 %. This novel
securitization deal has been structured by RSA Capital, Citigroup, FMO and KfW.. RSA Capital,
a fully owned subsidiary of RSA Security is the lead arranger. The Netherlands Development
Finance Company (FMO), KfW and Citibank are the co-arrangers of this transaction. BRAC's
micro-credit receivables are in Bangladeshi Taka (BDT). A local currency transaction cuts out
any currency mismatch and associated exchange risk to the local client. BRAC will also
replenish all non-performing loans in the trust and there is a 150 % collateralization of
receivables
Parties
Originator & Servicer: BRAC will be the originator as well as the service provider for the
transaction.
Trustee: A special purpose vehicle (SPV) is set up to purchase the receivables from BRAC and
issue Pay Through Certificates (PTC) to investors. Eastern Bank Limited of Bangladesh is the
trustee for the transaction.
Tranches: The transaction consists of 12 tranches and each tranche matures in 12 months.
Account Bank: Citibank, N.A. Bangladesh is the Account Bank for the trust.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Financing cost: Financing cost of this deal is approximately 12%, about 200 basis points
lower than BRAC’s traditional source – bank loans.
Investor: The investors in these transactions are FMO, Citibank and two leading local bank,
Pubali Bank Ltd and City Bank. The investors have agreed to provide an aggregate of
Bangladesh Taka - BDT 12.6 billion (USD 180 M) for BRAC over a period of six years.
Guarantor: Citibank’s investments are guaranteed by FMO and counter guaranteed by KfW.
Rating: The transactions are rated by Credit Rating Agency of Bangladesh, the local Moody’s
affiliate.
BRAC
Selling microcredit
receivables Sale proceeds
(Investors)
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Advantages:
The transaction is advantageous to BRAC in following ways
Firstly, BRAC’s portfolio size is large and diverse - $ 348 million in disbursed loans are
outstanding and spread over 4.48 million poor entrepreneurs.
Secondly, the organization’s skilled and qualified work-force at the head and
the field offices ensures a repayment rate of nearly 99 percent. The organization also employed
qualified personnel in the MIS department thereby guaranteeing effective data management.
Finally, the strength and the credibility of the dependent parties – RSA Capital, FMO, KfW, and
ULC
ULC issued Tk 0.40 billion worth asset backed zero coupon bonds in 2005 through private
placement.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
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Parties
Originator: ULC
Trustee / SPV: As per Trust deed dated February 7, 2005 between United Leasing Company
Limited (ULC) and Investment Corporation of Bangladesh (ICB) a Trust in the name of “ULC
Securitization Trust 2005-A” was formed and ULC sold lease receivable of Tk. 400 million to
the Trustee (ICB) to issue Asset Backed Zero-Coupon Bonds.
Bond Classes:
Class B Bond: The trustee also issued 3 Class B Bonds of Tk.10 million each of which ULC
purchased 3 class B Bonds bearing 7.90% interest as credit enhancement to secure the interest of
class A bond holders.
Credit enhancement: Any loss due to non-collection of lease receivable in respect of class-
A bonds held by the investors will be adjusted against the amount of class B bonds held by
United Leasing Company Limited. All Class A Bonds have been redeemed by January 2009. The
redemption of the Class B Bond starts from February 2009.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
ULC
(Originator)
Selling lease
receivables Sale proceeds
(SPV)
Issued Tk 0.40
billion worth asset Proceeds of
backed zero coupon issue of
bonds
Other Investors
Class B bonds Class A bonds
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
IDLC
institution formally launched Asset Backed Securitized Zero Coupon Bonds with an issue
value of BDT 190 million on February 9, 2005 (IDLC, 2005). This marks a significant
achievement in the company’s quest to mobilize funds, at lower cost, as part of its continuing
Bank initiated the debt instrument to enable financial institutions to mobilize funds against
Parties:
SPV: IDLC Securitization Trust 2005 is formed to serve as the Special Purpose Entity
(SPE),which will issue Zero Coupon Bonds against lease receivables of IDLC. The Investment
Corporation of Bangladesh (ICB) is nominated as the trustee of the issue and ICB, being the
trustee will handle the transaction by receiving the subscription payments and forwarding these
to IDLC as per agreements.
Investor: Commercial Bank of Ceylon Limited, BRAC Bank Limited, The City Bank Limited,
Green Delta Insurance Company Limited and Reliance Insurance Limited have subscribed to the
issue under private placement.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
IDLC
(Originator)
Sale proceeds
Selling lease
receivables
ICB
(SPV)
Issued BDT 190 Proceeds of issue of
million worth asset bonds
backed zero coupon
bonds
(Investors)
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
IIDFC
The Industrial and Infrastructure Development Finance Company Limited (IIDFC), a leading
non-banking financial institution (NBFI), has submitted an application to the Bangladesh Bank
(BB), the country’s central bank, seeking permission to issue zero-coupon bonds worth BDT4.0
billion.
1. Administering cost: For a large number of investors (in case of IPO), definitely this cost will
be much higher.
need to comply with various regulatory authorities, such as SEC, Bangladesh Bank, or
3. Lack of knowledge of investor: It is expected that general investors may lack knowledge of
a complicated instrument like ABS, although this problem can be easily solved by investment
bankers of the country.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
In the Bangladesh context, securitization is the only ray of hope for funding resource starved
infrastructure sectors like Power, Public Transport. Public Private Partnership (PPP) is very
much talked issue now a days. The basic idea behind this PPP is simply creating opportunity for
the private investor to participate in public sector. When any private entity wants to invest in
public sector then this entity will be provided the right of that public property for a certain time
to make pay off. This idea is quite new in Bangladesh. To make PPP fruitful GOB need to build
huge capacity in terms of rules, regulation, monitoring etc. Moreover pricing conflict between
public and private entity, protecting competition of market economy, private sector incentive
issues are very much complex to deal. Asset Securitization can be implemented more easily.
Unlike equity transfer in PPP, ABS issue debt securities backed by future revenue flow. And
ABS is more efficient in respect to time, flexibility, fund generation etc.
Banks and financial institutions can securitize a pool of housing loans to raise fund at
cheaper cost and make their balance sheets free.
The government could support the ABS program through providing insurance to the
ABS program as a contingent credit enhancement.
The banking sector of the country experienced a total of Taka 226.2 billion non-
performing loan (NPL). Securitization can play a critical role to mitigate the burden of
NPL largely. Banks and FIs can sell their non-performing loans to the SPE; the SPE
would then pool the loans and issue asset-backed securities. It is superior way to give
healthy look to the balance sheet than NPL rescheduling. In case of securitizing the
NPLs the issuance of zero coupon bonds are usually favored on the ground that the
estimated amount loans to be sold to the SPE and the size of the ABS program may not
be economical to have monocline insurers insure the interest payments. The use of zero-
coupon bonds would compensate for the questionable timing of the cash flow obtained
from the sale of the properties.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
Asset and Investment Management Services (AIMS) of Bangladesh Limited suggests creating
the Special Purpose Vehicle (SPV) Trust as a ‘not-for-profit’ entity for getting tax-exempt status.
It also suggests that the NBFIs shall not go for public issue in their several tranches, which will
save their issue cost including underwriting commission to a great extent. AIMS also holds that a
conduit SPV structure, pooling of assets from different NBFIs, may also reduce issue cost while
enhancing credit quality of the securitized instruments.
Despite the restrictions imposed on the commercial banks that accept funds, the infusion of
public funds is essentially a direct subsidy to the banks. The infusion of public funds provides
the banks with the necessary capital needed to write-off the non-performing loans on an
accounting basis; however, the non-performing loans, as well as the collateral, remain with the
banks. Therefore, the banks need to dispose of these assets to truly solve the NPL problem. Our
proposal is such that the commercial banks sell their non-performing loans to a jointly
established SPC (Special Purpose Companies – like SPV); the SPC would then pool the loans
and issue asset-backed securities (ABS).
First:
Under the proposed structure, banks could mix any proportion of performing and non-
performing loans, depending on market demand. Banks however, may have some reluctance to
sell performing loans to the SPC due to cultural, social, political and economic reasons and to
consideration of this, the proposal leaves a provision of allowing the banks to determine the
proportion of performing and non-performing loans sold to the SPC.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
In the proposed plan, a group of banks will first establish a SPC by investing a small amount of
capital, and then sell their loans to the SPC. For example, the book value of bank A’s loans is
100; the probability of recovering the loans is very low; the loan has collateral of an estimated
fair market value of 60; after establishing the SPC, bank A sells the loans to the SPC at 60; bank
A will recognize a tax-deductible loss of 40 at the time of the sale and the loans (100) will be
removed from bank A’s balance sheet; however, SPC won’t be able to purchase loans from all
the banks at a time due to small initial capital; Initially it would buy loans on a pro-rata basis and
gradually grasp all the NPLs of participating banks through issue proceeds of securitization
II. The loss of sale creates tax benefit immediately to the banks
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
Second:
The next step is for the SPC to sell the collateral underlying the loans. If the SPC tries to sell all
of the collateral real estate properties in the market at once, it is likely that the weak country’s
real estate market would deteriorate further (assuming the loans were real estate loans). The SPC
should avoid an immediate sale of the properties that may damage the real estate market. Such
action may not only push the national economy further into trouble, but also decrease the
proceeds from the sale of the properties. Therefore, the SPC should pool the loans and issue
ABS, using the proceeds from the sale of the properties as collateral or as cash flow.
The sale of loans to the SPC de-links the loans from the banks, and in that case, the rating of the
ABS would be based solely on that of the SPC, whose only assets are the pool of properties. But
the lack of liquidity in the real estate market is an obstacle to creating high demand from
investors for ABS. To address the risk of default on interest payments by the SPC due to
insufficient cash flow generated by the properties, arrangements can be made with insurers such
as Sadharan Bima Corporation to insure the interest payment. However, given the estimated
amount of loans to be sold to the SPC and the size of the ABS program, insurers may not find it
economical to insure the interest payments. Thus, the ABS issued by the SPC may be zero
coupon bonds (ABS issued in Bangladesh so far are zero coupon bonds). The use of zero-coupon
bonds would compensate for the questionable timing of cash flow obtained from the sale of the
properties.
Third:
Finally, SPC can get relief of purely bad loans by making factoring arrangement with local
factors like IDLC and ILFSL.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
Credit Enhancement:
Unlike a direct subsidy such as purchasing banks’ preferred shares, the government might
provide insurance to the ABS program in the form of a contingent credit enhancement. Different
government bonds or treasury bills held by the Bangladesh Bank may be used to enhance the
credit of the ABS program. If the SPC fails to generate sufficient cash flow from the sale of the
properties or from the properties’ cash flow, the government can liquidate part of the treasuries
or government bonds to make the payment. The ABS might be issued in senior, junior and
subordinate portions varying by the amount of the guarantee. For example, in Bangladesh ULC
sold lease receivable of Tk 0.40 billion to the trustee (ICB) to issue asset backed zero-coupon
bonds. Thereafter the trustee issued 37 class A and 3 class B bonds of which ULC purchased 3
class B bonds bearing 7.90% interest as credit enhancement to secure the interest of class A bond
holders. Any loss due to non collection of lease receivable in respect of class A bonds held by
the investors would be adjusted against the amount of class B bonds held by ULC.
Lack of a sophisticated debt market is always a drawback for securitization due to the absence of
benchmark yield curve for pricing. ABS is a complex secondary market based debt instrument
and it is very tough to introduce it in a completely new channel. The bond market has played a
limited role in the Bangladesh economy in compared to the neighboring countries. In Bangladesh
the outstanding bond volume over GDP was only 1.4%, compared with India (34.8%), Pakistan
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
(30.9%), Sri Lanka (53.6%), and Nepal (9.8%) in the year 2005. The share of the Bangladesh
bond market in South Asia (0.2%) is also the smallest among the five countries.
(Source: South Asia Bond Markets: Bangladesh, Yibin Mu, Version April 2007, World Bank.)
The development of the debt market would naturally increase the securitization activity in
Bangladesh.
In Bangladesh legislation was established in 1996 to provide a framework for credit ratings, as
well as there are two domestic credit rating agencies capable of rating securitized products.
CRISL
Credit Rating Agency of Bangladesh (CRAB).
The capabilities of the domestic credit rating agencies are questioned by those familiar with
international rating agencies. This is partly due to compensation arrangement. On the one
hand, rating fees approximate $3,623 and annual fees come in at about $1,450 .
(Source: South Asia Bond Markets: Bangladesh, Yibin Mu, Version April 2007, World Bank.)
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
But securitization market needs highly qualified and credible credit rating to motivate investors
and mobilization of participants.
There are no laws specially governing securitization transactions in Bangladesh. The idea of
introducing asset securitization in the country originated in 1999. Since then Bangladesh Bank as
a regulator has not provided any guideline regarding asset securitization. But Bangladesh Bank
issued only a tentative guideline on mortgage-backed securitization which is insufficient to
promote the securitization. Moreover, the Asset Backed Securities Issue Rules, 2004 under
Securities and Exchange Commission Act, 1993 is unable to depict the trading guideline.
Besides the two regulators Government of Bangladesh also failed to support the securitization
process such as Government had the scope to securitize their receivables from infrastructure and
housing sector. No bill has been tabled in the parliament of Bangladesh yet to transform an act
for securitization.
The following are the key areas where legislators should focus:
requirement for that is to achieve a “true sale” of the assets to the Special Purpose Entity.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
Transfer of collateral:
Financial Institution cannot transfer the underlying collateral securities of immovable property
attached with the receivables though they are allowed to sell or transfer the cash flows associated
with the receivables to other interested investors. This lapse of in the law should be eradicated.
Stamp Duties:
Stamp Duties on transfer of assets in securitization can often make a transaction unviable. Article
40 of the First Schedule of the Stamp Act of 1899, states that the stamp duty is not required in
case of a new mortgage but is silent about any modification of mortgages which is essential in
case of ABS.
Conclusion
Despite obstacles, there is a huge potential for asset securitization in Bangladesh in banking
sector, as well as in other sectors such as housing finance companies, which can securitize their
mortgages, credit card companies, which can securitize credit card receivables, micro finance
companies, which can securitize micro credits (As BRAC ) or ministry of communication can
securitize toll receivables of Jamuna Bridge and other infrastructures. Securitization thus has a
potential of becoming alternative to loans from foreign countries. Further, through securitizing
future flows of remittances sent by the Bangladeshi workers abroad, financial institutions can
issue Islamic Shariah based securities in Middle East countries and can reap the benefit of low
cost financing. All these would ultimately pave the way for faster progress in financial sector
reforms and a higher growth of the economy.
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH
April 5, 2011 LEGAL INFRASTRUCTURE AND OVERALL SCENARIO OF ASSET BACKED SECURITIES IN
BANGLADESH