Insolvency & Restructuring
The complex crises of recent years – COVID-19, the war in Ukraine, the energy crisis – have led to declines in economic activity, disruptions in global supply chains, reduced employment, and lower purchasing power of consumers, causing many businesses, as well as freelancers and workers, to face financial difficulties and uncertainty. For the financial position of banks, this generally means a decline in the creditworthiness of borrowers, other counterparties, and issuers of securities. Besides the potential impact on balance sheets, the consequence – at an earlier stage – is an increase in RWAs or cases of default as defined by the relevant regulations. This will, in turn, come with higher capital requirements, either directly through an increase in RWAs, or through higher Pillar 2 requirements or MREL requirements.
What are the options for banks?
Fundamentally, banks can resort to asset side measures and/or liability side measures, as they could during the financial crisis. In this context, liability side measures (new issues, liability management) depend on the bank generally (still) being able to access the capital market under reasonable conditions.
Potential asset side measures include, in particular, the sale of individual receivables or of portfolios, securitisation, but also “simple” collateralisation models.
What are the effects of these measures?
While RWAs and the related capital requirements can be reduced to zero or close to zero by selling receivables or portfolios, certain forms of collateralisation and/or synthetic securitisation can lead to a noticeable improvement, at a minimum.
What are the key issues to consider?
Sales of accounts receivable or loan portfolios by Austrian banks have to be structured in a way that ensures legal compliance of the following aspects in particular:
- Banking secrecy
- Licensing requirements for factoring
- Assignment fees
- Insolvency resistance of a sale of receivables
- Assignment of securities
In case of “simple” collateralisation and/or synthetic securitisation, the following questions of structure will be of particular interest:
- Extent of risk transfer, optimisation of RWA reduction
- Maturities, redemption rights
- CRR requirements for CDS/guarantees (if unfunded)
- CRR requirements for CLN/cash deposits (if funded)
Moreover, the requirements under the Securitisation Regulation will have to be observed in each instance, i.e. in the following regulatory areas in particular:
- Risk retention (retention of a material net economic interest)
- Transparency requirements for originators
- Facilitation of “private” transactions
- Criteria for credit granting for originators
- Securitisation repository
- Special rules for “STS securitisations” with favourable risk-weighting
A sound structure will minimise the legal risks associated with securitisation and collateralisation while maximising effective capital relief. Moreover, practice-driven and experience-based counsel can help limit servicing costs of long-term transactions and also keep data collection and regular reporting within bounds, all while ensuring compliance with market standards.
