September 20, 2021

Volume XI, Number 263

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September 20, 2021

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The View From Across the Pond — UK/EU Updates

The “The View From Across the Pond — UK/EU Updates” panel featured Financial Markets and Funds partner Neil Robson and Transactional Tax Planning partner Charlotte Sallabank and was moderated by Private Credit partner Peter Englund. The panel included discussion of rules and regulations put into place to help businesses address economic uncertainty caused by COVID-19, challenges facing the Coronavirus Business Interruption Loan Scheme (CBILS) and bounce-back loan programs that were developed to help businesses struggling with COVID-19, updates to the EU Securitization Regulation, the effects of the UK tax regime on securitization and the effects of Brexit on the securitization market. Here are the top five takeaways from the panel.

Legislative and Regulatory Uncertainty in Response to COVID-19

Certain rules and regulations put in place to help businesses cope with the economic impacts caused by COVID-19 are approaching their expiration dates, and it’s unclear whether they will be extended. For example, a moratorium to prevent companies from being pushed into an insolvency process unless its creditors had reasonable grounds to believe that COVID-19 had no financial impact of that company, i.e., such company’s debt would have existed even without COVID-19, is set to expire on December 31. Other protections limiting a director’s liability have already expired. Even though vaccines are being administered, COVID-19 is likely to continue to have an effect on the broader economy for several more months, and it is unclear how businesses will cope if or when such protections expire.

Loan Programs Intended to Assist Businesses Uncertain as Asset Classes

Two schemes providing loans to businesses struggling with COVID-19 have faced some challenges. In the CBILS scheme, the British Business Bank (BBB) agreed to guarantee up to 80 percent of loans issued to businesses. Many origination platforms were quick to get the necessary accreditation from the BBB, but we saw that sourcing funding for such loans was made difficult due to the restrictions from the BBB in assigning the government guarantee and an insistence that funding sources were robust and of a high standard, i.e., big name banks or well-established funds. The other scheme, bounce-back loans, have mainly been provided by traditional banks issuing small/micro business loans between £2,000 to £50,000 that are 100 percent guaranteed by the British government. According to a study, up to 40–60 percent of those bounce-back loans are likely to suffer defaults, which could present a long-term issue for the government as guarantor of those loans and of such loans remaining a viable asset class during their six-year term.

Updates to EU Securitization Regulations

In 2020, the European Union largely completed the implementation of its new Securitization Regulation, which establishes the first true pan-EU framework regulating issuers of, and investors in, securitizations. The new rulescover more than traditional risk retention: potential investors in securitizations must conduct an initial diligence assessment of the securitization to evaluate all risk characteristics of the deal, including reviewing underlying exposures and structural features, e.g., the priority of payments, and ensuring that certain ongoing disclosure obligations are met. The application of this regime to EU investors in non-EU issuances remains unclear and generally depends on the risk appetite of the specific EU investors. Finally, the Securitization Regulation will be reviewed by 2022, which provides an opportunity for investors, issuers/originators and European policymakers to address certain shortcomings in the regime that have acted as a drag on the relaunch of the EU securitization market. Following Brexit, the United Kingdom will onshore the Securitization Regulation and implementing secondary legislation into domestic law, meaning that the two frameworks will be nearly identical in the immediate near term, however the United Kingdom may ultimately determine to diverge from the EU framework where it is justified based on the specificities of the UK market.

UK Tax Regime and Its Effects on Securitization

A UK tax regime was introduced in 2005 to address the adverse effect that the introduction of International Accounting Standards had on the taxation of UK securitization vehicles. The introduction of IAS 32 and IAS 39 resulted in potentially large annual fluctuations in securitization companies’ accounting profits, which in turn led to fluctuations in tax liabilities year on year, as accounting profits are the basis for the computation of taxable profits. This variation in annual tax charge created unique problems for securitizations.

The large fluctuations were hard for rating agencies to rate and, in the event the profits unexpectedly increased, the securitization SPV issuer may not have enough cash on hand to pay the necessary taxes. Consequently, the 2005 tax regime for securitization vehicles was introduced in the United Kingdom to flatten out the fluctuations. However, these regulations only apply to securitization vehicles that are part of a capital markets arrangement, which essentially requires there to be a fund raising through an issue of securities to third parties which are rated by internationally recognized rating agencies and are traded on a recognised exchange. These regulations were a step in the right direction, but many securitizations do not fall within the definition of capital markets arrangement and so the regulations cannot apply to them, or originators do not want to have to comply with the stringent requirements of the regulations, and so many UK-sourced securitizations have non-UK issuers in jurisdictions where the securitization regime is easier to comply with, such as Ireland and Luxemburg. Effects of Brexit on the Securitization Market Under the EU Withdrawal Act, all EU rules and regulations as of December 31, the end of the transition period, shall become UK law for purposes of financial market regulation. Thus, the rules will be identical between the United Kingdom and the European Union on January 1, 2021.

As time passes, though, we expect the rules to deviate as the United Kingdom and European Union have no obligations to follow changes in each other’s laws and regulations and are free to, and have already expressed interest in, diverging from one another. This will inevitably lead to new structuring and tax issues for future securitizations. However, there is also an opportunity for either the United Kingdom or European Union to implement a regulatory scheme that attracts increased securitization activity.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 358
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About this Author

Christina B. Burgess Financial Attorney Katten Muchin Rosenman Charlotte, NC
Partner

Christina Burgess works with issuers, underwriters and lenders on asset-backed and mortgage-backed structured finance transactions. With a focus on automobile and equipment loan, lease and dealer-floor-plan receivables-backed term deals and warehouses, Christina advises clients on transaction structures and regulatory developments impacting these transactions.

Taking the surprises out of financing transactions

Christina's clients range from large, established financing companies to newcomers to the sector from across the United States. She understands they value smooth...

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Chris DiAngelo, Finance Legal Specialist, Katten Law Firm
Managing Partner

Chris DiAngelo is managing partner of Katten's New York office and co-head of the Structured Finance and Securitization practice. He focuses his practice on structured finance and securitization matters. Chris represents a variety of clients, including issuers, lenders, underwriters and bond insurers, in a wide range of programs and projects involving asset-backed debt, municipal debt, straight corporate debt and equity, warehouse lines, regulatory matters and acquisitions.

Chris’s clients describe him as a “significant market player” and say "He has the ability...

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Peter Englund Commercial Finance Attorney Katten Muchin Rosenman London, UK
Partner

When debt funds, hedge funds, sponsors and borrowers/platforms find themselves in uncharted deal waters, Peter Englund is their safe harbor. He is known for handling complex middle-market debt finance transactions that require a creative approach.

Advice that sets clients up for future success

For Peter, a successful deal is one that both funders and borrowers see as the foundation of a beneficial long-term relationship. No matter which side he's on for a particular transaction, he makes it a priority to understand his client's goals and areas of concern. For debt funders,...

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Jonathan D.S. Evans Structured Finance Attorney Katten Muchin Rosenman New York, NY
Partner

Jonathan Evans works with lenders, underwriters, issuers and borrowers on a range of different public and private asset-backed finance transactions. His clients include private equity funds, investment banks and finance companies.

Jonathan and his colleagues understand the needs and expectations of their clients. What's more, they feel a personal sense of obligation to help each of their clients succeed. That is why clients of the structured finance team know that they can count on Katten for responses that are quick, efficient and innovative.

Jonathan represents various...

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Prachi Shah Gokhale Financial Attorney Katten Muchin Rosenman New York, NY
Partner

Prachi Gokhale helps clients in the structured finance market identify and meet their unique needs. As a trusted legal advisor to a range of market participants, Prachi works to ensure her clients can develop and execute complex deal structures and novel transactions while overcoming potential legal and regulatory challenges.

Wide-ranging experience in structured finance

In public and private transactions, Prachi represents issuers, underwriters, lenders, borrowers and government-sponsored enterprises on a variety of US transactions, including asset-backed and mortgage-...

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