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Loan securitisation law less appealing compared to EU, Moody’s says

By Stelios Orphanides

Moody’s Investors Service said that while the latest legislative package passed by the parliament on July 8 can help banks reduce their bad loans stock, it also contains provisions that remain ambiguous.

The ambiguity is related to the powers and provisions given to the Central Bank of Cyprus, “making securitisations less appealing compared with other European securitisation markets,” the rating company said on Thursday.

The ambiguous provisions require the Central Bank of Cyprus’ approval for any securitisation and give the bank supervisor the right to veto such a transaction, Moody’s said adding that the central bank’s powers were “unusual” compared to what is the case elsewhere in Europe, as they allow it to initiate the liquidation of securitisation special purpose entities, appoint a liquidator or block a voluntary liquidation.

The central banks powers “include assessing a servicer’s management and key function holders, requiring securitisation special purpose entities and servicers to report audited financial statements, the authority to conduct on-site investigations and have access to books and records of both securitisation special purpose entities and servicers, and imposing sanctions in relation to securitisation special purpose entities and servicers,” Moody’s said.

The new legislation, already published in the government’s gazette, makes it easier for banks to securitise or sell loans, allowing the creation of a secondary market for loans which can ultimately help them reduce their stock of non-performing loans which in March accounted for €19.9bn or 43 per cent of the total. The legislative changes which also aim at helping banks improve borrower discipline and tackle strategic default, were a condition of the European Commission for approving the deal for the transfer of assets of the state-owned Cyprus Cooperative Bank to Hellenic Bank.

Furthermore “a provision to fully collateralise set-off exposures creates additional barriers to entry, costs and constraints that will make securitisation less attractive as a funding tool for financial institutions,” the rating company continued. “The current scope of the law is also limited to the securitisation of credit facilities or other forms of receivables or exposures originated or acquired only by credit institutions, financial institutions or credit acquiring companies, provided they are subject to supervision by a competent authority”.

Still, the new legislation simplifies asset transfers to the special-purpose entity and “can now be carried out by assignment, transfer or declaration of trust,” with the securitisation special-purpose entity assumes all rights and obligations from the originator, Moody’s said.

“The new framework outlines the procedures for securitisation transactions and grants the Central Bank of Cyprus the power to authorise, regulate and supervise securitisation activities,” Moody’s said. “Key amendments pivotal to a sustainable securitisation market, including true sale, insolvency remoteness and set-off provisions, will provide legal certainty around the sale and transfer of assets to a securitisation special-purpose entity. Under these provisions and subject to a legal opinion, the transferred assets can be separated from the originator’s insolvency estate”.

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