Following the boom years of securitisation origination and the well documented post-Lehman troubles securitisation transactions are now coming to the end of their life cycles as assets default, are re-financed or bought back by originators. However, there are typically numerous legal and accounting costs – and possibly taxes – associated with unwinding a securitisation such as releasing security, terminating the legal agreements and liquidating the issuer (and any related entities such as the SPV holding companies and SPV holders of post-enforcement call options). The fact that, usually, little thought was given at the outset of a transaction as to how such costs should be allocated, begs the question “who pays”?
A typical priority of payments in a securitisation provides for the payment of the costs, fees and expenses of the corporate services provider due and payable on the relevant interest payment date. However, costs associated with an unwind of a securitisation will necessarily be incurred after the last interest payment date.
Such unwind fees and costs were not typically accounted for in securitisation documents probably because it was expected at the outset that the arranger or originator of a securitisation would be there at the end of deal and in turn would work with the corporate services provider to unwind the transaction (and probably cover any costs) in much the same way as it had originally arranged or originated it. However, in transactions arranged/originated by entities that have subsequently become insolvent (most notably Lehman Brothers) or are otherwise not involved in the liquidation, there is no third party that can be relied on to cover the corporate services providers’ costs. But, it is surely not reasonable to suggest that costs should be borne by the corporate services provider itself?!
If the transaction documents do not provide for costs to be reserved (as payment on an interest payment date is restricted to amounts due and payable), then in practice, the corporate services provider may have to ask all interested parties (such as auditors and law firms) to provide invoices in time for such amounts to be paid on the final interest payment date. However, this does not provide any room for error if there are unexpected disputes or other costs incurred after that date or if there is not actually enough cash running down the priority of payments on the final interest payment date. If invoices cannot be submitted on time we would expect the cash manager to take a prudent approach and withhold amounts at the behest of the issuer to cover costs associated with the unwinding of the transaction.
Where the arranger or originator are still actively involved in the transaction, one practical solution could be to obtain an indemnity (in addition to a reservation of costs on the final interest payment date) for unwind costs, especially if the originator is still holding the equity position in the transaction. In commercial mortgage backed securitisations the underlying facility agreements may permit the servicer to set aside amounts for the unwind of a securitisation.
As with all securitisation transactions, the wording of the transaction documents will need to be looked at carefully in each case in order to ensure that monies are reserved to cover costs at the end of a securitisation transaction. What is clear, however, is that the corporate services providers (and their legal advisors) will need to start thinking about the amount of the unwind costs and who will pay them well in advance of the last interest payment date to ensure that it is not they who are ultimately left with a hefty bill while everyone else has already left the table.