Securitisation legislation to put Malta on sounder footing

A Bill providing the necessary legislative framework for securitisation started being debated in Parliament yesterday.

The Bill provides for securitisation, regulates existing laws in support of securitisation and introduces new rules on securitisation vehicles.

Moving the Bill, Parliamentary Secretary in the office of the Prime Minister Tonio Fenech said its aim was to regulate a product which was not yet offered in the country.

The main aim was for Malta to make further advances in the financial sector, which kept progressing consistently even due to the fact that the government and opposition always discussed ways to improve the sector together, giving it the necessary stability.

Last year, Mr Fenech said, had been a good one for the financial sector in Malta. Although it was not easy to quote figures as most business was international, the sector had directly generated employment for around 6,000 people.

A total of 2,347 new companies had been registered by the end of last year, and there was an increase in the number of applications from trustees. While in June there were 16 registered trustees, the number shot up to 41 in September, and 57 by the end of the year.

He referred to the positive results being obtained by the banking sector in Malta, and said that Malta was being used as a springboard for international banking. New licences for banks which wanted to operate from Malta were also issued last year.

The Malta Financial Services Authority (MFSA) also received notification that three banks of member states wanted to provide cross-border services from Malta.

There were also positive indications from the insurance sector, with a number of new licences being issued and a number of pending applications. When it came to securities, the MFSA issued licences to new operators to operate collective investment schemes.

The parliamentary secretary said that the securitisation market in Europe was no longer on the periphery, and had become a core segment of European capital markets. It was an easy way to release locked capital into the market, generating the necessary liquidity.

Securitisation, Mr Fenech said, was an arrangement through which a special purpose vehicle acquired assets from an originator, taking on the risks and paying for them by issuing new financial opportunities for the public.

He said that the pensions reform would require part of the national insurance contribution to go towards future investment. So there had to be products for investment.

The financial market in Malta was now mature enough, there were people who could give technical advice and it was desirable to initiate this development for the sector to widen the basis of the products it offered.

The law, Mr Fenech said, contemplated three forms of securitisation.

One was for the securitisation of assets. This was the most popular and representative of the three. Through it, the originator sold the assets to a special purpose vehicle (SPV), which paid back the agreed sum and listed the assets in its books, issuing bonds to the public.

These bonds would be secured on the same assets through an underwriter, and a public or private offer would be issued. The special purpose vehicle would take into possession and manage its assets to pay back the bonds and interests year to year from the money it made on them.

The necessary administrative work became the responsibility of the SPV which should keep good relations with clients, honour payments, assume all responsibilities and the day-to-day mangement of assets.

Then there was the concept of syntethic securitisation, which compared to the previous. The main difference was that the assets did not move from the originator to the SPV. There would be regular payments of fees for collecting funds, but whoever got involved with the shares did so because of the guaranteed income stream.

Since the SPV was undertaking the risk, the originator would not be pocketing all the income.

The SPV would then issue capital bonds wherein the security would be deposited in banks; then it would make periodic payments to the originator, withholding its management fees.

The third form being proposed was the securitisation of whole businesses. This structure was common especially in the UK. It was mainly used in countries with insolvency laws. The security possessor would take full custody of the assets, and the procedures would have no connection with court procedures.

The government, Mr Fenech said, was legislating the right rules to regularise the sector, with a view to enacting subsidiary legislation in future.

The Bill contained a number of consequential amendments to legislation, including the civil code.

Mr Fenech said the Bill was proposing a number of benefits, which would be evident in a number of ways. These included less costly loans with a certain element of guarantee of revenue for securitisation and raising capital without having recourse to bank loans.

This would encourage a certain amount of committed revenue to be released on the market for use in the continued generation of business.

The concept of public participation had not really taken off in Malta, with preference being given to bonds which offered certain guarantees.

The legislation was expected to generate a certain amount of new interest in the loans sector.

Securitisation would also help in the spreading of invested capital. To date most financial institutions only loaned funds in areas where they were quite sure of returns. There could now be other non-bank institutions to engage in new competition in this sector.

One should beware not to confuse securitisation with property funds, a mistake that was all too common. The former concerned more liquid assets rather than fixed ones.

Concluding, Mr Fenech said this new legislation would be putting Malta on an even sounder footing as far as legislative framework was concerned.

Nationalist MP David Agius said the bill constituted another major step forward by Malta in the financial sector. On the other hand there were a number of EU member states that did not yet have this sort of legislation.

Financing was the lifeblood of any company, without which it was bound to flounder. Long-term finance was obviously more important than short-term. Securitisation was a way of converting non-tradable terms into tradable ones.

This method had been very successfully used in the past by corporations, firms and well-known personalities, utilising asset-backed securities for long-term financement. This left normally-used assets free and increased cash flow.

Other firms could use securitisation to maximise shareholders' wealth.

Could it be that Maltese business was under-capitalised? Was it still true that businessmen preferred to use bank funds rather than risk their own moneys? It would appear that certain types of banks offered Maltese businessmen better futures.

Business could only be sustainable with the necessary funds, both in the medium and longer terms. Securitisation would help towards longer-term finance for companies in Malta, buoyed by successful experiences overseas. This made an even-stronger case for Malta to engage in this practice.

Mr Agius said the Bill being debated was based on the securitisation law of Luxembourg. It would not only affect Malta but also have cross-border effects, attracting new business to the country. This was why it was necessary to make changes to the Civil Code and the Companies Act.

Parliament was debating the Bill because Malta had a sound financial framework that both sides of the House had cooperated on. If the MFSA continued on its excellent track record to date there could not fail to be a bright future in the sector of securitisation.