Moody’s rating agency has welcomed the new securitisation framework, approved by Cyprus saying it will assist banks reduce the high stock of non-performing loans hampering the economy.
“The new legislation is credit positive for future securitisations in Cyprus because it will create an effective and transparent framework that provides legal certainty to market participants, allows the broader distribution of risk and frees up capital from originators’ balance sheets for further lending,” Moody’s said in its bi-weekly Credit Outlook, recalling that the “high level of problematic loans is one of the biggest challenges facing the Cypriot economy and its financial system.”
NPLs in December 2017 amounted to 42.5% of gross loans.
According to Moody’s, the new framework outlines the procedures for securitisation transactions and grants the Central Bank of Cyprus (CBC) the power to authorise, regulate and supervise securitisation activities.
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 (SSPE). Under these provisions and subject to a legal opinion, the transferred assets can be separated from the originator’s insolvency estate.
“Asset transfers from the originator to the SSPE have been simplified and can now be carried out by assignment, transfer or declaration of trust, while the SSPE will automatically assume all rights and obligations of the originator and its rankings regarding both the exposures and the related collateral,” Moody’s added.
The agency highlighted that the legislative framework has also been amended to enable, subject to legal opinion, the transfer of credit obligations and underlying collateral free from tax, duties and other costs that would otherwise make securitisation less cost effective.
However, Moody’s said the CBC authority over is “unusual compared with other European securitisation markets because it has supervision powers over SSPEs and servicers.”
The CBC’s powers include assessing a servicer’s management and key function holders, requiring SSPEs and servicers to report audited financial statements, the authority to conduct on-site investigations and have access to books and records of both SSPEs and servicers, and imposing sanctions in relation to SSPEs and servicers. The CBC has the authority to initiate the liquidation of a SSPE.
Furthermore, Moody’s said that the framework also enacts additional legislative changes to insolvency procedures and foreclosure mechanisms to facilitate a well-functioning securitisation market.
More specifically, the agency pointed out that the new framework removes a clause that enabled borrowers to delay foreclosure proceeding, reduces the time frame in which notices are sent out for immediate repayment of outstanding loans, and introduces e-auctions as well as the ability of an originator to split mortgages and their underlying security into parts and register them accordingly.
“These changes will further support the predictability of timeliness and rate of recovery from these loans,” Moody’s said.
The agency pointed out however that “ambiguity remains around certain provisions and the powers vested to the CBC, making securitisations less appealing compared with other European securitisation markets.”
The ambiguous provisions include a requirement for the approval by the CBC of any securitisation activity (most notably, the CBC has the power to oppose a securitisation) and the notification of an intent to securitise 30 days in advance.
Moreover, the agency added, “the 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.”