Part 1 - AL-Tax

Chapter 5only to equitable interests in existence at the time of assignment. Where debts arebeing securitized and the originator holds legal title to the debts, the assignmentin equity of those debts to the securitization vehicle does not need to be made inwriting, as at the time of the assignment there are no existing equitable interestsin the debts separate from the legal title to those debts (Ali, 2002). It is, in fact, theassignment itself that effects a severance of the equitable title to the debts fromthe legal title held by the originator and brings into being a separate equitableinterest in the debts (Ali, 2002).5.7 ReplenishmentMany securitization structures, particularly CDOs, incorporate lightly dynamicfeatures enabling the manager of the transaction to replenish and substitute securitizedassets (de Vries Robbe and Ali, 2005).Replenishment refers to the situation where the manager tops up the securitizedassets by purchasing new assets as existing assets in the securitized poolamortize or are prepaid or repaid (de Vries Robbe and Ali, 2005). Again, the introductionof the new assets into the pool can be effected via the method of equitableassignment described above to ensure that the replenishment of the securitizedpool does not result in dutiable transfers of assets.5.8 SubstitutionThe substitution of assets, in contrast to replenishment, raises more complexissues, both in relation to the taxation status of the relevant transfer and asregards the validity of that transfer. While replenishment involves the purchaseby the securitization vehicle of new assets, substitution refers to the situationwhere existing assets in the securitized pool are exchanged for new assets becausethe former no longer qualify for inclusion in that pool (de Vries Robbe andAli, 2005).Substitution is primarily used to preserve the credit quality of the securitizedpool. For this reason, it is vitally important to ensure that the ability of the managerto call for an exchange of assets from the originator does not translate into a blanketobligation on the part of the originator to make good any deterioration in the creditquality of the securitized assets by taking back the credit-impaired assets andreplacing them with unimpaired new assets. Such an obligation could well beviewed by a court as the conferral of a right, common to the holder of a mortgage or107