A Guide to the Law of Securitisation in Australia - Clayton Utz

14 Synthetic securitisations14.1 IntroductionIn a synthetic securitisation, the credit risk in relation tospecified receivables is transferred to a special purpose vehicle(and from there to investors who acquire notes issued by thespecial purpose vehicle) without any transfer of the receivablesthemselves.As is the case in the United States, the most common form ofsynthetic securitisation in Australia is a synthetic collateraliseddebt obligation (a synthetic CDO). In this type of transaction,the special purpose vehicle issues notes (credit linked notes) therepayment of which is linked to the credit of a number of named,and usually well-known, companies (reference entities). Ifenough of the reference entities become insolvent or default inpayment of their debts, noteholders may not receive fullrepayment of their credit linked notes. Credit linked notes insynthetic CDO transactions have been issued both to retail andto wholesale investors in Australia (and are one of the fewsecuritisation structures in Australia that has retail investors -see section 1).Synthetic securitisations in Australia have also occurred inrelation to:• corporate loans;• small and large commercial property mortgages; and• equipment leases,amongst other assets.There are relatively few legal issues associated with syntheticsecuritisations in Australia. One of the advantages of asynthetic securitisation is that it can avoid the legal problemsassociated with outright transfers of some assets - and inparticular complex tax and stamp duty issues.The principal legal issue peculiar to synthetic securitisations iswhether the risk transfer agreement may be characterised as aninsurance contract.14.2 Insurance contractThe transfer of risk that occurs in a synthetic securitisation willusually be documented by way of a credit swap usingInternational Swaps and Derivatives Association provisions.This is not always the case, however, particularly where thetransaction is not a synthetic CDO. Other types of documents,such as financial guarantees, may be used.Regardless of the document used, there is usually some risk thatthe risk transfer contract may be characterised as an insurancecontract. Like an insurance contract, these transactions involvethe transfer of the risk of a future event happening in return forthe payment of a fee.It is important that the risk transfer contract not be characterisedas insurance contracts because if it is:• the transaction will be subject to the Insurance Contracts Act1984 which will incorporate terms into the contract,including duties of disclosure, which may not be appropriate;• the parties may be conducting an insurance business withinthe scope of the Insurance Act 1973 and, if so, will requireauthorisation under that Act;• this will affect the GST treatment of the transactions(insurance contracts are taxable supplies but swaps andguarantees are generally not); and• insurance contracts are generally subject to stamp duty.The position under Australian law in relation to characterisingcontracts as insurance contracts is very similar to that in theUnited Kingdom. There is no single test for determining whethera contract is an insurance contract, it is a matter of comparingthe features of the contract to the usual features of an insurancecontract. As in the United Kingdom, the credit swap market inAustralia has satisfied itself that there is no significant risk ofrecharacterisation – principally because there is no necessaryrequirement in a credit swap that the buyer of protection needsuffer any loss for which a payment under the credit swap willcompensate (that is, the buyer of the protection need not haveany exposure to the reference entities of the relevant creditswap).The analysis becomes more difficult where the syntheticsecuritisation relates to assets on a bank’s balance sheet (and inparticular where the reference entities are not well knownentities). Nevertheless, it is usually possible to conclude thatthese are sufficient differences such as to prevent the risktransfer contract from being characterised as an insurancecontract.73