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

1 General overview of the nature ofsecuritised instruments1.1 IntroductionThis section briefly reviews the nature of securitised instrumentsand the types of issuers in the Australian marketplace. Theanalysis proceeds using the market’s distinction between equityand debt securities.1.2 Equity securitiesAn investor in an equity security issued through a securitisationstructure holds a beneficial interest in the underlying mortgageor asset pool. Although the instrument may be described as abond or note, strictly speaking an investor receives a unit in a unittrust entitling it to a share of the income and capital of the trustassets. The unit is structured to replicate the qualities of a debtinstrument. Measures are put in place to ensure that investorsreceive, on nominated dates, an amount equivalent to interest(ie. a distribution of income) and a repayment of principal (ie. aredemption of principal).The initial securitisation structures in Australia, such as the earlyFANMAC Trusts, were based upon equity securities. However,the then requirements of the former Insurance andSuperannuation Commission (ISC) favoured debt securities overequity securities. This resulted in these structures being modifiedso that investors held a debt rather than an equity security. TheISC requirements no longer apply, however, new stamp dutyimpediments have developed that prevent the Australia-wideutilisation of equity securities. The impediments are brieflydiscussed in section 4.1.3 Debt securities1.3.1 Overview of debt securities in AustraliansecuritisationsUnder a debt security, the issuer allots instruments known asbonds, notes or commercial paper. Unlike equity securities,investors do not have an ownership interest in the underlyingmortgage or asset pool. Instead, they hold a promise by theissuing vehicle to pay interest and principal. This is typicallycombined with a security interest over the securitised assetsthrough a charge given by the issuing vehicle to a security trusteefor the benefit of investors (and often for others who providesupports for the structure). Such debt securities can bestructured on a bullet maturity or pass-through basis and asfloating rate or fixed rate securities.1.3.2 The issuers of debt securitiesDebt securities overseas tend to be issued only by specialpurpose corporations. This also occurs in Australia, but heretrustees also issue debt securities (this is particularly the case forAustralian mortgage securitisations). The securitised assets areheld on trust by the trustee and its liability under the debtsecurities is limited to the proceeds from the underlying assetsthat are available to pay the securities in accordance with therelevant trust deed.The use of trusts to issue debt securities is largely confined toAustralia. This in turn has led to Australian securitisers and theiradvisers dealing with a series of unique trust issues connectedwith this development. Some of these are discussed in section 10.1.3.3 The form of debt securitiesDebt securities are typically issued in one of two forms.Physical securityUnder this, an investor holds an instrument which itself containsthe issuer’s debt obligation. The instrument can be transferred bydelivery or endorsement. Promissory notes are an example of thistype of debt security. While physical securities were oncecommon in the securitised market, they are less so now for threereasons. The first is that the preparation and issue of individualsecurities are relatively cumbersome when compared to othermethods, particularly the electronic issue and trading ofsecurities within the Austraclear system. The second reason isthat the requirement of the trustees that their liability on suchsecurities be limited, and the similar (but slightly different)requirement imposed by the rating agencies in relation tosegregated corporate issuers, mean that it is increasingly difficultto satisfy the strict legal requirements for such securities toqualify as promissory notes under the Bills of Exchange Act1909. This is discussed in further detail in section 10. Finally,section 126 of the Income Tax Assessment Act 1936 imposes adomestic withholding tax on interest paid by a company on adebenture payable to the bearer where the company does notgive the Commissioner the name and address of the holder of thedebenture. This tax discourages the use of bearer securities inAustralia.Registered securitiesThe other type of debt security is known as a registered security.The actual debt obligation of the issuer is constituted in aseparate document from the security itself. In the separatedocument, the issuer promises to pay the persons who from timeto time appear on a register as holders of the relevant securities.8