SECURITISATION IN ADGM, ABU DHABI, UAE.

ABU DHABI GLOBAL MARKET (ADGM)

Established in Abu Dhabi, the capital of the United Arab Emirates, and starting operations in 2015, the Abu Dhabi Global Market is a global financial center that caters to institutions from all over the world, including those from the area and the rest of the world. It has been awarded the title of "Financial Centre of the Year (MENA)" and has consistently developed novel ways to address the expanding need for financial services in the region.

The three autonomous authorities of ADGM are the Registration Authority, the Financial Services Regulatory Authority (FSRA), and the ADGM Courts. ADGM entities are created in accordance with Common Law. In contrast to other jurisdictions, the ADGM has embraced the English common law in its original form. This is a first for the region and is intended to facilitate the ease of doing business for foreign investors.

What is securitisation?

In the simplest form, Securitisation is the conversion of an asset, especially a loan, into?marketable?securities, typically for the purpose of raising cash by selling them to other investors. Securitization is the financial practice of pooling diverse types of contractual debt, such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets that generate receivables) and selling their related cash flows to third-party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). The capital structure of the new financing redistributes the principal and interest cash flows generated from the underlying loan in order to repay the investors. Mortgage-backed securities (MBS) are securities guaranteed by mortgage receivables, whilst asset-backed securities (ABS) are securities backed by other forms of receivables.

It is possible for granular pools of securitized assets to reduce the credit risk of individual borrowers. The credit quality of securitized debt, in contrast to that of regular corporate debt, is not stationary because of the changes in volatility that are based both on time and structure. If the transaction is effectively designed and the pool performs as predicted, the credit risk of all tranches of structured debt improves; if the transaction is not properly structured, the impacted tranches may face a severe deterioration in their credit and a loss of value.

Since its inception in the late 18th century, securitization has expanded to an estimated $10.24 trillion in the United States and $2.25 trillion in Europe as of the second quarter of 2008. In 2007, ABS issuance in the United States was $3.455 trillion while in Europe it was $652 billion. WBS (Whole Business Securitization) arrangements first surfaced in the United Kingdom in the 1990s, and have since become prevalent in numerous Commonwealth legal systems, where senior creditors of an insolvent business effectively seize control of the company.?

The importance of Securitisation.

Utilizing either factoring or securitisation, businesses can turn their illiquid assets into actual cash flows. Both forms permit the business to sell assets, such as accounts receivable, at a discount to third parties. Factoring is typically utilized when the third parties are banks or financial institutions, whereas securitisation structures are utilized to gain access to funds from the broader market, such as capital markets.

Assets are transferred into a distinct legal entity so that investors can access them, and a potential capital market instrument is created.?The assets transferred into the ADGM SPV are ring-fenced for the benefit of the SPV's investors; creditors of the originator entity have no access to these assets.?The SPV can then issue securities backed by the underlying assets.

What are the benefits of setting up a securitisation vehicle in the ADGM?

Securitisation of a wide variety of assets, loans, bonds, earnings, and hazards is permitted in the ADGM. In addition, risks associated with debt, moveable or immovable property, tangible and intangible assets may be securitized. In general, in the ADGM, any asset that represents a source of future income can be securitized through an SPV (Special Purpose Vehicle).

The ADGM SPV is regulated by Common Law, and its direct applicability in the ADGM provides international investors with legal clarity and confidence. SPVs also have access to the ADGM Courts, which provide a vehicle for contract registration and enforcement under Common Law. There are no foreign ownership limits in the ADGM, hence ADGM SPVs may issue all of their securities and shares to foreign nationals.

The ADGM SPV is an inexpensive and adaptable vehicle. Multiple classes of shares are permitted, and office space is not required (the services of an ADGM registered agent are sufficient). In addition, an ADGM SPV has access to the substantial Double Taxation Avoidance Treaty Network that the UAE has established with the majority of the world's most important nations. In this instance, additional Ministry of Finance standards must be met.

The ADGM is a tax-free zone, with no corporate, withholding, or income taxes. 100% of an ADGM SPV's profits may be repatriated.

What is the Structure and process of securitisation? Why Set Up a Securitisation Vehicle?

The assets involved in the transaction are initially owned by the originator. This is typically a company looking to raise capital, restructure debt, or otherwise adjust its finances (but it also includes businesses set up specifically to generate marketable debt (consumer or otherwise) for subsequent securitization). To raise new capital, such a company would have three options under traditional corporate finance concepts: a loan, a bond issue, or the issuance of stock. However, stock offerings dilute the company's ownership and control, whereas loan or bond financing is frequently prohibitively expensive due to the company's credit rating and the associated rise in interest rates.

The consistently profitable portion of the business may have a significantly higher credit rating than the business as a whole. For instance, a leasing company may have offered leases with a nominal value of $10 million, which will generate cash flow over the next five years. It is unable to seek early repayment on the leases and cannot, therefore, receive its money early if required. If it could sell the rights to the cash flows from the leases, it could immediately convert this revenue stream into a lump payment (in effect, receiving today the present value of a future cash flow). When the originator is a bank or other entity subject to capital adequacy rules, the structure is typically more complex because a second entity is formed to purchase the assets.

Pooling and Transfer.

A suitably large portfolio of assets is "pooled" and transferred to a "special purpose vehicle" or "SPV" (the issuer), a tax-exempt corporation or trust formed specifically for the purpose of funding the assets. Once the assets are transferred to the issuer, the originator typically has no recourse. The issuer is "bankruptcy remote," which means that if the originator declares bankruptcy, the issuer's assets will not be transferred to the originator's creditors. To do this, the issuer's governing papers restrict its actions to only those required to complete the issuance of securities. Typically, many issuers are "orphaned." In the event of certain assets, such as credit card debt, where the portfolio is comprised of an ever-changing pool of receivables, a trust in favor of the SPV may be declared rather than a standard transfer by assignment.

ADGM securitisation vehicles can offer issuers of securities the following advantages:

Liquidity - Certain assets cannot be sold, but they continue to generate consistent income streams. These assets may be securitized, so providing the issuer with liquidity while retaining asset ownership.

Access to capital markets - The issuer's rating and the issued security's rating may differ. For example, the corporate issuer may have a BB rating, but the high-quality assets that are securitized may result in a AAA rating for the securitisation vehicle. In such circumstances, the company may be able to obtain cash at cheaper interest rates.

An?ADGM SPV?is usually set up as a Private Company Limited by Shares.?

Company secretarial and registered agent services are now required to be carried out by a Company Service Provider for all ADGM Special Purpose Vehicles. This requirement came into effect recently. Between the ADGM Registration Authority and the SPV, communication will be handled through the ADGM Company Service Provider who will operate as the point of contact.

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