Structured finance and securitisation in Hong Kong: overview
Structured finance and securitisation in Hong Kong: overview
by Paul Landless and James Pedley, Clifford Chance
A Q&A guide to structured finance and securitisation law in Hong Kong.
This Q&A provides an overview of the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.
This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-guide.
Market and legal regime
1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
- How developed is the market and what notable transactions and new structures have emerged recently?
- What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?
- Is securitisation particularly concentrated in certain industry sectors?
The law, and associated regulatory regime, in Hong Kong provides a developed framework in which securitisation transactions can be undertaken.
There have been no central bank programmes in Hong Kong which have had an effect on the local securitisation markets.
Except for some historic residential-mortgage backed securitisations the securitisation market in Hong Kong is relatively private, with securitisation transactions being put together to finance a variety of asset classes, such as trade receivables, trade finance exposure and short term consumer assets.
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
- What are the main laws governing securitisations?
- What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?
There are no specific laws in Hong Kong designed to accommodate securitisation transactions. However, the well developed legal and regulatory framework provides a robust environment within which securitisation transactions can be undertaken.
As securitisation transactions can have a variety of features there are a number of Hong Kong laws which are regularly considered in the context of such transactions. These include the:
- Companies Ordinance (Cap. 622) in connection with corporate originators and the registration of security.
- Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) in connection with insolvency.
- Conveyancing and Property Ordinance (Cap. 219) in connection with insolvency.
- Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) in connection with transfer of loans and receivables.
- Securities and Futures Ordinance (Cap. 571) in connection with the issuance of securities.
- Money Lenders Ordinance (Cap. 163) in connection with lending activity.
- Personal Data (Privacy) Ordinance (Cap. 486) in connection with the use and transfer of personal data.
The Hong Kong Monetary Authority (HKMA) is the regulator in Hong Kong most relevant to securitisation transactions and is responsible for regulating financial institutions. The Securities and Futures Commission is also involved where there is an issuance of securities.
Reasons for doing a securitisation
3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
- Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
- National or supra-national rules concerning capital adequacy?
- Risk retention requirements?
- Implementation of the Basel III framework in your jurisdiction?
Usual reasons for securitisation
The main reasons for doing a securitisation usually include:
- Cheaper borrowing and credit arbitrage.
- Balance sheet benefits.
- Capital relief.
- Efficient alternative source of funding..
Accounting practices and treatment of securitisation transactions is outside the scope of this guide. The accounting treatment given to transaction is often a significant factor in an originator deciding to undertake it.
The HKMA is responsible for implementing Basel III in Hong Kong and sets out the framework dealing with the:
- Capital treatment which financial institutions in Hong Kong give to securitisation positions they take.
- Circumstances in which capital relief can be obtained when undertaking a securitisation.
The Supervisory Policy Manual it publishes contains rules relevant to securitisation transactions including in connection with credit risk transfer, large exposures and collateral and guarantees..
The special purpose vehicle (SPV)
Establishing the SPV
4. How is an SPV established in your jurisdiction? Please explain:
- What form does the SPV usually take and how is it set up?
- What is the legal status of the SPV?
- How the SPV is usually owned?
- Are there any particular regulatory requirements that apply to the SPVs?
The Companies Ordinance in Hong Kong provides a legal framework for the establishment of companies and this includes SPVs. An SPV incorporated in Hong Kong has its own legal personality and, when used, is typically incorporated as an orphan, that is, its shares held on trust for charity. There are no particular regulatory requirements which an SPV needs to meet in and of itself. The structure of the transaction dictates whether any regulatory approvals or other licences are required.
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?
While it is possible to establish SPVs in Hong Kong it is more common for offshore SPVs to be used, for instance in the Cayman Islands or Luxembourg. The choice of SPV jurisdiction can be made for a number of reasons, including, for example, tax, investor preference, regulatory or licensing requirements and the jurisdiction in which the counterparties to the transaction are located.
Where offshore SPVs are used consideration needs to be given to local Hong Kong regulatory requirements. For instance, if the SPV's activities amount to undertaking "trade, commerce, craftsmanship, profession, calling or other activity carried on for the purposes of gain", registration under the Companies Ordinance is required.
Ensuring the SPV is insolvency remote
6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
- Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?
- Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?
Hong Kong has a variety of legal tools which can be used in securitisation transactions to strengthen the insolvency remoteness of the transaction from the originator. Key techniques include:
- Transferring assets from the originator to an SPV, thereby removing them from the originator's estate in the event of its insolvency.
- "Orphaning" the SPV from the originator, ensuring it is not part of any corporate group.
- Limiting recourse to the SPV to the assets it has acquired.
- Contractually restricting counterparties to the SPV from initiating insolvency proceedings.
- Imposing on the SPV a restrictive set of covenants limiting the activities it can undertake and, consequently, the liabilities it may become subject to.
- Granting security over an SPV's assets to protect them and the cash flows they generate against any unsecured third party creditors of the SPV.
- Undertaking solvency and corporate searches in respect of the originator.
- Undertaking regular performance audits to ensure counterparties to the transaction are performing their roles properly.
Courts in Hong Kong generally give effect to typical limited recourse and non-petition clauses.
Ensuring the SPV is treated separately from the originator
7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?
There is no doctrine of substantive consolidation in Hong Kong. SPVs (including foreign SPVs) are recognised as having their own legal personality, and their rights and liabilities are seen as their own rather than those of the originator.
However, there are a limited number of circumstances in which the separate legal personalities of two companies can be ignored. For instance where:
- A separate company has been set up as a "sham" or to deceive a third party.
- There is an element of fraud.
- One company is an illegal purpose to the arrangement.
To minimise the risk of these circumstances arising a number of practical steps can be taken:
- Checking there are no legal grounds on which the obligations of the SPV can be set aside.
- Ensuring none of the SPV's obligations are guaranteed by the originator.
- Keeping the corporate activities of the SPV separate from those of the originator, for instance by having a corporate service provider provide directors to the SPV.
- Avoiding, to the extent possible, mingling of the SPV's assets with those of the originator.
- The SPV produces its own audited accounts..
Issuing the securities
8. What factors will determine whether to issue the SPV’s securities publicly or privately?
In Hong Kong, the securitisation market is almost entirely private. Factors which are taken into account when considering whether securities should be issued publicly include:
- An originator's desire to attract funding from a broader base of investors.
- Investor requirements.
- Tax requirements (for example, withholding tax).
- Regulatory requirements.
- Rating agency requirements.
- International transparency requirements.
- Disclosure requirements.
- Listing costs.
9. If the securities are publicly issued:
- Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
- If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
- If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
If securities are publicly issued for a Hong Kong securitisation they are typically listed on the Hong Kong Stock Exchange. However, there is no legal requirement for them to be so and they could be listed on a foreign exchange.
The main document produced in connection with a public issuance is an offering circular or prospectus, which outlines in detail the terms of the securities and the characteristics of the securitised assets.
There is no minimum share capital requirement for listing on the Hong Kong Stock Exchange.
Constituting the securities
10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?
The concept of trusts is recognised in Hong Kong.
In public Hong Kong securitisations a trust deed is typically used to constitute the securities. The trust deed sets out the conditions attaching to the securities and appoints a trustee who acts as a representative of the noteholders. Under the trust deed the issuer also makes certain covenants directly to the noteholders for their benefit.
Securities are typically cleared and a global note (whether bearer or registered) produced for including the securities in the applicable clearing system.
Transferring the receivables
Classes of receivables
11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?
Any contractual (or in some cases statutory) right to payment, whether contingent or not, is capable of being the subject matter of a securitisation in Hong Kong. Some types of receivables which have been securitised include:
- Residential real estate.
- Trade receivables.
- Corporate loans.
- Toll receivables.
- Project loans.
- Trade finance receivables.
- SME loans.
- Ticket sale receivables.
- Consumer loans.
Transferring the receivables from the originator to the SPV
12. How are receivables usually transferred from the originator to the? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?
Transfer of receivables from an originator to an SPV is usually undertaken by way of assignment. Depending on the circumstances of a particular transaction an assignment can be legal or equitable. As between the originator and the SPV there is no particular legal concern with this distinction. There is no requirement for such an assignment to be registered at any registries in Hong Kong.
Whether the underlying debtor of a receivable is notified of the assignment will affect the rights the SPV is able to exercise against that debtor. For instance, until a debtor has been notified of the assignment:
- The debtor is entitled to make payments in respect of the receivables to the originator.
- The originator can give the debtor a good discharge for payment.
- The debtor can set off against the SPV any claim against the originator arising before receipt of written notice of the assignment to the SPV.
- Rights of counterclaim, set-off or defences arising before the sale may be available to debtors.
- A later assignee of or grantee of a fixed charge over any of the receivables without notice of the assignment to the SPV who gives first notice to a debtor of its interest takes priority over the SPV.
- (Unless the assignment was also "legal") the SPV would have to join the originator as party to any action the SPV may wish to take against a debtor.
Notice of assignment can still be given to a debtor following the commencement of insolvency proceedings in relation to the originator.
In a typical securitisation the assignment takes the form of a sale agreement, signed by the originator and the SPV, setting out the terms of the assignment, the list of receivables being assigned (or setting out a framework for ongoing assignments) and regulating the circumstances in which the debtors can be informed of the assignment.
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?
As long as they are capable of being identified when they arise, future receivables are assignable under Hong Kong law.
There are no categories of receivables which are, in and of themselves, not capable of assignment. Transaction specific considerations should be given to whether:
- A term of the receivables purports to prohibit their assignment (see Question 15).
- There are public policy grounds (for instance, assignments of salary payments).
- The originator is a public authority or government (which may, by statute, be unable to transfer its assets).
These instances may give rise to complications when trying to assign receivables.
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?
Under Hong Kong law any security relating to the receivable is also usually transferred to the SPV. This can be achieved by including the security in the ambit of the rights assigned in the sale agreement between the originator and the SPV (the benefit of the security will not pass to the SPV without such an assignment). There are no particular perfection requirements for the security itself. However, if the subject matter of the security includes certain types of asset (such as land or ships) there may be additional registration requirements.
Prohibitions or restrictions on transfer
15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?
A contractual clause, if inserted to prohibit the originator from assigning his rights under the receivables contract, is recognised under Hong Kong law. Primarily the debtor is not obliged to recognise the title of an assignee under an assignment performed by the originator in breach of a no-assignment clause. The debtor would be entitled to refuse to deal with the assignee and to continue making payment to the assignor, invalidating the ability for the SPV to take the assignment as a statutory assignment. Also, a purported assignment by the originator would place him in breach of the contract and entitle the debtor to exercise any remedies for breach of contract given him by the agreement or by law.
It is necessary to check whether the receivable contract has any prohibition on the originator assigning its rights to the receivable. If so, the assignment to the originator will be ineffective against the debtor.
However, in these instances it is often possible for the originator to declare a trust over the receivables in favour of the SPV. This construct has a very similar legal effect (including on the originator's insolvency) to an assignment but, as a trust is a different legal mechanism to an assignment, would not violate a prohibition on assignment. In such instances the prohibition should be checked to ensure it does not also prohibit declarations of trust over the receivables.
Data protection laws need to be considered in the context of a securitisation but do not, of themselves, prohibit the transfer of a receivable. In Hong Kong, the Personal Data (Privacy) Ordinance (Cap. 486) (PDPO) regulates activities of anyone who controls the collection, holding, processing or use of personal data by prescribing various rights and obligations of data users and persons whom the personal data relates. It sets out six data protection principles which the originator and SPV in a transaction must comply with if there is any personal data in the securitisation transaction. These six principles are:
- The personal data must be collected for a lawful purpose and by means that are lawful and fair in the circumstances. The data subject must have been explicitly informed on or before the collection of his/her personal data of the purpose (in general or specific terms) for which the data is to be used and the classes of person to whom the data can be transferred.
- Personal data must not, without the data subject's prescribed consent, be used for any purpose other than the purpose for which the data was to be used at the time of collection or a purpose directly related to it.
- Personal data must not be kept longer than is necessary for the purpose for which the data is used and the user of the data must take practicable steps to ensure that personal data is accurate, having regard to the purpose of its use.
- All practicable steps are taken to ensure that personal data is secure.
- All reasonably practicable steps must be taken to ensure that a person can ascertain the policy of a person who uses data as regards personal data.
- Providing data subjects with rights of access in relation to the personal data held by the user of the data and rights to request correction of any incorrect data.
A data subject can complain to the Privacy Commissioner for Personal Data about a suspected breach of the PDPO requirements and claim compensation for damage caused to him/her due to a breach of the PDPO in civil proceedings. A breach of the PDPO does not invalidate the assignment of the receivables.
Avoiding the transfer being re-characterised
16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
- Can this risk be avoided or minimised?
- Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?
The sale of the receivables to the buyer is not effective if a court finds the transaction to be a sham or re-characterises it as a secured loan. The Hong Kong courts have applied English law principles relevant to this question which set out three essential differences between a sale and a secured loan:
- In a transaction of sale, the seller is not entitled to get back the subject-matter of the sale by returning to the buyer the money that has passed between them. In the case of a mortgage or charge, the mortgagor is entitled, until he has been foreclosed, to get back the subject-matter of the mortgage or charge by returning to the mortgagee the money that has passed between them.
- If a mortgagee realises the subject matter of the mortgage for a sum more than sufficient to repay him, with interest and costs, the money that has passed between him and the mortgagor, he must account to the mortgagor for the surplus. If a buyer sells the subject matter of the purchase and realises a profit, he does not have to account to the seller for the profit.
- If a mortgagee realises the mortgage property for a sum insufficient to repay him the money that he has paid to the mortgagor, together with interest and costs, the mortgagee can recover from the mortgagor the balance of the money, either because of a covenant by the mortgagor to repay the money advanced by the mortgagee, or a simple contract debt created by the mere fact of the advance having been made. If a buyer resold the purchased property at a price insufficient to recover the money he paid to the seller, he is not entitled to recover the balance from the seller.
Case law suggests that Hong Kong courts will look to the economic substance of the transaction, rather than just the terms of the documents, when deciding whether to re-characterise.
To mitigate the risk of recharacterisation careful attention is paid to the terms of the transaction documents as they are drafted, seeking to minimise the presence of the above factors.
The following features of a transaction are not generally considered inherently inconsistent with a sale treatment:
- The originator continuing to service and collect the receivables following the transfer to the SPV.
- The originator entering into arm's length hedging with the SPV.
- The originator assuming a portion of credit risk by holding or being exposed to the first loss position in the transaction.
- The right or obligation of an originator to repurchase receivables, or indemnify the SPV in relation to the purchased receivables, in certain limited circumstances (such as breach of warranty).
True sale opinions are typically delivered in connection with Hong Kong securitisation transactions.
Ensuring the transfer cannot be unwound if the originator becomes insolvent
17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?
Where the originator is a Hong Kong incorporated company, there is the possibility of the transaction being subject to the risk of being unwound where a court finds the assignment of receivables was either:
- An unfair preference or a transaction at an undervalue.
- A disposition to defraud creditors.
A company gives an unfair preference to a person if that person is a creditor, surety or guarantor of the company, and the company does anything or suffers anything to be done which puts that person in a position which, if the company goes into liquidation, would be better than the position that person would have been in if that thing had not been done (Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)).
The company must have been influenced by a desire to prefer that person (which is presumed in the case of connected parties) and been insolvent at the time of, or as a result of, entering into the relevant transaction. The look-back period for an unfair preference is six months, or two years where the transaction is with a connected party. The scope of connected parties has recently been widened.
The Conveyancing and Property Ordinance (Cap. 219), provides that no purchase, made bona fide and without fraud of any interest in property of any kind in Hong Kong will be open or set aside merely on the ground of undervalue.
Transaction at an undervalue
A transaction at an undervalue occurs where the company enters into a transaction with a person where either the company receives no consideration (or makes a gift) or receives consideration the value of which is significantly less than the consideration provided by the company. The risk period is five years in all circumstances and the company must have been, or become as a result of the transaction at an undervalue, insolvent at the relevant time. There is a presumption of insolvency where the transaction at an undervalue is entered into with a connected party.
The court will not make a remedial order restoring the company to the position it would have been in if it had not entered into the transaction if it is satisfied that the company entered into the transaction:
- In good faith.
- For the purpose of carrying on its business.
- At the time the company did so, there were reasonable grounds for believing that the transaction would benefit the company.
Under the Conveyancing and Property Ordinance (Cap. 219), every disposition of property made with intent to defraud creditors is voidable at the instance of any person thereby prejudiced. The statutory provisions do not set out a particular suspect period before the commencement of the winding up. The case of Tradepower FACV 5/2009 suggests that, for this section to apply, the originator needs to be insolvent at the time that the disposition was made, though this is not an absolute requirement.
Although the presence or not of these factors is a matter of evidence for a court in Hong Kong to consider, various certificates, relating to the relevant points, such as good faith, value and intention not to defraud, will be provided on closing.
Establishing the applicable law
18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?
Choice of law clauses are generally recognised in Hong Kong if both:
- The choice of such law was made in good faith and not to avoid the provisions or effects of any other applicable law.
- The law is pleaded and proved to the satisfaction of the courts of Hong Kong (at the discretion of these courts).
- This law will be disregarded if its application will be illegal or contrary to public policy or mandatory rules in Hong Kong.
- Matters of procedure including questions of set-off and counterclaim, interest chargeable on judgment debts, priorities, measure of damages, limitation of actions and submission to the jurisdiction of foreign courts are generally governed by Hong Kong law, to the exclusion of the relevant chosen governing law.
Security and risk
19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.
There are four main types of security interest in Hong Kong:
- Mortgages. This involves a transfer of title in the applicable property from the charger to the chargee. In the context of intangible rights, such as receivables, this transfer of title is done by means of an assignment.
- Charges. These are equitable rights in property held by the chargor which it grants to the chargee but does not involve the transfer of title in that property to the chargee (unlike a mortgage). Charges can be fixed or floating. If security is taken over an asset by a fixed charge or assignment, it is essential to impose restrictions on what the chargor can do with that asset and the proceeds of that asset (for example, the chargor cannot sell, dispose of or give further security over that asset or the proceeds of that asset) and for the chargee to exercise control over the asset and its proceeds in practice. If inadequate control is exercised over that asset or its proceeds by the chargee (such as collections from receivables), the fixed security could be recharacterised as a floating charge by the courts on the insolvency of the chargor. A floating charge will normally rank behind all fixed security and other creditors preferred by statute.
- Pledges. This is a possessory security interest where possession of the asset is passed from the security provider to the security taker, with a power for the security taker to dispose of the asset on default by the security provider.
- Liens. This typically arises in a commercial arrangement where possession of property is transferred otherwise than as security. It gives the person with possession a right to retain the asset until they are paid, but not to otherwise dispose of the asset.
A statement of particulars of any security created by a company, together with a certified copy of the instrument creating or evidencing security given by a company over certain assets, must be delivered by that company (or the secured creditor) to the Companies Registry in Hong Kong for registration within either:
- One month after the date the security is created.
- One month after the date on which a certified copy of the instrument creating or evidencing that security could, if despatched with due diligence, have been received in Hong Kong in due course of post, if the security is created outside Hong Kong and relates to property situated outside Hong Kong.
This registration is required to make the security effective against creditors of the company and any liquidator of the company. Registration is not general notice to the world of the existence of that security. Third parties who could reasonably be expected to make a search with the Companies Registry can be treated as having notice of that security.
Registration is required where the security is granted by either:
- A company incorporated in Hong Kong.
- A company incorporated outside Hong Kong that is registered as a non-Hong Kong company under Part 16 of the Companies Ordinance and creating security over assets in Hong Kong.
There are separate rules governing registration of security created by individuals.
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?
Trusts, including validly constituted foreign trusts, are recognised in Hong Kong and security is typically granted by the SPV to a security trustee, which holds the benefit of that security on trust for all secured creditors.
There are three certainties that must be fulfilled before a valid trust is held to be created: certainty of object, certainty of subject matter and certainty of intention. The property to be affected by the trust must be expressly designated or so defined that it is capable of being ascertained, otherwise the trust is void for uncertainty.
21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation (Guide)?
The methods of credit enhancement mentioned in the Guide have all been used in Hong Kong securitisation transactions.
Risk management and liquidity support
22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?
The methods of liquidity support mentioned in the Guide have all been used in Hong Kong securitisation transactions.
Cash flow in the structure
Distribution of funds
23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?
The cash flows for any particular Hong Kong securitisation are set out in detail in the relevant transaction documentation, and are usually designed to meet the specific requirements of the transaction.
The anti-deprivation principle, relevant to cases concerning "flip clauses", is recognised in Hong Kong although its scope is limited. In general, provided it was drafted in an appropriate manner, such a clause could be enforceable in Hong Kong.
24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?
The methods of profit extraction outlined in the Guide have been used in Hong Kong securitisations.
The role of the rating agencies
25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?
The Hong Kong government has its own credit rating, separate from the People's Republic of China. Its current sovereign ratings are (September 2017):
- Moody's: long term Aa2 (stable) and short term not applicable.
- Fitch: long term AA+ (stable) and short term F1+.
- S&P: long term AA+ (stable) and short term A-1+.
The factors rating agencies take into account with sovereign ratings differ from agency to agency but include a range of factors such as political stability, GDP, government borrowing, economic growth, trade deficits and current strength.
While most securitisation transactions in Hong Kong are private and unrated, there are no specific factors in Hong Kong which affect the ratings of those securities which are rated.
26. What tax issues arise in securitisations in your jurisdiction? In particular:
- What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
- Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
- Are there any other tax issues that apply to securitisations in your jurisdiction?
- Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?
There are generally no taxes in connection with the transfer of receivables in Hong Kong.
Limited categories of debt instrument fall within the definition of Hong Kong stock and are subject to stamp duty on their transfer, subject to certain exceptions such as debt instruments qualifying as loan capital, but these assets are not typically the subject of a securitisation.
Withholding tax is not imposed in Hong Kong on the transfer of receivables. Similarly, no withholding tax is imposed on:
- Amounts paid to the SPV through the originator as servicer before notification to the underlying debtors.
- Amounts paid directly to the SPV from the underlying debtors after such notification is made.
A person (for instance, a foreign SPV) is subject to profits tax if he carries on a trade, profession or business in Hong Kong and derives Hong Kong source income (that is, the income must be arising in or derived from Hong Kong) from it. In very general terms, provided the SPV does not have an office, employee, or agent with general authority to conclude contracts on its behalf, the SPV is more likely to be treated as doing business with Hong Kong and not in Hong Kong, and so should not be subject to Hong Kong profits tax. In some transactions where there is less certainty, rulings from the Inland Revenue Department can be obtained.
Hong Kong's territorial based tax regime does not tax income based solely on whether a permanent establishment is established in Hong Kong. A person is only subject to profits tax if that person is treated as carrying on a trade, profession or business in Hong Kong and derives profits arising in Hong Kong from it.
Hong Kong's inter-governmental agreement with the US came into force in July 2016 and is a Model 2 IGA.
Recent developments affecting securitisations
27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.
Global regulatory developments, in particular from the US and Europe, will continue to impact on Hong Kong securitisation, if the transaction has a connection with the US and Europe. In this regard, particular consideration needs to be given to disclosure requirements and risk retention.
Other securitisation structures
28. What other structures, including synthetic securitisations, are sometimes employed in your jurisdiction?
Master trust, synthetic and programmatic securitisation structures can all be used in Hong Kong.
Securitisation transactions in Hong Kong tend to be private transactions which do not require the features of these more complex structures.
29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?
While the Hong Kong Monetary Authority is currently consulting on the implementation of the Securitisation Framework from Basel III, there are no currently proposed reform proposals in Hong Kong which would have a particular impact on securitisation transactions.
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?
Securitisation transactions in Hong Kong have not been impeded by the variety of global reforms concerning securitisation. Securitisation is driven less by the legal or regulatory framework and more by the consequences which can be achieved by the participants, whether a particular legal, regulatory or accounting effect.
In particular, in connection with the growth of businesses disintermediating banks from the chain of credit provision, the appeal of structured finance, which allows investors to take risks on assets, rather than the business intermediating the provision of credit, is clear.
Department of Justice Bilingual Laws Information System
Description. The Bilingual Laws Information System (BLIS) is an electronic database of the legislation of Hong Kong established and updated by the Department of Justice. BLIS contains official English and Chinese texts of Ordinances and subsidiary legislation in force on or after 30 June 1997.
Paul Landless, Partner
Clifford Chance Pte. Ltd
T +65 6410 2235
Professional qualifications. England and Wales; Hong Kong.
Areas of practice.
- Specialises in structured finance, derivatives and financial markets products, including securitisations, repackagings, structured notes, securities lending and repo.
- Leads the financial markets team in Singapore and South East Asia.
- Extensive experience in various types of structured transactions, including in relation to commodities trading, and regularly advises on global and local financial market regulatory developments and financial market infrastructure.
- Member of the firm's Brexit Markets Group and co-head of the firm's global Tech Group as one of the leaders of the Fintech practice.
- Helps lead the ASEAN Focus Group and Philippines Focus Group.
James Pedley, Registered Foreign Lawyer (England and Wales)
Professional qualifications. England and Wales.
Areas of practice. Structured debt transactions, including public and private securitisations of various asset classes, trade receivables financings, portfolio acquisitions, warehouse financings, ABCP programmes, supply-chain-finance, invoice discounting and factoring platforms and programmes and capital markets work.
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