1. Securitisation: Lessons from SA and Implications for Nigeria
March 2008

2. Table of Contents
South African Securitisation Market…………………………………………..Slide 3
Legislation and Regulations…………………………………………………….Slide 4
Securitisation Regulations in SA………………………………………………..Slide 5
Consumer Protection – National Credit Act………………………………..Slide 6
Insolvency Act……………………………………………………………………Slide 7
Deeds Registry Act……………………………………………………………….Slide 8
Taxation…………………………………………………………………………….Slide 9
Accounting………………………………………………………………………..Slide 10
Key Asset Classes…………………………………………………………………Slide 11
Key Asset Characteristics……………………………………………………….Slide 12
The Participants……………………………………………………………………Slide 13

3. The South African Securitisation Market

4. The South African Securitisation Market

5. The South African Securitisation Market
Issuers were initially non bank but since 2005 the market has been dominated by bank Issuers driven mainly by the need for additional funding in a market where the rate of loan advances accelerated much faster than the banks were able to attract deposits

6. Legislation and Regulations
In shaping up the guidelines, and legislation due consideration should be given to all related legislation and regulations and as far as possible to avoid/minimise conflict and to facilitate applicable legislation for Nigeria

7. Securitisation Regulations in South Africa
Securitisation transactions in South Africa are regulated by the South African Registrar of Banks under the Banks Act('the Banks Act'), under which the current securitisation regulations were issued.  The 2001 (reviewed in 2004, 2008) Regulations substantially overhauled the previous securitisation regulations of 1992, contributing to the growth of the securitisation industry in South Africa. The initial regulation was divergent from the G10 approach and restricted support by originators and had to be done through a bank for non bank issuers
South Africa opted for regulations which clearly specify that non compliance will lead to loss of benefit and all qualifying transactions need approval of the Registrar of Banks. This is contrary to the FSA in the UK and the FRB in the USA which have only issued guidelines –mainly to maintain flexibility in the application of such guidelines
The 2001 Regulations provide that securitisation issuer special purpose vehicles are exempt from having to register as banks. They regulate, among other things, four important areas: 
the corporate status, ownership and control of the issuer of the notes 
requirements in respect of the transfer or 'true sale' of assets to the issuer 
the provision of credit enhancement facilities to issuers 
the provision of liquidity facilities to the issuers
restrictions are placed on institutions that interact with the issuer

8. Consumer Protection – National Credit Act
The Credit Act of 2005, was passed in December 2005.  It was enacted in March 2006 and came into effect fully on 1 June 2007, replacing the existing Usury Act, No. 73 of 1968, and the Credit Agreements Act, No. 75 of 1980.  Implementation took a phased approach to allow credit providers to align and familiarise themselves with its requirements before June 2007 including the requirement that all credit providers register with the National Credit Regulator.
In relation to existing and potential securitisation transactions, where the relevant credit agreements fall within the provisions of the National Credit Act, issuers have been deemed to be credit providers under the National Credit Act
Under the National Credit Act, borrowers can potentially delay foreclosure process by seeking counselling with debt counsellors.  If a credit provider is found to have lent recklessly by the Magistrates' Court, the court has the power temporarily to suspend the credit arrangement, re-arrange the borrower's obligations or even set aside the borrower's obligations.  If the credit agreement is found by the Magistrates' Court to be unlawful, the asset either stays with the borrower or, if the asset would unjustly enrich the borrower, it is forfeited to the state and not returned to the credit provider. 
Sale agreements between an originator and an issuer are now being drafted to provide that if a credit agreement purchased by the issuer is unenforceable due to non-compliance with any applicable law, including the National Credit Act, the issuer will be entitled to enforce the remedies set out in the sale agreement for breach of warranty by the originator. 

9. Security and Insolvency
Peculiarity of South African law prevents sharing of security amongst noteholders of different levels of seniority and secured creditors of the issuer. This led to the development of a Security SPV to which all security held by the issuer is pledged. The benefits of this security is then governed by the priority of payments governing the transaction.
Certain sections of the Insolvency Act:
Section 26 (dispositions without value)
Section 29 (voidable preferences)
Section 30 (undue preferences)
Section 31 (collusive preferences)
Section 34 (voidable disposition of a business)
Section 46 (set-off)
Impact on a South African securitisation transaction in respect of the sale of assets by the originator to the issuer.  Generally, where the originator sells or transfers assets to the issuer in contemplation of its own insolvency or to favour specific creditors, the assets will be considered to form part of the assets of the originator.

10. The Deeds Registries Act
South Africa has a well developed and accurate land registration system.  Every piece of land has been measured and surveyed by a land surveyor and plotted on a diagram or general plan which is held in the office of the Surveyor General.  Each of those pieces of land is registered in one of nine provincial Deeds Registries.
Security for any lender in the form of a mortgage will only be recognised in law for the benefit of the lender when the lenders beneficial interest is noted in the Deed Registries.
Typically in RMBS and CMBS transactions on transfer of the assets to the Issuer, each mortgage will need to be registered usually by way of a registered cession.
Since there is no special dispensation to prioritise securitisation transactions, a bottleneck which results from trying to register thousands of mortgage loans in the provincial Deeds offices often delay the timely conclusion of transactions.
In other European countries the registration in the deeds offices is considered to be an administrative process which can progress after the sale agreements have been executed. Hence ownership will pass on execution of the sale agreement which makes it procedurally easier to undertake securitisation transactions on the basis of the sale alone. Due consideration of the Nigerian process of transfer will be required to avoid similar procedural hindrances to securitisation.

11. Taxation
There are no specific tax laws governing the taxation of securitisation transactions, nor any taxation cases on which to base most of the subjective issues associated with securitisation.
Contentious areas of taxation include:
Excessive interest payable on subordinated loans
Stamp Duties Act of 1968 (cancelled in 2002)
Value Added Tax (VAT)
Transfer Duties and
Capital Gains Tax
Reliance on legal opinion of senior legal counsel underpin most transactions. More recently South African Revenue Services (SARS) is working with industry participants and giving rulings on treatments of taxation associated with specifically securitisation transactions primarily based on the premises that transactions are structured to achieve tax neutrality in the issuers
To assist the promotion of securitisation transactions, and to avoid lengthy court cases which may occur as a direct result of taxpayers interpreting the tax laws incorrectly. Nigerian taxation authorities should take cognisance of the efforts of other countries, such as the USA, and provide relevant guidelines or rulings. This can be done without compromising the ability to levy taxation for the fiscus.

12. Accounting
In South Africa Generally Accepted Accounting Practice (GAAP) is applied for the accounting treatment of Asset Backed Securitisation Transactions. Following on the guidance from IAS 39 and FRS5 the South African standard AC412 proceeds on the basis of substance over form, and hence the SPV should be consolidated when the substance of the relationship between an originator and the SPV indicates that the SPV is controlled by that originator based on the guidelines for determining control as outlined in the standard
Consequentially the majority of transactions executed in South Africa are consolidated by the originators and remain on the statutory balance sheet reflecting the effect of these transactions as loan financing as opposed to asset sales. Since the controversies surrounding Enron and Worldcom in the US, securitisation transactions are no longer regarded as off balance sheet funding solutions
Bank securitisations have become an area of accounting contention particularly where the origination bank seeks to gain relief for liquids and reserving costs or capital. Generally bank regulatory returns (which reflect the capital and liquid costs) are based on the statutory accounting records which do not recognise the form of the transaction often causing reporting difficulties for banks. Banks have to implement changes to their reporting procedures to alleviate this problem

13. Key Asset Classes Residential Mortgage Backed Securitisation (RMBS)
Retail consumer receivables (ABS)
auto loan securitisations
in-store- credit card securitisations
office equipment leases
personal loans
Commercial Mortgage Backed Securitisations (CMBS)
Collateralised Debt Obligations (CDO’s)
Hybrid Asset Backed Commercial Paper Conduits (ABCP)

14. Key Assets characteristics
Uniform term for underlying loans
up to 60 months for autos
up to 30 years for home loans but mainly 20 years
Uniform interest rate basis
largely variable expresses as a margin and referenced to Prime or JIBAR
some fixed rate loans typically quoted of the swap curve
other consumer loans mainly variable referenced to the maximum rates specified by legislation such as the Usury Act
Repayment Profile
Loans to individuals are typically fully amortising over the term of the loan
Legal requirement for loans to permit for prepayment
Most bank lenders have an access facilities which allow for prepaid principal to be redrawn without penalty on most variable rate loans

15. Assets characteristics……continued
Loan terms and conditions have converged and very similar
Consumer protection legislation driven – National Credit Act
market competitiveness
differentiation is typically around margin pricing
Loan portfolios typically have characteristics that enable quantitative assessment of credit quality including default frequency predictions and loss severity (loss that would be realised in the event of a default) such characteristics include:
loan to value ratios –proxy for loss severity
debt/payment to income debt ratios –proxy for default
loan seasoning - time that the loans have been on the books
geographical distribution
systems and historical information on loan book performance
As the Nigerian market develops asset originators should avoid contracting on terms that hinder direct debt capital market financing especially around transferability of the loan. South African experience has shown that companies such as SA Homeloans who set out to fund their debtors books through securitisation have enjoyed a much smoother ride in deal execution. Most banks have had to revisit loan agreements to generate eligible loans for example.

16. Calculating /Paying Agent/Administration Roles Investors/ABCP Conduits
The Participants
Rating Agencies
The emergence of local and international rating agencies has provided a means for independent assessments of credit. They also provide independent research and monitoring services enabling investors to check on the performance of securitisations
Calculating /Paying Agent/Administration Roles
The calculating agent, paying agent who determine and make the interest payments on behalf of the issuers is a role usually retained by banks.
Administration roles for managing the day to day affairs of the issuer have been retained by banks or originators.
Investors/ABCP Conduits
Investors comprise mainly fund managers support securitisation transactions. ABCP conduits have played a major role in the development of the market by investing in up to 30% of all term transactions since 2002 most of which are settled through BESA
Auditors
The auditors will perform audits of the data pool, cashflow model and data in the Offering Circular, including the pool stratification and weighted average life tables
Trustee
Due to the lack of substantive Trustees (BONY, HSBC Trustees, Citibank Trustees) in the local market the Trustee roles have been restructured. Generally they hold security, monitor cashflows on behalf of investors and will engage professional firms to assist upon the occurrence of significant events.
Regulators
Specific consideration will need to be given as to the desired regulatory treatment for the securitisation transaction
Legal advisors
Typically represent the arrangers are responsible for drafting documentation and setting up the SPV’s. In most SA transactions only one set of legal advisors are engaged to minimise the legal costs.
Arrangers and Managers
Typically investment banks, facilitating the disintermediation process play a pivotal role in structuring assets to generate bonds meeting the requirements of the investors and originators.

17. Confidentiality and Disclaimer
This document and its contents are private and confidential and are the sole and exclusive property of Nedbank Limited (“Nedbank”). This document and its contents have been furnished to participants of the Seminar for the benefit and information of the participants only, to whom this document is submitted in good faith and who is deemed by Nedbank to have accepted responsibility for ensuring that the confidentiality of this document and its content will be maintained at all times. This document may not be circulated, published, copied, reproduced, disclosed or distributed, in whole or in part, to any third party without the prior written consent of Nedbank.
Nothing in this document constitutes any offer, nor does it confer on any of Nedbank any commitment, to provide services, financing or underwriting in relation to any transaction or strategy.
The contents of this document do not and are not intended to constitute accounting, legal, tax or any other advice and should not be relied upon as such. You should seek advice from your own independent professional advisers as to the financial, regulatory, legal, tax and accounting implications of any transaction referred to herein.
Nedbank, nor any of its subsidiaries, holding or associated companies, nor any officer, employee, director or agent of Nedbank shall be liable for any loss or damage of whatever nature suffered as a consequence of the reliance by any party on any information contained in this document.

18. The ABC’s of Securitisation
Appendix 1
The ABC’s of Securitisation

19. What is securitisation
Securitisation is the process of converting illiquid cash flows into rated securities
Securitisation is a financing technique used by banks (“Originators”) to relieve capital, diversify funding sources, manage the balance sheet, and transfer risk
Securitisation involves the sale, transfer or pledge of specified assets to a bankruptcy-remote Special Purpose Vehicle (“SPV”), which in turn issues Asset
Backed Securities (“ABS” or the “Notes”) to investors in order to fund the purchase of the assets
The risk associated with the assets is stratified by looking at historical default and loss information. Each rated tranche will have an expected probability of default and loss, subject to the maturity profile of that tranche
Generally, the Originator remains the servicer in charge of managing the pool of assets it has sold to the SPV
Investors (banks, insurance companies and specialised funds) rely on the cash flows (principal, interest, and sale proceeds when sold after foreclosure)
generated by the underlying assets to pay interest and principal on the Notes
Main benefits of the securitisation
Diversify funding sources
Liquidity tool
Regulatory capital management
May improve certain financial ratios
Risk transfer
Balance sheet management
Maintain market competitiveness as margins decline

20. Key Elements
Originator - The Originator is the bank which transfers assets to the SPV
Assets - The securitised assets should generate predictable and stable future cash flows and also be legally transferable by the Originator to the SPV. There must be an absolute separation in the ownership of the assets from the Originator, in order to avoid consolidation of the assets into the bankruptcy estate of the Originator. Separation is created by a ‘true sale’ of the assets which ensures that no other creditors of the Originator have any claims against the sold assets
SPV/Issuer - The Issuer is a specially created entity for the purposes of the securitisation, known as a special purpose vehicle (SPV). It is a bankruptcy-remote entity owned by a charitable trust. The SPV is structured to be legally different and independent from the Originator and is not meant to have any other substantial obligations or incur other debt, which could jeopardise its bankruptcy-remoteness
Servicer and back up servicer - The Servicer is typically the Originator but can also be a third party (as is common in the US). The Servicer is responsible for the management of the assets (cash collection, pursuing delinquent and defaulted accounts, sale of assets, etc.). If the Servicer is the Originator, any negative changes to the Originator could affect its role as Servicer, influencing the performance and rating of the ABS. Often, in case the originator is not a sufficiently rated counterparty or its market share is not “extraordinary” as well as its financial stability is not adequate, then rating agencies will require a back up servicer
Liquidity provider -(if any) Typically a bank providing a liquidity facility to cover potential timing mismatches between the cash flows generated by the assets and cash flows needed to be paid under the ABS. The Liquidity Provider does not cover cash shortfalls due to losses in the Assets
Rating agencies - The Rating agency establishes the credit enhancement levels, i.e. the cushion that investors receive to protect them against losses, according to the desired rating levels. Credit Enhancement levels ultimately depend on the credit quality of the Assets and the desired rating of the bonds
Investors - Investors in ABS are typically banks, insurance companies and specialised funds
Swap provider - The swap mitigates interest rate risk as well as currency risk: the swap provider will need to be an eligible counterparty
(i.e. minimum rating imposed by the rating agencies)

21. Third Parties Underwriter/ Lead Manager/Arranger
The Investment Bank’s role is to manage the transaction, and advise the Originator through the process. Our job is to achieve the best transaction for the Originator, while minimising the required management time for the Bank
Legal Counsel
The lead manager and the Originator will require legal counsel. The lead managers’ counsel should also have primary responsibility for drafting the legal documentation (Offering Circular and supporting documents)
Auditors
The auditors will perform audits of the data pool, cash flow model and data in the Offering Circular, including the pool stratification and weighted average life tables
Rating Agencies
Provide transaction ratings based on analysis of the underling pool data and structure cashflows, and produce pre-sale and/or new-issue reports for the benefit of investors
SPV Set up and Management
Sets up and administers the SPV and provides corporate services— directors, secretaries, etc
Calculation Agent, Paying Agent and Collection Bank
Provides administrative support to the borrower throughout the life of the issuance
Trustee
Appointed as an independent party to ensure the interest of investors and lenders are protected
Regulator
Specific consideration will need to be given as to the desired regulatory treatment for the securitisation transaction

22. Contact Stewart Makura Nedbank Capital - Debt Capital Markets
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