Securitisation - frequently asked questions

An originating ADI must not be obligated to repurchase underlying exposures from a securitisation other than where the ADI is required to repurchase an exposure, due to a breach of a representation or warranty within 120 days of the original transfer (as per APS 120 paragraph 18(b)). In any other circumstance, a repurchase must be fully discretionary, at the election of the ADI, and in accordance with the requirements in APS 120 Attachment A paragraph 6 or Attachment B paragraph 5.

Except in the case of a self-securitisation, an originating ADI is only permitted to repurchase underlying exposures from a securitisation, including both capital relief and funding-only securitisations, in limited circumstances. These circumstances include where the borrower requests a further advance (or a similar purpose), provided that the loan is not in default and the repurchase is conducted at arm’s-length (see APS 120 Attachment A paragraph 6 and Attachment B paragraph 5). 

The intention of these provisions is not to facilitate the repurchase of loans in arrears, on repayment deferral, or which have been subject to restructuring or renegotiation as a result of real or anticipated financial hardship. Repurchases must not be undertaken to allow the securitisation special purpose vehicle (SPV) or its investors to avoid losses in relation to the underlying exposures, or to improve the credit quality of the remaining pool. Where such repurchases have occurred, it is likely that APRA will consider that the originating ADI is providing implicit support to the securitisation (see APS 120 paragraphs 68 to 70).

For the purposes of APS 120, APRA considers a ‘further advance’ to be new monies provided by an ADI as part of an existing loan with a borrower for the purpose of providing the borrower with additional funds. APRA does not consider a ‘further advance’ to include an increase in an existing loan balance as a result of the capitalisation of interest, expenses or other costs. 

References:

• APS 120, paragraph 13;
• APS 120, Attachment A, paragraph 6;
• APS 120, Attachment B, paragraph 5; and
• APG 120, paragraph 15. 

APS 120 Attachment A paragraph 6 and Attachment B paragraph 5 allow an originating ADI to repurchase underlying exposures from securitisations in limited circumstances, and provided the repurchase is conducted on an arm’s-length basis. To be considered arm’s-length, any exposures that are repurchased from a securitisation must be repurchased at prices which would be consistent with prices ordinarily used for dealings with independent third-parties, such as the fair market value. Loan repurchases at the outstanding loan balance plus accrued interest, particularly where those loans are non-performing, are unlikely to be considered by APRA to be on arm’s-length terms. This applies to all loan repurchases including where loans are repurchased to exercise calls.  

References:

• APS 120 Attachment A, paragraph 6; and
• APS 120 Attachment B, paragraph 5.

Where an originating ADI is funding a self-securitisation SPV’s purchase of assets from a funding-only or capital relief securitisation, such an arrangement would be considered as the ADI repurchasing those assets and would likely be non-compliant with APS 120 Attachment A paragraph 6 and Attachment B paragraph 5. This is because risk associated with the underlying pool, that was previously held by an independent third-party, is transferred back to the originating ADI. 

References:

• APS 120, paragraph 21(b); and 
• APG 120, paragraph 29.

Under APS 120 paragraph 21(b), other than in the case of a self-securitisation, an originating ADI must not increase a retained first loss position or provide additional credit enhancements after the inception of a transaction, regardless of the circumstances or reasons for doing so. For example, an ADI must not increase a first loss position or provide additional credit enhancements (other than in the case of a self-securitisation) for the following reasons: 

-    to prevent, or in response to, a more senior securitisation exposure being downgraded by an External Credit Assessment Institution (ECAI) or the holder of the senior exposure;

-    to prevent, or in response to, the holder of a more senior exposure being required to hold additional capital against their exposure; or 

-    in response to, or anticipation of, a deterioration in performance and/or credit quality of the pool.

APRA would expect that the requirement in paragraph 21(b) would also apply to back-to-back arrangements documented outside of the securitisation with holders of more senior positions, including where these arrangements are used to compensate for the above circumstances.

References:

• APS 120, paragraph 21(c).

Under APS 120 paragraph 21(c), other than in the case of a self-securitisation, an originating ADI must not increase the yield payable to the investors in a securitisation in response to a deterioration in the credit quality of the pool, regardless of the circumstances or reasons for doing so. For example, the margin payable to investors cannot be increased (other than in the case of a self-securitisation) for the following reasons: 

-    in response to exposures in the pool going into arrears or default, and/or loss triggers being breached (including where any of these events triggers an amortisation event or an event of default);

-    in response to a more senior note being downgraded by an ECAI or by the holder of the senior exposure; and

-    in response to a more senior investor being required to hold additional capital against their exposure.

APRA would expect that the requirement in paragraph 21(c) would also apply to back-to-back arrangements documented outside of the securitisation with holders of more senior positions, including where these arrangements are used to compensate for the above circumstances.

A key principle of APS 120 is economic substance over legal form. Therefore, where the SPV increases the margin payable to investors in response to a deterioration in the credit quality of the pool, APRA would consider this equivalent to the originating ADI having increased the yield payable to the investors if, as a result, the ADI is financially disadvantaged. This is likely to be the case where the ADI has an exposure to the SPV; for instance, if it holds non-senior notes or is the beneficiary of excess spread, the repayment of which is subordinated to the increased margin payable to senior investors.