Securitization in Emerging Markets, Including Government Promotion of Securitization
Booth, Charles D., Stern, Bruce E., Duke Journal of Comparative & International Law
The articles by Professors Doug Arner and Claire Hill address two aspects of securitization in emerging markets. Professor Arner's article, Emerging Market Economies and Government Promotion of Securitization, describes the benefits of securitization, provides an overview of the key underlying elements that are necessary for the development of securitization in emerging markets, and stresses the need for government leadership in the process. Professor Hill's article, Whole Business Securitization in Emerging Markets, focuses on the benefits and value that could result in emerging markets from pursuing a relatively new form of securitization--the securitization of whole businesses.
Emerging markets could indeed benefit from securitization. For example, many financial institutions would not have been as adversely affected by the Asian financial crisis if they had been able to spread out their risk through the use of mortgage-backed securitization. However, the establishment of securitization structures will take time. As Professor Arner argues, "traditional asset securitization structures cannot simply be `parachuted' into individual financial systems." (1) Rather, a "complex matrix of supporting elements, all of which have a significant legal element," must be put into place for asset securitization to be successful. (2) With regard to the traditional and most common form of asset securitization, the securitization of mortgages, he rightly argues that this matrix must include the following elements: (1) a real estate-based finance market (the primary mortgage market); (2) capital markets (including secondary mortgage markets and domestic bond markets); and (3) infrastructure supporting securitization. (3) Professor Arner highlights the need for government involvement in developing these three elements and promoting mortgage securitization. Governments must pay particular attention to the development of the necessary economic and legal framework for supporting securitization. Furthermore, Professor Arner correctly stresses that in emerging markets, this consideration necessitates starting with the enactment and enforcement of clear real property rights, efficient mechanisms for transferring these rights (including bankruptcy and foreclosure laws), and the use of real property as collateral. (4) It cannot be overemphasized that anticipated benefits from securitization will not accrue until these basic matters are properly addressed.
Professor Arner might consider adding a fourth element into the matrix--infrastructure for cross-border securitization. Banks in many emerging countries, and in Asia in particular, would most likely have to hold a regional portfolio of investments in order to achieve the same level of diversification that U.S. banks holding a national portfolio achieve. It is difficult enough to determine how to perfect security interests in mortgage-backed securities when focusing on the laws of one country with developed securitization procedures in place; these determinations are more complicated in cross-border scenarios involving emerging markets.
Professor Hill focuses on a different aspect of securitization, the benefits that would result in emerging markets from whole business securitization. (5) In such a transaction, a group of creditors provides a company's entire debt funding through a special purpose vehicle (SPV). The creditors agree at the time the loan is made on their respective rights and obligations if the company later encounters financial problems.
In a whole business securitization, simultaneously with the SPV making the loan, the corporate borrower grants the SPV fixed and floating charges on all its corporate assets. This is a crucial part of the transaction, for as Professor Hill emphasizes, the success of whole business securitization requires that the priority rights of secured creditors are absolutely respected. At present, this level of protection is possible primarily in jurisdictions that have adopted the concepts from U. …