I. Core Issues
Like elsewhere, most securitizations carried out in Panama are structured in the following manner: A special purpose vehicle (“SPV”) is constituted by an originator that owns assets which it intends to securitize. The SPV performs an offering of securities (usually debt instruments such as bonds or notes) and uses the proceeds received from the offering to purchase the assets from the originator. The originator receives cash, the SPV receives the assets, and the flows generated by the assets are used by the SPV to pay sums due under the securities to investors, who are creditors of the SPV and not of the originator.
A properly structured securitization should prove to be beneficial for all parties thereto. Benefits for originators include access to a new (and potentially cheaper) source of funding, improved liquidity and risk profile, and the opportunity to expand operations with cash received. Benefits for investors include the possibility of investing in securities that do not carry the risk of the originator itself and the repayment of which only depends on the quality and performance of the assets securitized.
For the aforementioned benefits to materialize, several requirements must be fulfilled in a securitization transaction, none of which is more important than achieving a “true sale” of the assets from the originator to an insolvency-remote SPV. It is only after this goal has been accomplished that the investors truly hold an investment that is shielded from the risks of the originator and its business and is linked only to the risks related to the underlying assets.
A. True Sale
Achieving a true sale of the assets is a fundamental element in any securitization, since it is necessary for the assignment of ownership of the assets from the originator to the SPV, thus removing the assets from the patrimony or estate of the originator and, in so doing, granting the SPV sole and exclusive title to the assets without them being available to fulfill obligations of the originator in case of insolvency or otherwise.
The transfer of property in Panama is most frequently performed by means of a purchase and sale contract (contrato de compraventa). In a purchase and sale contract, one party (the seller) is obligated to deliver a determinate (or determinable) object (asset or service) and the other party (the buyer) is obligated to pay a determined (or determinable) price in money for said asset or service.
Articles 1234 and 1278 of the Civil Code allow the sale of incorporeal rights and credits. Furthermore, articles 1122 of the Civil Code and 197 of Decree-Law No. 1 of July 1, 1999 (as amended to date, the “Securities Law”) permit the sale of future credits and other incorporeal rights. Future credits and rights may be transferred even before the contracts that will create them have been entered into and formalized or the securities that represent them have been granted or issued. The capacity to sell future credits and other rights allows for the securitization of future flows in Panama.
Given their intangible nature, credits and other incorporeal rights are usually sold by means of a special form of purchase and sale agreement known as an assignment contract (contrato de cesión), rather than through a simple purchase and sale agreement. In an assignment contract, the assignor transfers or assigns ownership title over the credits to the assignee.
Under Panama law, it is advisable that certain formalities and actions be met for a true sale of present or future credits to be deemed to have occurred, with effects not only between buyer and seller but also in relation to third parties such as the debtor of the transferred credit, creditors of the seller and third parties, in general. The requirements that must be fulfilled to achieve a true sale are the following:
(a) The contract must be in writing,
(b) The contract needs to have a date certain,
(c) The credits need to be identified or determinable,
(d) The price must be set or be determinable,
(e) The price must be paid in money,
(f) Delivery of the credits must have occurred, and
(g) The debtor must be notified of the sale of the credits.
Contract must be in writing. The agreement must be in writing for purposes of constituting evidence of the existence of the obligations that arise therefrom, as set forth by article 1103 of the Civil Code. An important advantage of the contract being in writing is that the signature of the same by the parties should be considered as proof of their intent or volition to enter into the agreement and be bound thereunder.
Date Certain. Article 1278 of our Civil Code requires that the agreement have a date certain (fecha cierta) for the transaction to have effects against third parties, including creditors of the seller. The date certain of a document will be that which occurs from the day on which the signatures of the parties have been recognized or acknowledged before a notary public. Having the agreement in the form of a public deed (escritura pública) also endows it with a date certain.
Credits. The credits should, if possible, be identified in the agreement, although this is not necessarily required since they only need to be determinable, as provided for by article 197 of the Securities Law. The assets are deemed determinable if they can be identified from the content of the documentation and without need for buyer and seller to enter into a new contract or perform any further action. For the assets to be determinable, parameters, formulas, descriptions, procedures and other content may be included in the agreement.
Price. The price to be paid for the assets must be identified in the contract or at least be determinable from the content of the agreement without need for buyer and seller to enter into a new contract or perform any further action. In a purchase and sale operation, the price must be paid in money. The price may be in US dollars without incurring in exchange rate concerns, because the US dollar is legal tender in Panama.
Delivery. For a true sale to occur, it is of the essence that delivery of the assets take place. Article 1231 of our Civil Code states that a seller that has entered into a purchase and sale contract is obligated to deliver the asset to the buyer. Under articles 1232 and 1234 of our Civil Code, delivery of incorporeal assets such as credits is considered to have occurred if the contract is in the form of a public deed. The foregoing provisions are over a century old. Article 197 of the Securities Law, originally enacted in 1999, provides that delivery of ‘future credits and other incorporeal rights’ shall be deemed to occur if (a) the transfer is in the form of a public deed or (b) the signatures of the parties are merely recognized by a notary public.
Notice to Debtor. It is important that the debtor be notified of the transfer of the credit for the debtor to be obligated to cease making payments owed under the receivable to the seller thereof and to begin making payments to the buyer. Notifying the debtor is not necessary for a sale to have occurred between the parties, but if the debtor is not notified, article 1279 of the Civil Code states that the debtor that continues to pay amounts due under the credit to the previous owner of the receivable is properly complying with its payment obligations under the credit, even though the party that receives payment has already sold the credit. Therefore, if the debtor is not notified, the debtor may continue to pay amounts due under the receivable to the previous owner of the credit, from whom the buyer of the credit must procure payment.
Regarding the performance of notice to debtors, provisions of the Commerce Code state that debtors must be notified in the presence of two witnesses or a notary public. In the context of the transfer of future credit for purposes of being securitized, however, articles of the Securities Law allow for the notice to be given to the debtor in any form as long as it is in writing, without needing to notify the debtor in the presence of witnesses or a notary public.
With respect to certain secured credits (such as mortgage loans), the loan document and the mortgage guarantee must be in the form of a public deed, which deed must be registered with the Public Registry. If a mortgage is constituted to secure a debt documented by means of a simple loan contract, the assignment agreement whereby a mortgage loan is sold for purposes of being securitized or otherwise must, in addition to complying with the requirements for a true sale mentioned above, be registered with the Public Registry of Panama. If, however, the mortgage is constituted to guarantee an obligation evidenced by an obligation that may be transferred by mere endorsement (for example, a negotiable instrument such as a promissory note), the assignment contract does not have to be recorded with the Public Registry and notice need not be given to the debtor, because provisions of the Civil Code state that the mortgage right is deemed transferred when the obligation is transferred by mere endorsement.
If the requirements mentioned above are fulfilled, a true sale of assets has occurred under Panama law, having effects not only between seller and buyer (SPV) but also in relation to the debtor of the receivables, creditors of the seller and any other third party. Having met the requirements, the transaction is not a mere promise to deliver the assets which could require further actions from the parties but, instead, full title and ownership of the assets would be deemed to have been transferred to the estate of the buyer-SPV, guaranteeing the insolvency remoteness that is of the essence for a properly structured securitization.
However, various challenges may arise if one or more of the requirements of a true sale are not met, and the consequences thereof will depend on the particular formality that was not complied with. For example, failure to notify the transfer of the receivables to the debtors allows them to continue to pay amounts due under the credits to the previous owner of the receivable, from whom the buyer of the credit must afterwards procure payment.
Consequences are more significant if the parties signed the agreement but the document is not in the form of a public deed or the signatures of the parties were not recognized by a notary public. Given the fact that the parties signed the sales or assignment agreement, a contract would exist between the parties and they would be reciprocally obligated thereunder, but the transaction would not be effective against third parties. Furthermore, delivery of the assets would not be deemed to have occurred, which means that the assets would still be property of the seller and available for payment of obligations to other creditors, which may even seize the assets in order to secure payment of debts owed to them by the seller. If this is the case and delivery of the assets has not taken place, the seller under the signed agreement will still have an obligation to deliver the assets and the buyer will still have a right to receive them. In this state of affairs, the buyer would be deemed, at best, an unsecured creditor of the originator. Panama insolvency laws state that the declaration of liquidation of a non-regulated party will cause bilateral contracts that have not been fully executed (perfected), or that have only been partly executed, to be declared as terminated by means of summary process.
Panama law allows for securitizations to be structured in a manner such that the SPV that will receive the assets being securitized will be considered “insolvency remote” - that is, that the SPV cannot be obligated to pay debts of the originator and the assets it has acquired cannot be made available to fulfill debts owed to creditors of the originator.
1. True Sale
The most important requirement that must be fulfilled to achieve insolvency remoteness is that the transaction whereby the assets are transferred to the SPV for purposes of being securitized complies with all requirements for it to be considered a “true sale” of the assets. If this is achieved, full title and ownership of the assets would have been transferred from the originator to the SPV and, therefore, the transaction cannot be avoided, the assets of the SPV cannot be consolidated with that of the originator and, in general, the insolvency of the originator should not affect the SPV or its assets, except under certain circumstances expressly provided in the law.
2. Voidable Transactions
The insolvency treatment of individuals and legal entities that are not governed by special laws is governed by Law 12 of 2016 (the “Insolvency Law”). This law does not apply to the insolvency of banks, insurance companies, broker dealers and other special entities that are governed by other statutes. Under the Insolvency Law, there are certain transactions that may be deemed or declared null and void even if they fulfill the requirements to be considered a true sale of assets.
Under the Insolvency Law, the liquidation of a non-regulated entity may only be declared by a court of law. The court may declare the liquidation of a non-regulated entity if a petition for said purposes is filed before it by the non-regulated entity itself (deemed a voluntary liquidation) or by a creditor of the non-regulated entity (deemed a forced liquidation).
For a liquidation proceeding to commence, a resolution declaring the liquidation of the entity must be issued by a competent court. Said resolution must contain, among other information, the date in which the entity entered a state of insolvency (the “Insolvency Date”). In the absence of special circumstances, the Insolvency Date will be deemed to be the date on which the petition requesting the declaration of the liquidation of the entity was presented to the court.
The following are transactions that will be deemed null and void if they were performed within the twelve (12) months prior to the Insolvency Date:
(a) Any act or contract on a gratuitous basis and those which, although performed in exchange of a consideration, should be considered as gratuitous, due to the excess in value of that which the originator has given to the other party in the transaction,
(b) The constitution of a pledge or mortgage, or any other action for purposes of securing previously contracted debts or to grant them a more senior preference or ranking over other debts, and
(c) The payment of debts that were not due and payable at the time of payment, as well as the payment of debts that were due and payable when the obligation was paid with consideration in-kind.
In addition, at the request of the liquidator or any creditor, the following actions of the originator may be declared null and void by a competent court: (i) fraudulent acts or contracts, being understood as fraudulent when the parties make false warranties or representations about facts or occurrences; and (ii) any sales or transfers of assets, whether on a gratuitous or onerous basis, in which the entity in liquidation performed the act or contract for purposes of setting aside assets against the interest of creditors.
3. Insolvency Remote SPV
It is recommended that the receivables be sold to an SPV endowed with traits that would increase remoteness from insolvency of the originator. Panama law offers two SPVs that comply with said criteria: the corporation (sociedad anónima) and the trust (fideicomiso). In this paper, we will focus more on trusts than on corporations because, in securitizations, the former is more frequently used than the latter. Nevertheless, corporations have been used as SPVs in securitizations and, therefore, we will provide a brief description thereof.
The type of Panama corporation that has been used in securitizations is governed by Law 32 of 1927 (as amended to date, the “Corporations Law”). A corporation is constituted when two or more parties, called underwriters (suscriptores), enter into and sign a document known as articles of incorporation (pacto social) and said document is recorded with the Public Registry of Panama.
Once it has been constituted, a corporation is deemed to be a juridical person (persona jurídica) with full legal capacity to enter into contracts, perform transactions, file suits and be sued and, in general, to be the title holder of rights and incur obligations. Among others, the articles of the corporation must express its share capital and the quantity of shares into which said capital is divided. The shares of a corporation are issued to the shareholders of the company and they are instruments that grant shareholders the right to an equity participation in the share capital of a corporation and in the gains (and losses) thereof.
The board of directors of a corporation is charged with the management of its business but the Corporations Law identifies certain actions that require approval of the shareholders, such as the sale of a majority of assets, guaranteeing obligations of third parties and amending the articles of incorporation. For securitizations that will use a corporation as SPV, usually a new corporation is constituted to participate in the transaction.
Corporations have been used as SPVs in securitizations because the securitized assets sold thereto by an originator are property of the corporation and are not part of the estate or patrimonies of individuals related to it, such as shareholders and directors. If the receivables are transferred by means of a true sale, they will, in addition, have ceased to be part of the estate of the originator and would not be available to creditors thereof.
Finally, the articles of incorporation of a corporation may include provisions that limit the powers of both directors and shareholders when it comes to the management of the corporation and the underlying assets. However, if a corporation is going to be used as an SPV, investors should require that the directors and shareholders not be controlled by the originator to avoid possible consolidation with the assets of the originator and for them to be able to act with complete independence in relation to the management of the assets, particularly in case of default, without interference from the originator.
Trusts are governed by Law 1 of 1984 as modified by Law 21 of 2017 (the “Trusts Law”). A trust possesses the characteristics of being a separate estate or patrimony that is constituted when a settlor (fideicomitente) transfers assets or rights to a trustee (fiduciario) that is charged with the management of said assets or rights solely for achieving a particular purpose determined by the settlor in the trust agreement. The Trusts Law sets forth the minimum information that must be included in a trust agreement and requires that persons regularly acting as trustees obtain a license from the Superintendence of Banks of Panama (Superintendencia de Bancos de Panamá and, hereinafter, the “SBP”).
A trust can be constituted to accomplish a purpose for the benefit of a beneficiary (beneficiario), which may be the settlor itself, or it may be created only to achieve the purpose set forth by the settlor. Once constituted, a trust may, through the trustee, enter into contracts and transactions and, in general, acquire rights and obligations in the same manner as other legal entities.
Trust are particularly attractive for securitizations because, once the settlor transfers assets or rights to the trustee, the assets constitute a stand-alone patrimony or estate managed by the trustee and the assets that comprise the trust are separate from the assets of the settlor, trustee and beneficiary, if any. Due to the foregoing, the assets of the trust will not be available to pay debts due to creditors of the settlor, trustee or beneficiary in the context of an insolvency or otherwise, provided that the transfer of the assets to the trustee met all requirements to be considered a true sale and is not a transaction that could be deemed or declared null and void under applicable insolvency laws.
Regarding the rights of the trustee, it is important to clarify that, even though a trustee acquires ownership of the assets given in trust, said rights are acquired by the trustee only on a fiduciary basis and the trustee must manage the assets in strict compliance with all limitations, restrictions and other terms and conditions set forth in the trust agreement.
Under Panama law, a trust can only be constituted by a settlor. However, the settlor of a trust for securitization purposes does not have to be the originator and this could even be preferable because the settlor of a trust does not receive cash in exchange for the assets it gives in trust. The reason why the originator does not have to be the settlor of a trust, without prohibiting the originator from transferring the assets being securitized to the trust, is because a trust can, acting through its trustee, enter into contracts and transactions. As such, a trust that has received funds by issuing securities can use said funds to acquire the assets from the originator, without the originator having to be the settlor of the trust.
Certain securitizations in Panama have used a two-trust structure. In this case, the originator (or an affiliate thereof) first constitutes a trust that will be the issuer of the securities (an “Issuer Trust”). Afterwards, the trustee of the Issuer Trust (the “Issuer Trustee”) would act as settlor in the constitution of a guarantee or collateral trust (a “Collateral Trust”) with a trustee that is usually independent from the originator and the Issuer Trustee.
In these two-trust structures, the Issuer Trustee uses the proceeds of the issuance to pay for the assets being securitized but, instead of the Issuer Trust holding the assets, it causes the same to be delivered to the Collateral Trustee for them to constitute the property of the Collateral Trust. An important advantage offered by this two-trust structure is the independence that exists between the Collateral Trustee and the Issuer Trustee. This independence should provide the investors assurance that, in case of default, the assets securitized can be sold and the funds received from said sale be used to pay investors without requiring any action from the Issuer Trustee. Finally, the assets that comprise the trust property of the Collateral Trust constitute an estate or patrimony that is not only separate from that of the originator but of the Issuer Trust as well, and are, therefore, not available to pay debts owed to the originator or the Issuer Trust.
4. Solvency of SPV
It is also of the essence that the SPV that will receive the assets be constituted in such a way that the SPV itself not become insolvent. Ensuring that the SPV operates on a solvent basis could be achieved by placing restrictions that limit the capacity of the SPV to perform activities other than holding the assets that are part of the securitization. These restrictions may include prohibiting the SPV from acquiring debts, giving the assets in collateral or in any way encumbering them, disposing of the assets or performing other similar operations, except in instances required for purposes of the transaction.
Some of the aforementioned limitations may be imposed by inserting them as covenants in the transaction documentation while other restrictions may be created by including them in the constitutive documents of the SPV. If the SPV that will be used for a securitization is a trust or a corporation, the laws that regulate both permit that limitations such as those defined above be set in their constitutive documents.
5. Independence of SPV
The parties should evaluate constituting the SPV in a manner that guarantees complete separation and independence from the originator. The SPV should be an entity that is identifiably segregate and distinct from the originator and, therefore, it would be preferable that, to the extent possible, the SPV not be created in such a way that it be deemed a subsidiary or affiliate of the originator. Interested parties will find out that Panamanian trusts and corporations present solutions that address the foregoing because the necessary independence is achieved if the SPV is constituted as either (a) a trust managed by a trustee that is not part of the originator or its economic group or (b) a corporation with a board of directors comprised by individuals that are not controlled by the originator or its group.
6. Secured Loans
As elsewhere, securitizations and secured loans or securities offerings in Panama are similar but not identical transactions. For example, trusts are also used as SPVs for purposes of securing other types of structured financings such as covered bonds and project financings. In these cases, the debtor-originator also transfers (or encumbers) assets to (or in favor of) a trust to constitute collateral for the payment obligations of debt or securities, but these cases differ from securitizations in several aspects, including: (a) the debt is incurred or the securities are issued by the debtor-originator and not the trust, (b) the investors are creditors of the debtor-originator and not the trust, (c) in case of transfer (as opposed to the creation of a security interest) the debtor-originator does not “sell” the assets to the trust but instead transfers them “in trust” (as settlor thereof in certain cases), (d) the trust does not pay a price to the debtor-originator as consideration for transferring the assets to the trust and (e) the flows generated by the assets transferred to the trust are, in certain infrequent cases, not always directly used to pay sums due to investors under the notes because the same are obligations of the debtor-originator and not the trust, which allows the debtor-originator to use its own funds to pay amounts due to the investors without need for flows generated by the trust assets to be used to pay investors.
If the bankruptcy or liquidation of the debtor-originator is declared and the security package was properly structured and implemented, the assets given in trust should not be consolidated with the assets of the debtor-originator for paying debts due to other creditors thereof and, even though the investors are creditors of the bankrupt debtor-originator and not of the SPV, they should solely be used to pay the investors without delay in accordance to the asset distribution provisions of the trust agreement.
7. Legal Opinion
It is common practice in securitizations that a Panamanian attorney issue a legal opinion regarding the “true sale” of credits to an insolvency remote SPV. In these opinions, the attorney usually concludes that, after reviewing signed documentation, a true sale to an insolvency remote SPV has occurred because all formalities (signed contract, payment of price, delivery of credits, etc.) have been satisfied.
As customary elsewhere, among the assumptions and qualifications that attorneys make in these opinions are the following: (a) the genuineness of all signatures, (b) the authenticity of all documents submitted as originals and the conformity to the originals of all documents submitted as copies; (c) the due organization, existence, good standing, capacity, power and authority of all parties to execute the contract and perform their obligations thereunder, and (d) the transaction is not one that would be deemed or exposed to be declared null and void under the Insolvency Law.
II. The Parties
The parties involved in securitizations carried out in Panama usually include the following: (a) an originator, (b) the investors, (c) an SPV or a trustee, if a trust is used as the SPV, (d) a servicer of the assets, (e) a paying agent, (f) an investment bank, (g) a guarantor, (h) a credit rating agency and (i) a stock exchange.
The role of originator in Panamanian securitizations has been performed by different types of entities depending on the nature of the asset that has been (or will be) originated and, in turn, will be securitized. In the case of consumer loans, mortgages, credit card receivables and DPRs, for example, the originator is usually a bank or finance company authorized to originate said assets. If the assets being securitized are the future flows of a toll road, the originator has been the toll road operator. In any case, the originator is usually the entity that, as a result of its business or operations, has originated the assets that will be securitized and which will eventually sell said assets to an SPV as part of the securitization process. There are no financial government sponsored entities that regularly participate in securitizations.
Most securities issued as a result of securitizations that have been performed in Panama are debt instruments such as notes, bonds and other obligations. Due to the foregoing, investors that have participated in securitizations usually become creditors of the issuing entity. The role of investors in securitizations are similar to those of investors in other debt instruments, for example, to cast their vote (that is, if they have been granted voting right) when the same is required, for example, for purposes of allowing the issuer to perform actions prohibited by the structure (such as selling assets or incurring further debt) or in order to approve or reject changes to the terms and conditions of the deal documentation proposed by the issuer or some other party.
If a trust will be used as the SPV in a securitization, the trustee will play a key role in the transaction because it will be the entity that will issue the securities on behalf of the trust and will also be charged with management of the assets being securitized in accordance with the deal documentation.
The Trusts Law adopted a specific supervision framework for companies engaging in the trust business as trustees. The SBP has the exclusive attribution to regulate and supervise trustees, which may only be persons holding a trustee license or that are otherwise authorized by law to act as trustees. Any party that intends to be authorized to engage in the trust business as a trustee must prove to the SBP that it complies with minimum financial, technical, legal, managerial and operational requirements to perform the trust business.
The role of trustees in securitizations usually encompass the following (a) registration of the securities with Panama’s securities commission (Superintendencia del Mercado de Valores and, hereinafter, the “SMV”) and listing in the local stock exchange (Bolsa de Valores de Panamá and, hereinafter, the “BVP”) in case of a public offering, (b) use of the proceeds of the issuance to pay the originator for the assets being securitized, (c) administration of the securitized assets for and on behalf of the trust and in accordance with the trust instrument, (d) constitution of a collateral trust and delivery of the in case of a two-trust structure, (e) engagement of the servicer, paying agent, broker dealer and other third parties, and (f) collection and use of the flows received from the assets to pay amounts due to investors and third parties, including service providers, as per a “waterfall” set forth in the transaction documentation.
Once an SPV acquires the assets being securitized as a result of a true sale, the SPV acquires property of the assets with full title to enforce all rights and privileges corresponding to it as owner thereof, including the right to collect the proceeds from the assets, determining the payment policies, modify their interest rates, allow for the creation of further liens over the assets, enforce real and personal guarantees and manage the assets in general. However, the SPV usually delegates these functions to a servicer by means of a servicing agreement.
The servicer shall administer the assets subject to the terms and conditions of the servicing agreement and following the same standards the servicer employs in managing its own business. Rights delegated to the servicer frequently include rights to modify interest rates of the assets, initiate judicial or extrajudicial procedures to collect delinquent sums, assist in preparing and filing financial and tax reports and collect tax refunds owed to the SPV.
E. Paying Agent
The SPV usually engages a securities registration, transfer and paying agent. This agent will keep a record or registry containing information of the securities or notes and the holders thereof, which typically include name and address of the holder as well as number of the certificate issued to the holder (if securities are in the form of physical certificates), date of issuance and authentication of the certificates, amount of principal, and each and every transfer or replacement of certificates.
The paying agent also assists the SPV with the transfer, replacement and cancellation of the notes. The securities are transferable only pursuant to annotations made by the paying agent in the registry mentioned above and only those persons identified in the registry as holders of securities shall be deemed the owners thereof. Finally, the paying agent is charged with the task of calculating sums owed to the investors and paying said amounts when due, with funds received from the SPV.
F. Investment Bank
A financial entity is commonly engaged to assist the originator with matters related to the structure of the transaction and/or the strategy regarding marketing and placement of the securities. This entity is usually an investment bank or a securities broker dealer which provides the originator with counsel related to the financial aspects of the securitization. If the broker dealer will be involved in seeking investors and assisting the issuer in the placement of the securities, the broker dealer will most likely require a license from the SMV to engage in the broker dealer business in Panama.
G. Credit Enhancer or Guarantor
A credit enhancer or guarantor of some sort is also frequently engaged in a securitization. For example, a credit enhancer may grant an outright guaranty whereby it undertakes to pay all or part of amounts due to investors if the issuer does not perform said payments. In other transactions, the issuer is obligated to maintain cash in reserve in order for it to be able to make payments of interest or principal at any given moment when the flows from the securitized assets are not sufficient to cover said payments. Instead of having the cash deposited in a bank account, a guarantor may issue a stand-by letter of credit whereby it agrees to deposit cash in the reserve account, if needed.
Moreover, in the case of mortgage-backed securities in Panama, for example, the transfer of mortgage loans documented by means of regular loans (and not in the form of a negotiable instrument such as a promissory note) needs to be recorded with the Public Registry of Panama for the transfer to be effective against third parties, including creditors of the originator. In these securitizations, the SPV issues the securities, uses funds to pay originator for the assets and acquires ownership of the credits, but said right will not have effects against third parties until the aforementioned registration is performed. This process involves a certain level of paperwork and can be time consuming. In order to guarantee that the recording of the transfer in the Public Registry will be performed, a guarantor such an insurance company issues a performance bond in favor of the SPV whereby it guarantees to the SPV that it will pay cash to it for an amount equal to the principal balance of any mortgages that have not been recorded with the Public Registry as transferred to the SPV in a given timeframe.
H. Credit Rating Agency
Issuers in securitizations frequently request a credit rating agency to rate the securities that will be offered. In our experience, credit rating agencies focus primarily, but not exclusively, on four main factors: (a) the quality of the underlying assets, (b) credit enhancements, (c) that the transfer of the assets from the originator to the SPV complies with all requirements to be considered a true sale and (d) the insolvency remoteness of the SPV. Securities offered as a result of securitizations have received both local and international credit ratings.
I. Stock Exchange
Securities resulting from securitizations have been offered and placed through the BVP, which is the local stock exchange. Before offering the securities through the BVP, the issuer must register or list the securities with said exchange. For this purpose, certain documentation has to be filed with the BVP for review and approval, including the Offering Memorandum of the securities. Since the BVP is a private company whose members are local broker dealers, the issuer has to engage a broker dealer that is a member of the BVP for said broker to offer and sell the securities through the BVP for and on behalf of the issuer. Securities that have been previously registered with the SMV for public offering are the only ones that can be sold through the BVP.
III. The Documentation
The documents customarily used in Panama securitizations to perform an insolvency remote “true sale” of the assets are (a) the trust agreement (if a trust will be used as SPV) whereby the SPV that will receive the assets is constituted, (b) a sales or assignment agreement pursuant to which the originator will sell and transfer the assets to the SPV, and (c) a servicing agreement whereby the SPV will delegate the management and servicing of the assets to a servicer. The servicing agreement is not of the essence to perform a bankruptcy remote “true sale” but it warrants consideration given the key role a servicer plays in a securitization.
A. Representations and Warranties
1. Trust Agreement
In a trust agreement whereby the trust will be constituted, certain warranties and representations are made by the settlor and the trustee. Warranties customarily made by the settlor include (a) that it has full legal capacity, authority and intent to constitute the trust and enter into the trust agreement, (b) that it has full legal title and ownership of the assets that will be given in trust, and (c) that the assets were generated as a result of lawful activities and their source is not illicit in any way.
Representations usually made by the trustee in a trust agreement include (i) that the trustee has full legal capacity, authority and intent to enter into the trust agreement, (ii) that the trustee is duly licensed to engage in the trust business in Panama and (iii) that the trustee has the operational capacity to manage the assets given in trust in accordance with the terms of the trust agreement.
2. Assignment Agreement
The originator or seller of the assets usually expresses in the sale or assignment agreement pursuant to which it will transfer the assets to the SPV certain representations and warranties in favor of the SPV as purchaser of the assets. The representations and warranties that the seller of the assets makes in the sale or assignment agreement are of importance because they relate to the condition and quality of the assets and, therefore, should be given careful consideration.
Warranties and representations made by sellers in favor of buyers in sale or assignment agreements vary depending on the nature of the assets but customarily include the following: (a) the assets were lawfully originated and constitute valid and binding obligations of the debtors or payors thereof, (b) the seller has full legal title to and ownership of the assets that will be transferred, including the right to sell the assets, (c) the seller has full legal capacity, authority and intent to enter into the agreement and perform its obligations thereunder, (d) the obligations derived from the assets are being timely paid by the debtors or, if delinquent, said delinquency is not more than for a defined time period, (e) the terms of the loan or other contract whereby the assets are originated have not been breached, waived, altered or modified, (f) collateral granted in order to secure the assets (such as mortgages over loans) was duly constituted and is valid, existing and binding, (g) the value of the debt represented by the asset did not exceed a defined percentage of the debtors income and/or indebtedness, and (h) the absence of litigation or dispute that adversely affected the assets being securitized.
3. Servicing Agreement
The entity engaged as servicer of the assets being securitized also makes certain representations and warranties to the SPV that engages it for purposes of servicing and managing the assets. These representations and warranties usually include (a) that the servicer has experience in the servicing and management of the assets being securitized, (b) that the servicer has the operational capacity to service the receivables, and (c) that the servicer will service and manage the assets in accordance with the standards and practices it applies when servicing its own assets, as well as giving due consideration to customary and usual standards of practices observed by prudent institutions that service assets that are comparable to the assets that the servicer manages for its own account.
B. Perfection Provisions
1. Trust Agreement
In order for a trust agreement to be effective against third parties, one of either of the following formalities must be fulfilled: (a) that the document be in the form of a public deed or (b) that the signatures of the parties be recognized by a notary public. If the trust agreement is not documented by means of public deed, therefore, the document should contain a provision whereby the parties agree to cause their signatures to be recognized by a notary public.
2. Assignment Agreement
For a delivery of credits or other incorporeal rights to be deemed to have taken place under a sale or assignment agreement and for said agreement to have a “date certain” and for it to be effective against third parties in general, one of either of the following formalities must be fulfilled: (a) that the document be in the form of a public deed or (b) that the signatures of the parties be recognized by a notary public.
If the sale or assignment agreement is not documented by means of public deed, therefore, the document should contain a provision whereby the parties agree to cause that their signatures be recognized by a notary public. If further requirements need to be met in order to perfect the transfer of the assets and/or accessory rights thereto (such as the recording of the assignment agreement with the Public Registry of Panama in case of mortgage loans not documented by means of a negotiable instrument), the contract should contain a provision in accordance to which the parties agree to comply with said formality in a specified timeframe.
Finally, the assignment agreement should contain a clause whereby the seller agrees to notify the debtors of the credits that the same have been transferred to the SPV for debtors to stop paying to the seller sums owed under the receivables and begin paying them to the SPV.
In securitization transactions that use trusts as SPVs, certain positive and negative covenants are undertaken in the trust agreement while others are expressed in the notes issued by the SPV. Typical positive and negative covenants include the following, some of which are required by the Securities Law:
1. Positive Covenants
(a) Maintain in full force and effect its existence as a trust, and all of its rights and permits necessary for the conduct of its business.
(b) Ensure at all times that the claims of the senior most noteholders rank at least pari passu among themselves as to priority of payment and senior in right of security to all other debt of all other creditors of the issuer trust, including the junior most notes.
(c) Maintain an accounting and control system and other records, which together adequately reflect truly and fairly the financial condition of the issuer trust (and the collateral trust, if any) and the results of its operations in accordance with certain standards (such as International Financial Reporting Standards or IFRS).
(d) Prepare and furnish quarterly financial statements of the issuer trust (and the collateral trust, if any), audited financial statements for each fiscal year for the issuer trust (and the collateral trust, if any).
(e) Maintain at all times a firm of internationally recognized, independent public accountants acceptable.
(f) Give notice to investors of (i) any event which has, or could reasonably be expected to have, a material adverse effect, or (ii) the occurrence of an event of default or any material breach or default under any securitization document.
(g) Use proceeds of the issuance of the notes exclusively to purchase the assets and hold them in trust or cause their transfer to the collateral trust, if it applies.
(h) Preserve the trust assets and undertake all actions necessary to maintain the investors and other parties’ interests in the trust assets in full force and effect.
(i) Execute, acknowledge where appropriate, and deliver all such documents necessary to carry out the interest and purposes of the securitization documents.
2. Negative covenants
(a) Amend, modify or supplement the issuer trust or other transaction documents in any material respect.
(b) Engage in any business or any activity other than those activities limited or incidental to its line of business.
(c) Create or suffer to exist any debt (other than the notes) and incur or allow any lien on any of its assets to secure any obligations other than as contemplated in the securitization documents.
(d) Enter into any arrangement to guarantee or become obligated for any obligation of another person.
(e) Make any loan, or make any acquisitions or investments in, or purchase any securities of any other person.
(f) Merge with any other person, liquidate, spin-off, wind up, dissolve, change or reorganize its legal form, or acquire any ownership interests in or all of substantially all of the assets of any person.
(g) Voluntarily amend, modify or change in any manner, or waive any of its rights pursuant to, any agreement the effect of which could adversely affect the trust assets or the trustee’s or the noteholders’ rights under the notes.
(h) Sell, lease, transfer or dispose of any assets, except as set forth in the securitization documents.
(i) Enter into any transaction not on the basis of arm’s-length transactions in the ordinary course of business on the basis of arm’s-length arrangements with any person.
The transaction documentation may provide that compliance with some of the foregoing positive and negative covenants may be waived by, for example, a majority of the holders of the securities issued.
D. Servicing Provisions
Provisions related to the servicing and management of the assets are customarily contained in the servicing agreement entered into by and between the SPV and the servicer. These provisions set forth the rights and duties of the servicer which regularly encompass the following: (a) maintaining accounting records for the assets being serviced, (b) hiring staff for these purposes, (c) physically keeping any documentation related to the assets, (d) collecting any and all sums due from the debtors, (e) opening and maintaining bank accounts into which the funds from the assets will be deposited, (f) calculate (sometimes in concert with the paying agent) amounts due to investors and other parties on payment dates, (g) assist in the use of said funds in order to make payments to investors and other parties under the securities and other deal contracts and (h) prepare and deliver to the SPV and other parties reports regarding the status of the assets.
E. Events of Default
The events or situations that would constitute a default in a securitization differ between transactions, sometimes depending on the complexity of the structure and in other occasions due to the nature of the assets. However, typical events of default contained in a senior note include, in summary, the following situations:
(a) If on the maturity date or any payment date the issuer fails to make any interest payment or principal payment to investors;
(b) If on any payment date, the outstanding balance of the notes exceeds the principal balance owed to the SPV resulting from the underlying assets;
(c) Any representation or warranty made by the issuer in connection with the issuance, sale and purchase of the note or with any securitization document, shall prove to have been inaccurate in any respect which was material when made;
(d) The issuer shall fail to perform or observe any term, covenant or agreement contained in the note or any other securitization document; or
(e) If the issuer shall become insolvent or make an assignment for the benefit of creditors or be declared bankrupt, or if any governmental authority having the power to do so orders the liquidation of the issuer trust’s assets or the suspension of its business operations.
In Panamanian securitizations, trustees, servicers, paying agents and other parties involved usually require that the documentation contain provisions whereby they are exempt from responsibility and/or will be indemnified in case they incur any loss or damage in the performance of their services. Provisions of this type usually include the following:
(a) in the performance of its duties, the agent will be able to act on the basis of any document that it believes to be authentic and to be executed or presented by an authorized person,
(b) in the performance of its duties, the agent will be able to request, before taking any action, written opinions of legal or accounting advisers and the agent will not be responsible for any action taken in good faith on the basis of these opinions,
(c) in the performance of its duties, the agent will be able to act through qualified third parties without responsibility for the negligence of these third parties,
(d) in the performance of its duties, the agent will not be responsible for any action that it takes or omits to take in good faith that it believed to be within the powers and authorizations conferred to it under the corresponding transaction document, and
(e) agent will be indemnified from any loss, damage or responsibility incurred in connection with the performance of its duties and obligations, provided that such loss, damage or responsibility is not caused by fraud, gross negligence or willful misconduct.
IV. Securitization Regulations
The Securities Law contains provisions requiring the disclosure of information to investors in the context of public offerings of securities that are subject to registration with the SMV, including publicly offered asset-backed securities. The SMV is the regulator charged with the enforcement of said provisions. An originator that wishes to make a public offering of asset-backed securities is required by the Securities Law to prepare and file an Offering Memorandum (“OM”) detailing, among other information, (a) the terms and conditions of the securities, (b) the risk factors related to the securities, the issuer and its industry, and (c) financial, market, managerial and historical data of the issuer. The information contained in the OM must be true and accurate and may not be false or misleading in any way. Including false or misleading statements in the OM, as well as not disclosing relevant information, is considered a very serious offence under the Securities Law and could lead the SMV to impose substantial monetary fines on the issuer and on individuals involved in the management of the issuer, without prejudice of any civil or criminal actions that investors could take against the issuer and its management.
In addition to the foregoing, issuers need to deliver financial statements to the SMV as part of the documentation that they have to file in the initial registration process and, once the SMV approves the registration of the securities for public offering, the issuer has an ongoing obligation to deliver quarterly unaudited financial statements and annual audited financial statements. The data contained in financial statements must also be true and accurate and reporting false or misleading information is also considered a very serious offence under the Securities Law, as well as constituting a felony under Panama’s criminal laws.
The amounts of the monetary fines that the SMV may levy on the registered issuer due to very serious offences as the ones described above can be (a) a sum no less that can be no less than the benefit that the offender received from the actions or omissions that constituted the offense but no more than twice the value of said benefit or, if said criteria cannot be applied, (b) the higher of (i) 5% of the assets of the offending party, (ii) 5% of the assets used in committing the offence or (iii) US$1,000,000.00. The amounts of the monetary fines that the SMV may levy on the managers of a registered issuer due to very serious offences as the ones described above can be of up to the higher of (x) 5% of the assets used in committing the offence or (y) US$1,000,000.00.
Finally, registered issuers are obligated to disclose to the investing public any event that takes place after registration with the SMV and that may be deemed of importance for investors. An event is considered of importance for investors if it is an event that would, when disclosed, have a significant effect on the market price of the security and if it would be an event that the holder of a security, or a prospective buyer or seller thereof, would grant relevance when deciding how to act in relation to the security. These importance events must be disclosed by the issuer to the SMV, to the stock exchange (in the case of listed securities) and to the investing public in general no later than the next business day after the event took place.
Issuers of securities through private placements or other offers exempt from registration should also use true and accurate information in their securitization documents but they are not held to the same ongoing standards of disclosure and transparency set for the issuers of publicly offered securities.
B. Credit-Risk Retention
As of the date of this paper, Panama has not adopted credit risk retention rules such as those set forth by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 of the United States, whereby the “sponsor” of a securitization generally is obligated to retain and hold a minimum of the credit risk of any asset that, as a result of a securitization, is transferred, sold, or conveyed to a third party SPV.
C. Rating Agencies
Entities that wish to engage in the business of rating securities registered with the SMV in Panama, including asset-backed securities, must be approved by the SMV. Agreement 12 of 2001 of the SMV regulates the operation of rating agencies, as well as the process for their registration with the SMV.
To achieve registration, rating agencies must provide to the SMV, in addition to other information and documentation, experience of their personnel in the business of rating securities, identification of technical and professional links with other rating agencies, a detailed description of the methodology that they will apply in the rating of securities and the procedures and criteria for reviewing and updating previously issued ratings.
The rating agency and all individuals involved in the issuance of a credit rating must maintain independence in relation to the ratings they assign. Independent status will not be achieved by individuals that, within the year before a rating was issued or updated, were any of the following in relation to the security or issuer being rated: (a) director, officer, executive or partner, (b) accountant or external auditor, (c) beneficial owner of more than 5% of shares outstanding, (d) creditor or debtor, and/or (e) sponsor, broker, distributor or trustee.
Article 197 of the Securities Law states that the SMV may issue provisions that regulate the offering, negotiation and terms options, futures and other derivatives. The SMV may also create regulations that would provide protection to those who invest in derivatives. No such regulations have been issued as of the date of this paper and, in their absence, parties may offer, negotiate and invest in derivatives, including any such that might be implemented for purposes of a securitization.
E. Investment Fund
In the process of structuring a securitization, the SPV should be designed and implemented in a manner that would differentiate it from an investment fund under Panama law. In Panama, investment funds are supervised by the SMV and are governed by the Securities Law and Agreement No. 5 of 2004 issued by the SMV.
An investment fund is defined by the Securities Law as a “juridical person, trust or contractual arrangement that, by means of the issue and sale of its participation quotas, engages in the business of receiving funds from the investing public through periodical or one-time payments, for purposes of investing and negotiating, directly or through investment managers, in securities, currencies, metals, commodities, real estate or other assets determined by the Superintendency.”
Investment funds that publicly offer their participation quotas to persons domiciled in Panama must register with the SMV, may be self-managed or they have to engage a duly licensed investment manager to invest its assets and engage a custodian to hold its investments. Investment funds that are self-managed must hire duly licensed personnel that will be charged with the administration of the fund. For the SPV in a securitization to differentiate itself from an investment fund subject to the aforementioned obligations, the securities issued by the SPV should not be considered “participation quotas”, which are defined by the Securities Law as “any share, security, certificate of participation or investment or any other instrument or financial right that reflects a participation interest in an investment fund.”
As participation quotas are customarily considered to be equity instruments (such as common stock), the securities issued by an SPV in a securitization are designed to avoid being characterized as participation quotas; instead, they are designed to be debt instruments (such as notes or bonds) that would constitute obligations of the SPV (and not equity interests), so that the investors would become creditors of the SPV.
F. Credit Enhancements
Credit enhancement techniques that have been implemented in Panamanian securitizations include (a) subordination, (b) reserve accounts, (c) excess spread and (d) overcollateralization. Subordination is fairly frequent and achieved by issuing securities in more than one tranche or series, such as, a senior note and a junior note. Flows generated by the securitized assets are first used to pay sums due under the senior notes and the remaining flows, if any, are used to pay the sums owed to the holders of the junior notes.
The constitution of a reserve account is also common in securitization transactions. If the SPV is a trust, the trustee opens a bank account in the name of the trust and funds generated by the assets are deposited into the reserve account until sums deposited reach a certain minimum amount. After said minimum amount is deposited, no additional cash derived from the assets is deposited therein. The funds deposited in the reserve account remain in deposit and are only used to pay interest (and sometimes principal) to investors in stressed scenarios in which the flows generated by the underlying assets are not sufficient to perform payments of interest and/or principal to investors. Instead of having the cash deposited in a bank account, the issuer may request a third party with a high credit rating to issue, for example, a stand-by letter of credit whereby the guarantor agrees to deposit cash in the reserve account if needed.
Excess spread has also been implemented because originators try to make sure that the interest rate (and, therefore, the interest payments) that the debtors of the underlying assets would have to pay to the SPV exceeds the interest rate (and, therefore, the interest payments) that the SPV must pay to investors under the notes. Furthermore, the excess spread can usually be maintained because the SPV would have the right to unilaterally increase the interest rate (and, therefore, the interest payments) that the debtors of the underlying assets have to pay. We have experienced, however, securitizations in which the SPV’s right to increase the interest rate of the receivables was limited to avoid defaults by debtors due to excessively high interest payments.
To achieve overcollateralization, originators have also transferred to the SPV assets with an outstanding principal balance that exceeds the outstanding principal balance that would be owed to investors under the securities upon issuance. In other transactions, originators have transferred to the SPV receivables with an outstanding principal balance that is equal or barely higher than the outstanding principal balance that would be owed to investors but with safeguards in the transaction documents whereby, if the principal balance of the underlying assets dipped below the principal balance of the notes by a given percentage, payments of interest and principal to the holders of junior notes would not be made (but would be accrued) and all funds generated by the receivables would be used to pay interest and principal to the holders of the senior notes.
Securities resulting from securitizations have been offered both inside of Panama as well as abroad in cross-border transactions. Most asset-backed securities offered primarily in Panama have been sold by means of public offerings subject to registration with the SMV and have been listed on the BVP. Securities of this type that are offered abroad (i.e., not offered in Panama) by local issuers may be sold in a manner so that they are exempt from registration with the SMV.
Due to their perceived sophistication, asset-backed securities are mostly offered to, and acquired by, institutional investors such as banks, insurance companies and pension funds. This seems to be particularly true in private deals. In public offerings, retail investors may participate, although this is not frequent. Under the current rules of the BVP, once the issuer of an asset-backed security (or of any security, for that matter) posts the issue price, there is a window of thirty minutes in which any investor can offer to buy the security at a higher price. At the end of the thirty minute span, the security will be sold to the investor that offered the highest price. Due to the foregoing, retail investors can acquire asset-backed securities if they outbid institutional investors and vice versa.
Securitizations could be performed with more frequency in Panama. The only originator that periodically realizes securitizations is Banco La Hipotecaria, S.A., which makes a deal about every two to three years. Banco General, S.A. performed one DPR securitization in 2012 and another one in 2016 and their intent could be to continue to do others. The other deals that have taken place are due to some key juncture or as a result of government motivated action. That makes it difficult to accurately assess the amounts invested in asset-backed securities.
V. Special Rules
In Panama, banks are governed by special sectorial legislation (the “Banking Law”) and they are supervised by the SBP. The SBP plans to adopt regulations specifically applicable to securitizations based on Basel III guidelines by 2018. Therefore, it is anticipated that banking regulations would be in line with the Basel III guidelines on risk management and supervision for these types of structured financing arrangements.
Other than as described below, currently there are no regulations that provide capital or liquidity benefits for any transaction that complies with any specific rules on the substantive quality of the transaction, such as “single, transparent and comparable” of Basel and IOSCO or similar regimes.
(a) Capital Adequacy
General capital adequacy and liquidity requirement rules applicable to originator banks are based on Basel Committee Standards. These rules are contained in the Banking Law and the regulations issued by the SBP. Capital adequacy requirements are established in Chapter V of the Banking Law and are further governed by Agreement N°1 of 2015 and Agreement N°3 of 2016 issued by the SBP.
The Banking Law requires banks to maintain capital funds and tier one capital equivalent to at least 8% and 4%, respectively, of the risk-weighted total of all assets and contingent off-balance sheet operations. Agreement No. 3 of 2016 of the SBP assigned risk-weights to assets held by banks. A risk-weighting of 35% is granted to mortgage loans in which the loan amount does not exceed 80% of the value of the asset and the asset is the primary house of the debtor. A risk weighting of 50% is assigned to other residential mortgage loans as well as to business and consumer loans that are guaranteed with mortgages over real property. A risk-weighting of 100% is granted to car loans with maturities of 5 years or less and to unsecured consumer loans with maturities of 5 years or less. Car and consumer loans with maturities of 5 years or more carry a risk-weighting of 125%.
Banks that pursue securitizations of pools of their mortgage, commercial, consumer and car loans with the aforementioned risk-weights could achieve relevant capital relief. However, the transfer by a bank of a significant amount of its assets is governed by means of Agreement N° 2 of 2004 of the SBP. A transfer or assignment of assets involving 25% or more of the bank’s assets is deemed to have a significant impact and will require prior authorization by the SBP in order to be carried out. Once the SBP authorizes a transaction of this type, the originator bank would have to publish the approval in a national newspaper. The SBP may deny the request when there are issues of solvency or solidity of the bank, or if because of the transaction the bank will not comply with legal or regulatory limits, or upon the presentation of incomplete or incorrect information.
Liquidity requirements for banks are established by Chapter VI of the Banking Law and further governed by the SBP in Agreement N°4 of 2008. Banks must at all times maintain a minimum amount of liquid assets equivalent to a percentage of the total gross deposits. Said percentage will not exceed 35%. Currently, the minimum liquidity index is set by the SBP at 30%. Nevertheless, said index will be 20% for banking entities that keep interbank deposits quarterly average greater than 80% of their total deposits.
Among the assets that the SBP has deemed “liquid” for purposes of calculating the liquidity index are debt securities issued by domestic or foreign private entities and approved by the SBP which are actively traded in a stock market and have been accorded investment grade by a qualified, internationally-recognized credit rating agency, at market value. Securities that meet these criteria (for example, those issued as a result of a properly structured securitization) should be assets that, if approved by the SBP, draw the attention of banks as low-risk investments with higher returns than other assets approved for complying with liquidity requirements such as cash, time deposits and other short-term investments.
2. Insurance Companies
Asset-backed securities could prove to be sound investments for insurance companies duly licensed to operate in Panama. Law 12 of 2012, which regulates insurance companies, states that these entities need to create capital and technical reserves that must be comprised by certain eligible assets. One of these eligible assets are debt securities registered with the SMV and actively traded in a stock exchange authorized by the SMV. According to said law, up to 50% of the capital and technical reserves of an insurance company may be constituted by investments in these assets, which would include asset-backed securities.
3. Reinsurance Companies
Reinsurance companies that operate in Panama are governed by Law 63 of 1996. Reinsurance companies are required to constitute reserves composed by defined eligible assets. At least 75% of the assets that comprise these reserves must be investments made “inside Panama” while the remaining 25% of the reserves may be comprised by investments abroad. One of these assets are “mortgage securities” (bonos or cédulas hipotecarias) registered with the SMV. These securities seem to include mortgage-backed securities, in which case reinsurance companies may invest in them in order to create their reserves that must be composed by investments inside Panama.
4. Social Security Authority
The Social Security Authority of Panama (Caja del Seguro Social and, hereinafter, the “SSA”) may also invest in asset-backed securities. The SSA approved Resolution No. 39,609-2007-JD dated May 8 2007 (as amended by Resolution No. 04,679-2008-JD of July 24 of 2008), pursuant to its organic Law No. 51 of December 27 of 2005, dictating parameters for investments of its reserve funds. Thus, the SSA may invest in securities with home-mortgages collateral having over five years of constitution, over assets covering no less than 125% of the debt, with a term of no less than ten years in different projects and with a normal credit risk level. These securities must be publicly traded in a stock exchange or other organized market, duly recognized by the SMV. These investments may not exceed 5% of the total amount of reserves of the SSA and may not exceed 20% of the security’s issuance.
5. Pension Funds
Private retirement and pension funds in Panama (“Pension Funds”) are governed by Law No. 10 of 1993 (as amended to date, the “Pension Funds Law”) and by Agreement No. 10 of 2005 (as amended to date, the “Pension Funds Regulation”) adopted by the SMV. The Pension Funds Regulation establishes that at least 80% of the financial assets acquired with the resources of a Pension Fund must be traded in a regulated financial market.
The Pension Funds Regulation also identifies the specific type of assets in which a Pension Fund may invest its resources. These assets include the following:
(a) Debt securities duly registered with the SMV and publicly traded in a duly authorized stock exchange or any other local or foreign regulated market; and
(b) Debt securities and shares issued by foreign states, central banks, financial institutions and corporations which, at least 50% thereof, must have received a rating of investment grade or more from a local or international rating agency.
Pension Fund Managers may design and offer their Pension Funds. All Pension Fund Managers must, however, offer at least one “basic” fund that must comply with the following investment limits for the asset types identified below:
% of Resources
Debt securities issued by banks with a general license to operate in Panama
Debt securities duly registered with the SMV and publicly traded in a duly authorized local stock exchange
The Pension Funds Regulation sets certain limits that apply when investing the resources of a Pension Fund in financial assets with a single issuer or debtor. The resources of a Pension Fund that may be invested in shares and debt securities issued by one single corporation may be, at the most, such amount which is the lower of the following two quantities: 10% of the patrimony of the fund, or 20% of the total assets of the corporation or financial institution that is the issuer of the securities, according to their latest audited financial statements. In no case can more than 20% of the investments of a Pension Fund, whether they are debt, equity or deposits, be placed with one single corporation or financial institution. Pension Funds may invest resources that do not exceed more than 20% of their patrimony in assets of a corporation that is a part of its same economic group.
VI. Synthetic Securitizations
Synthetic securitizations are not prohibited under Panama law but, to the best of our knowledge, no synthetic securitizations have been performed in Panama as of the date of this paper. If securities are issued as a result of a synthetic securitization, they would most likely be subject to the provisions of the Securities Law and its regulations and their issuers would be supervised by the SMV.
VII. Income Tax
Panama’s tax regime is territorial, which means that only profits, dividends, capital gains and other types of income generated from operations undertaken within the territory of Panama will be subject to the payment of income tax.
A. Special Purpose Vehicles
Regardless of whether the SPV that will issue the securities and receives the assets is constituted as a trust or corporation, any Panama-source income it generates will be subject to the payment of income tax at a rate of 25%. If the securities issued by the SPV are debt instruments such as notes or bonds, the interest paid thereon by the SPV to the investors will be deductible as an expense for tax purposes.
B. Securities Offered
1. Taxation of Interest
Interest payable on asset-backed securities issued by an SPV deemed to be generating Panama source income will be taxable for investors located in Panama, who would have to file their annual return and pay the tax at individual or corporate income tax rates, as applicable. If the investors are located outside of Panama, the issuing SPV would have to withhold an amount equal to 50% of the tax payment that the investor would have to pay if located in Panama and pay the amount so withheld to the local tax authority.
However, if the asset-backed securities are registered with the SMV, interest payable thereon will only be subject to a 5% income tax, which would have to be withheld by the issuer. Moreover, interest payable would be exempt from any income tax payment or withholding if they securities are registered with the SMV and, in addition, are placed through a securities exchange or through an organized market.
2. Taxation of Transfers
If the securities are registered with the SMV, any capital gains realized by a holder thereof on their sale or other transfer will be exempt from income tax in Panama, provided also that the sale or transfer of the security is made through a securities exchange or another organized market.
If the securities are not sold through a securities exchange or another organized market, (i) the seller will be subject to income tax in Panama on capital gains realized on the sale of the securities calculated at a fixed rate of ten percent (10%); (ii) the buyer will be obligated to withhold from the seller an amount equal to five percent (5%) of the aggregate proceeds of the sale, as an advance in respect of the capital gains income tax payable by the seller, and the buyer will be required to send to the fiscal authorities the withheld amount within ten (10) days following the date of withholding; (iii) the seller will have the option of considering the amount withheld by the buyer as payment in full of the seller's obligation to pay income tax on capital gains; and (iv) in the event the amount withheld by the buyer is greater than the amount of capital gains income tax payable by the seller, the seller will be entitled to recover the excess amount as a tax credit by filing a special sworn income tax declaration with the fiscal authorities.
VIII. Asset Types
Receivables that have been securitized in Panamanian transactions include those derived from consumer loans, mortgage loans, maritime loans, credit cards, toll road operations, construction payment obligations and diversified payment rights (remittances). In the case of consumer, mortgage and maritime loans, the securitizations have mostly been of rights or credits resulting from operations (loans) that, at the moment of the transaction, had been executed and were existing. In the case of transactions related to credit cards, toll road operations, construction payment obligations and diversified payment rights, the rights or credits securitized had not, at the moment of the transaction, come into existence.
Consumer Loans. Banco La Hipotecaria, S.A. (“BLH”), a local bank that started as a finance company and is part of a group with operations in Colombia and El Salvador, performed a securitization of a pool of personal or consumer loans granted to debtors in Panama. The transaction took place in 2008 and the notes were issued in two series, knowingly, Series A for US$6,400,000 and Series B for US$1,600,000, for a total of US$8,000,000. The notes were issued by an issuer trust, registered with SMV as part of a public offering, listed and placed through the BVP and paid interests at a fixed rate. The consumer loans were sold by BLH to a collateral trust constituted by the issuer trust for the benefit of the noteholders and other secured parties. BLH was engaged by the collateral trustee to service the consumer loans.
Credit Card Receivables. Banks in Panama have also securitized credit card receivables. Banistmo, S.A. (“Banistmo”), a local bank that became part of Grupo Bancolombia in 2013, performed securitizations of receivables from VISA and Mastercard credit cards granted to their clients. This was a securitization of future flows because Banistmo sold in advance the rights it may become entitled to in the future as a result of credit card transactions performed by their clients.
Flows from Toll Roads. Future revenues to be collected by operators of Panamanian toll roads have also been securitized. ICA Panama, S.A., the initial operator of one of Panama’s largest toll roads, obtained financing by performing a securitization of future flows it expected to receive from toll road operations. More recently, state-owned enterprises ENA Norte, S.A. and ENA Sur, S.A. (successor to ICA Panama, S.A.) performed similar transactions in order to buy back the concessions granted by the state for operating the toll roads.
Mortgage Loans. BLH is also active in the securitization of mortgage loans. Since 1999, BLH has securitized more than US$400,000,000 in mortgage loans. The structure used by BLH for securitizing mortgage loans is similar to the one implemented for the consumer loan securitization described above. The notes were issued by an issuer trust in more than one tranche, were registered with SMV as part of a public offering, listed and placed through the BVP and the interest paid was fixed in certain deals and variable in others. The mortgage loans were sold by BLH to the issuer trust, which caused the same to be transferred to a collateral trust constituted by the issuer trust for the benefit of the noteholders and other secured parties. In a couple of transactions, the mortgages that were securitized were not granted by BLH to debtors located in Panama but by its affiliate in El Salvador to debtors in said country. BLH was engaged by the collateral trustee to service the mortgage loans. Several notes issued under mortgage loan securitizations in which BLH acted as originator have received high credit ratings.
Construction Payment Obligations. An instrument known as non-objection certificates (or, in Spanish, certificados de no objeción; herein “CNOs”) exist under Panama law to evidence a payment obligation that a government entity has acquired with a contractor in connection with public works. CNOs are issued by the corresponding government entity pursuant to a turn-key construction contract, usually based on the advance of works and expressly provide for payment of the stated amount at a later date. CNOs constitute autonomous, unconditional and irrevocable payment obligations of the State that are transferrable and, therefore, practical for purposes of financing. A securitization of CNOs was performed in 2017 for purposes of financing the construction of Line 2 of the subway of Panama.
The regulations governing CNOs provide that their assignment or sale requires complying with certain formalities. The rules that govern the requirements for transferring CNOs vary depending on the government entity that issues the same but, in general, the assignment of the CNOs must, at least, be notified to the authority that issued them and to the Office of the General Comptroller of the Republic (Contraloría General de la República and, hereinafter the “CGR”) and it may even be required that the assignment agreement be countersigned by a representative of the issuing authority and/or the CGR.
Diversified Payment Rights (DPRs). Payment rights resulting from remittances of cash by persons located in Panama to recipients abroad have also been securitized. Banco General, S.A. (“Banco General”) has performed two such transactions, in 2012 and 2016. In both cases, Banco General sold its DPRs existing at the time, as well as any generated thereafter, to a Cayman SPC that paid for the DPRs with funds received from notes that it issued and loans it contracted.
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