EXAMINATION OF THE LEGAL REGIME OF SECURITIZATION AND ITS IMPACT ON THE NIGERIAN ECONOMY

Abstract 
Asset securitization is one of the new methods of financing beyond the horizon of the traditional equity and debt financing and it is still untested waters in Nigeria. This study is set against the background of possible utility of asset securitization in Nigeria and adequacy or otherwise of the existing law in structuring asset securitization given the peculiarities of the transaction. It adopted the analytical research approach involving analysis of case law and statutory provisions as well as secondary sources of law and scholarly writings by application of the power of reasoning. The study discussed and identified the areas of utility of asset securitization in Nigeria. For instance, providing access to banks funds to match their regulatory capital requirements and their financial obligations; possibility of investment in asset securitization under the National Pension Commission by its Regulation on Investment of Pension Fund Assets; the possibility of asset securitization helping in addressing the challenges in the housing sector; and possible utilization of asset securitization in facilitating access to immediate funding from the capital market to address the infrastructural problem. The study established a link between asset securitization and security interests and therefore discussed the challenges of priority and enforcement of security interests. The study found the asymmetric relationship between perfection and priority of security interests as unsatisfactory. It found that the existing rules of priority is complex, cumbersome and is not conducive to emergence of asset securitization. 

Chapter One 
General Introduction 
1.1 Background to the Study 
Carrying out economic activities by individuals, governments and corporate bodies requires finance. According to Smith,[1] ―commerce and investment are the lifeblood of any economy and financing these major economic activities requires the use of credit facilities by individual entrepreneurs, corporate entities, small and large-scale industries and multinationals‖. 

In traditional corporate finance, there are three basic ways by which a company finances its operations: share issues,[2] debt and retained profits.[3] Raising finance through debt may be by way of direct financing where the company raises capital by issuing debt securities to investors through the capital market[4] or indirect financing where the debt finance is raised through bank loan.[5]

Development in international financial markets has thrown up new methods of financing beyond the horizon of the traditional equity and debt financing. Asset securitization, which is the focus of this study, is one of such methods of financing. Other methods of financing and credit restructuring include, trust, factoring, discounting, novation, loan selling, participation, sub-participation and swaps. 

A distinction should immediately be made between asset securitization and securitization in the literal sense. Generally, securitization implies ―every such process that converts a financial relation into a transaction, more specifically, into a capital market instrument.‖[6] It has also been described as ―a process of converting something into a security.‖ Security in this context is a capital market instrument. [7] In this literal context, securitization is the ―monetisation of assets, a mechanism which converts an illiquid monetary obligation into a marketable security instrument.‖[8] Thus, securitization will encompass debenture, bonds, notes and other debt instruments that are cognisable and regulated under the Investment and Securities Act[9] and applicable provisions of Companies and Allied Matters Act, 1990.10 However, it is asset securitization and not securitization in the literal sense that is contemplated in this study. 

Asset securitization, in the context of this study, is ―a process by which an entity pools together its interest in identifiable future cash flows, transfers the claims on those cash flows to another entity specifically created for the sole purpose of holding those financial claims and then utilises those future cash flows to pay off investors over time, either with or without credit support from a source other than the cash flows.‖[10]

Descriptively, the structure of a basic asset securitization transaction is that an enterprise (be it bank, corporate or other), known as the originator, sells a pool of assets, (such as loans, mortgages, leases, consumer receivables), to a special purpose vehicle, (SPV), established for the transaction or an existing SPV. The sale may be by way of assignment or similar transfer technique and the SPV is usually an orphan company, (its shares being held on trust for charitable purposes), rather than a company in the originator‘s group. The SPV raises funds with which to purchase the assets by issuing bonds or other forms of securities in the capital market. The SPV then contracts with another party, usually the originator, for the administration (servicing) of the assets. Income and principal arising from the assets are applied in paying interest and principal on the bonds or other securities such that payments to investors depend on the performance of the assets in the pool purchased by the SPV rather than on the credit of the originator. Any surplus is returned to the originator.[11]

The end product of asset securitization is the creation of asset-backed securities (ABS) which must be distinguished from securities in the usual capital market instruments. The distinction lies in the fact that whereas a usual capital market instrument is an exposure in the business of the issuer, an ABS is simply an exposure in an asset, or a bunch of assets.[12] Also, an ABS is not a claim on an entity but a claim on a pool of assets.[13]

Even though in the United States of America (US), distinction is made between mortgage backed securities, that is, where the receivables securitized are supported by mortgage security and ABS where the receivables are not supported by mortgage security,[14] in practical terms, ABS typically includes all kinds of receivables including mortgage-backed receivables.[15] Therefore, in this study, ABS when used includes mortgage-backed securities. Apart from mortgage-backed securities, other common assets under the generic term ABS, include credit card receivables, auto loan, equipment loan and consumer loan receivables, trade receivables, and lease receivables.[16]

1.2 Significance of this Study 
The motivation for this research is brought about by a number of reasons. First, there is the recent experience in the Nigerian banking sector where some banks had huge amount of receivables and yet became technically insolvent because they lack immediate funds to meet their regulatory capital requirements and their financial obligations. Second, it is found that the National Pension Commission by its Regulation on Investment of Pension Fund Assets, 2012[17] recognised that pension fund assets may be invested in investments that are structured as a securitised transaction.[18] Yet, there is absence of asset securitization in Nigeria. 

Third, asset securitization may, going by the experience of the US, help in addressing the challenges in the housing sector. The development of modern asset securitization in the US developed as part of the conscious effort by the US government to facilitate home ownership. Fourth, Nigeria is faced with the problem of provision of adequate infrastructure. It is felt that utilization of asset securitization may facilitate access to immediate funding from the capital market with a view to solving the infrastructural problem.[19] Fifth, the passage of the Asset Management Corporation of Nigeria (AMCON) Act, with the taking over of some of the receivables of the banks, has also opened a vista for possible promotion of asset securitization in Nigeria. Lastly, considering the interconnectedness of market in the now globalized world, it is a matter of time that circumstances may impel the introduction of asset securitization in Nigeria. 

In view of the foregoing, it is felt that it is a relevant field of inquiry to consider the issue of promotion of asset securitization in Nigeria and in particular, the challenges and prospects of legal aspects of its introduction and utilization in Nigeria. 

1.3 Statement of the Problem 
In Nigeria, the use of asset securitization as a means of financing is untested waters notwithstanding that other developing economies, like South Africa, have embraced it. Asset securitization is a distinct financing transaction with its peculiar legal and regulatory considerations. Asset securitization is described as the creation of ABS, that is, debt instruments secured against specific assets or against specific cash flows or receivables whereby the creation of the ABS is effected by a company first selling the assets or the specific cash flows (receivables) to an SPV, who then issues bonds or other debt instruments and use the money raised from the issue to pay the company for the assets. 

The applicability of different laws in itself does not constitute problem; the real problem is that these potentially applicable legal provisions were fashioned out as general property and corporate law provisions not specifically tailored for asset securitization. Asset securitization has its peculiarities like bankruptcy remoteness of the SPV, effective non-recourse transfer of asset to the SPV, true sale characterization of transfer of asset to the SPV and effectiveness of the underlying security and its transfer to the SPV. There is, therefore, the problem of adequacy of the extant statutory regime to structure asset securitization given the peculiar requirements of the transaction. 

Flowing from the problem of adequacy of the existing potentially applicable law is the problem of legal risks attendant to asset securitization using the infrastructure of the existing law and the extent that these legal risks can be mitigated using contractual and due diligence mechanisms. 

Also, the applicable legal provisions to asset securitization straddle legislative competence of federal and state legislatures, therefore there is the problem of determining, as between the federal and state legislatures, the issue of legislative competence to make laws to provide for and regulate asset securitization. This may arise in the context of legislative reform to make an all-encompassing legislation to address the problem of legal risks and challenges in asset securitization under the existing law as has been done in some other countries like France, Germany and Belgium. Therefore, there is the problem of constitutional competence to make necessary legislative reform on asset securitization. 

1.4 Aims and Objectives 
The aims and objectives of this research work are: 

1. Examining the relevance and impact of promotion of asset securitization in Nigeria; 

2. Examining the existing legal provisions on asset securitization and the legal risks and challenges attendant to structuring asset securitization under the existing law; 

3. Examining the constitutional competence to make law on asset securitization in Nigeria; and 

4. Proposing reform of the existing legal frameworks for security interests to facilitate asset securitization and new legal frameworks for asset securitization in Nigeria. 

1.5 Operational Definition of Terms 
The following important terms in the title of the study bear the following meaning in the context of this work: 

1.5.1Asset Securitization- The creation of ABS, that is, debt instruments secured against specific assets or against specific cash flows or receivables which creation is effected by a company first selling the assets or the specific cash flows (receivables) to a 

special purpose vehicle, (SPV), who then issues bonds or other debt instruments and uses the money raised from the issue to pay the company for the assets. 

1.5.2Assets/Receivables- This means debt or contractual right to payment of a monetary sum. 

1.5.3Originator- This is the company or entity that initiates and engages in asset securitization transaction. 

1.5.4Special Purpose Vehicle (SPV/SPE)- This is the company or the entity created for the purpose of asset securitization transaction and to whom the assets/receivables are transferred by the originator and which then issues debt securities or debt instruments to the investors/bondholders. 

1.5.5Investors/bondholders- These are members of the public who purchased the debt securities or debt instruments. 

1.5.6Asset-backed securities- These are debt instruments secured against specific assets or against specific cash flows or receivables. 

1.5.7Legal Risks- Risks of a legal nature that may affect the validity of and/or attainment of the goals and objectives of asset securitization transaction 

1.5.8Credit Rating Agencies- These are the bodies that examine and assign credit rating to an asset securitization deal. 

1.5.9Credit Enhancement- These are the mechanisms adopted to protect investors in 

securitised assets against loss or shortfall in the value of the asset. 

1.5.10Federalism- This is a system of government whereby there is division or allocation of legislative and executive powers between two tiers of government. 

1.5.11Security- This is the mechanism by which lenders seek to protect themselves against the risk of payment default by the borrower. 

1.5.12Security Interests- This is a right given to one party in the asset of another party to secure payment or performance by that other party or by a third party. 

1.6 Scope and Delimitation of Study 
This study focuses on the relevance and justification for evolution of asset securitization transaction in Nigeria. It examines the existing legal and constitutional frameworks relevant to asset securitization as well as legal risks of asset securitization under the existing law. It also examines the relationship between security interests and asset securitization and the importance of adequate security interests‘ law to asset securitization. In this connection, the study identifies areas of inadequacies of existing security interests‘ law in Nigeria and proffers suggestions for reform. Further, the study identifies legal risks and challenges to asset securitization using the infrastructure of the existing law and proposes a new legal regime specifically targeted at asset securitization in Nigeria. 

Whereas there are different kinds of securitization with each having different levels of sophistications, this study focuses on what is generally referred to as asset securitization. The study is primarily about legal aspects of effecting asset securitization and is, therefore, not concerned about tax, accounting and financial issues in asset securitization. 
1.7. Research Methodology 

The study is a work of legal research.[20] It adopts the analytical research approach involving analysis of case law and statutory provisions by application of the power of reasoning. Methodologically, the work was organised around legal propositions, while primary sources of law served as the main sources of data, its secondary sources played supportive role. The work finds primary sources of law or primary authorities and searches secondary authorities for background information on the subject.[21] Three basic steps were undertaken. These are: 

I. finding the relevant provisions of the law on the subject matter of this study in the primary sources of the law; 

II. finding the opinion of experts and scholars on the subject espoused in journal and law review articles, and so forth; and III finding non-legal sources for materials that support or negate analysis or position on the matter.

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Item Type: Project Material  |  Attribute: 58 pages  |  Chapters: 1-5
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