The extraordinary evolution of financial products and instruments over the past two decades, made ever more complicated through continual innovation and globalisation, has made structured finance the fastest growing specialism in legal practice. Like much jargon, the term 'structured finance' means many different things to many different people: repackaging, credit-linked notes, collateralised loan obligations, securitisation; put simply, if you need a diagram to describe a transaction, it's probably a structured finance deal.
Perhaps the archetypal structured finance deal is a repackaging. An investment bank takes an existing piece of debt (the 'underlying debt') that doesn't quite fit the requirements of the bank's investor customers - perhaps it's the wrong currency, or the credit rating isn't right or maybe investors are not permitted to hold it for regulatory reasons. The bank sells the underlying debt to another company and enters into a swap with the company to change the currency or provide some form of credit enhancement. Not surprisingly, the bank gets a fee for its services. The company issues bonds to the investor, secured on the underlying debt and the swap/credit enhancement, thus funding its purchase of the underlying debt from the investment bank.
Originally repackaging was used as a way of making existing debt more marketable, but latterly we have seen transactions where the underlying debt is specially issued for the purposes of the repackaging, and the latest development is to use as the underlying debt securities which themselves are the product of a structured finance deal; for example, notes issued out of US credit card securitisation trusts are being repackaged into secured eurobonds, bringing a new type of asset to investors in the Euromarket, and giving US borrowers indirect access to that market.
A structured finance lawyer needs to be familiar with the law in a number of areas which are in themselves specialisms: contract, banking law, securities law, financial regulation, derivatives, tax, taking security, and insolvency. International structured finance demands advice on all these areas in a range of jurisdictions. Typically, there will be a minimum of four jurisdictions to be considered: the jurisdiction of the issuer (typically a special purpose vehicle), the jurisdiction of the originator or the asset which is the subject of the structure, the governing law of the transaction and the laws of any jurisdiction where the debt is to be offered. Because of the extraterritorial application of US securities law, US advice will almost always be needed, even if there is no direct connection with the US. Since most structured finance deals involve underlying securities, US Investment Company Act issues, as well as the more common Securities Act and tax issues, will need to be investigated. The governing law of the transaction will usually be either English or US law, although increasingly we are seeing transactions where both are involved. For example, the relative simplicity of taking security in DTC mitigates strongly in favour of grafting a US-law-governed security interest onto a secured debt issue governed by English law if the underlying debt is capable of being held in DTC rather than Euroclear or Cedel.
Counsel in the issuer's jurisdiction (usually a tax-friendly jurisdiction such as the Cayman Islands or Jersey) will be instructed to advise on the incorporation of the vehicle, its regulatory position and the insolvency risks in that jurisdiction. If the underlying debt is, say, Italian trade receivables or Australian home loans, 'local' advice in that jurisdiction will be needed too.
Finally, what next for structured finance? Two recent developments in particular indicate that more and more fund raising will use structuring techniques: firstly, the economic situation in the Asia Pacific region will make securitisation an increasingly attractive means of fund raising for corporates in that region. Secondly, banks are increasingly determined to find ways of securitising their own loan portfolios without incurring the wrath of their corporate customers. A properly structured issue of collaterised loan obligations can achieve that end, but not, fortunately, for the legal profession, without an analysis of a host of legal and regulatory issues.