Under paragraph 20(d) of the Consultation, the EBA proposes that legal opinions which are required to be obtained in the context of collateral agreements relating to other physical collateral" (i.e. collateral which is movable and not in the possession of the institution) should confirm the legal effectiveness and enforceability of the collateral against the obligor in "the set of jurisdictions where the collateral could move during the lifetime of the loan according to the collateral agreement". A similar requirement is set out in paragraph 21(b) for collateralised leasing exposures.
We are concerned that this requirement is simply unworkable. Furthermore, we do not consider that it addresses the risk of enforcing security over movable assets, nor the likelihood of recovery. Rather, given that these sectors are specialist by their nature and dominated by bank finance, we believe it will simply result in reduced access to finance for sectors such as aviation, shipping, automotive, transportation (as well as associated leasing businesses), and trade and commodities since they would become unviable for A-IRB institutions to provide.
By its intrinsic nature, "during the lifetime of the loan", movable collateral "could" move to any number of jurisdictions and, despite ownership in the case of leasing, is not in the control of the collateral takers. Furthermore, it should be noted that it is extremely rare for asset leasing and financing arrangements to prescribe a location or series of locations where the moveable asset must be located or operated. Such an approach would be too restrictive for the obligor who, as a commercial matter, may need to change operational routes and locations for business flexibility/continuity or to move the asset swiftly for maintenance or regulatory reasons. Whilst it is common for the user to be restricted from moving the asset to a list of prohibited countries (e.g. by reference to applicable sanctions or excluded countries for insurance purposes) these would typically be relatively few in number. As a consequence, in theory, a moveable asset could pass through/be located in almost any jurisdiction in the world, thus requiring legal opinions in relation to every such jurisdiction. The situation may be further complicated by the fact that some assets are routinely leased/sub-leased to third parties and that market practice allows a degree of flexibility to most obligors to lease out the asset within certain parameters without lender consent (e.g. in shipping, short term leases are generally permitted without consent; in aviation, there is typically a lengthy “white list” of permitted lessees/jurisdictions). As a result, an analysis of where the financed asset could go during the financing term would in many cases need to include not only the primary obligor’s, but also any lessee’s/sub-lessee’s potential operational routes. Consequently, any assessment of the collateral arrangement's legal effectiveness and enforceability as required by Paragraphs 19 and 20 would be hugely challenging, time consuming, costly to undertake and, given the undeveloped state of some jurisdictions' personal property laws, probably conceptually impossible.
The burdensome nature of the requirement appears to be recognised by the EBA in paragraphs 16 and 17 of Section 3 of the Consultation ("Background and Rationale"). In addition, the fact that the EBA has articulated that "softer alternatives" had been considered suggests that it would be amenable to considering alternatives methods by which this requirement could be more appropriately dealt with, whilst maintaining compliance with the CRR.
We firstly note that Article 194 of the CRR requires institutions to obtain assurances that collateral (funded credit risk mitigation) arrangements are effective and enforceable in "all relevant jurisdictions" and that Article 181 requires that a that "generally consistent" approach is taken. We believe that this implies that a more purposive, rather than literal interpretation, of "all relevant jurisdictions" could be taken by the EBA in its guidance. This is particularly important given the range of assets that are caught by the category of "other physical collateral", bearing in mind that what might work for one asset or group of assets, may not work for others.
Therefore, in terms of which jurisdiction could be considered "relevant" for the purpose of the guidance, some potential "relevant jurisdictions" for a moveable collateral asset could include:
a) The jurisdiction where the asset is registered, if the institution considers appropriate given the overall structure of the financing (we would highlight, however, that this remains asset/sector dependent since the law of the flag (for shipping finance) may be more appropriate in some instances);
b) The jurisdiction of the governing law of the asset mortgage/other security – this is relevant to the enforcement of the mortgage and will generally be the same as the jurisdiction where the asset is registered, although that is not always the case;
c) The jurisdiction of the governing law of the facility agreement - this will most commonly be English, New York law or sometimes the lender’s domestic jurisdiction law (mainly in relation to loans to relationship customers);
d) The jurisdiction of incorporation of the grantor of the asset mortgage / other security.
However, we would emphasise that, whilst these and other jurisdictions might be considered "relevant" for certain assets/transactions, above all, the guidance has to facilitate a case-by-case analysis of each individual transaction, since what is appropriate for a particular asset and range of circumstances, may not be relevant for another. Given the range of assets and sectors covered by paragraphs 20(d) and 21(b), we believe it is extremely important that flexibility is maintained. It is also our understanding that numerous institutions and industry bodies with expertise in respect of particular assets/sectors are submitting responses to the Consultation and we would ask the EBA to take their representations into account before publishing final guidance, since not to do so could result in a particular asset class being treated unfavourably over another, for reasons that have very little to do with legal effectiveness or enforcement of the underlying collateral.
Finally, we would also highlight the existence of the Cape Town Convention on International Interests in Mobile Equipment ("CTC") as something of potential relevance. Whilst the CTC is currently only relevant (given ratifications to date) to aircraft and is not of universal application (it only applies where a transaction has the relevant nexus which is, in simple terms, by way of either (a) the aircraft being registered in a jurisdiction which has ratified the CTC or (b) the relevant obligor being situated in a jurisdiction which has ratified the CTC), given that nearly 80 countries have ratified the convention, and given that aircraft are often owned by SPVs which are incorporated in a jurisdiction that has ratified it, the application of the CTC in the context of aircraft is widespread. The applicability of the CTC means that an “international interest” over the aircraft is created, which is perfected by online registration with the International Registry, maintained in Dublin. The CTC therefore offers material additional enforcement protections in the context of aircraft security used as CRM."