Securitization in the Philippines: Legal Framework Under the Securitization Act of 2004

The Philippine securitization legal framework is set out in Republic Act No. 9267, known as The Securitization Act of 2004. The law defines securitization as the process by which a Seller sells assets on a without-recourse basis to a Special Purpose Entity (SPE), which then issues asset-backed securities (ABS) whose repayment depends on the cash flow from those assets under an approved Plan. The State's policy is to develop the capital market by providing a legal and regulatory framework for securitization and a favorable environment for asset-backed securities.

What Is Securitization Under Philippine Law

Section 3 of the law defines the key terms. Securitization is the sale of assets on a without-recourse basis by the Seller to an SPE, followed by the SPE's issuance of ABS that depend for payment on the cash flow from the sold assets in accordance with the Plan.

Assets refer to loans, receivables, or other similar financial assets with an expected cash payment stream. This includes receivables, mortgage loans, and other debt instruments. Future receivables require approval by the Securities and Exchange Commission (SEC) or the Bangko Sentral ng Pilipinas (BSP), as the case may be. Receivables from future government revenues such as royalties, fees, or imposts are excluded.

An Asset Pool is the group of identified, homogeneous assets underlying the ABS. Credit Enhancement refers to any legally enforceable scheme intended to improve marketability and increase the probability that ABS holders receive payment.

The Special Purpose Entity

Under Section 5, an SPE may be either a Special Purpose Corporation (SPC) or a Special Purpose Trust (SPT). An SPC is a stock corporation established under the Corporation Code solely for securitization and registered with the SEC. An SPT is a trust administered by an entity licensed to perform trust functions under the General Banking Law and need not be registered with the SEC. The SEC and BSP determine the required capitalization for SPCs and SPTs respectively.

Section 10 lists the SPE's powers, which include accepting the sale or transfer of assets, issuing and offering ABS for sale, undertaking activities in the approved Plan, creating indebtedness to defray expenses, and paying out or investing funds per the Plan. Under Section 11, the SPE may not undertake any activity outside the approved Plan without written SEC approval and the written consent of holders of at least two-thirds of the outstanding ABS.

The Plan and SEC Approval

After establishing an SPE, the proposed Plan must be submitted to the SEC for approval under Section 6. The Plan must include the mechanics of the asset sale, credit enhancements, identities of the Originator, Seller, Servicer, underwriter and dealer, the trustee's identity and qualifications, the aggregate principal amount of ABS, the structure and payment priorities of each class, a full description of the asset pool, the rating agency, collection and remittance procedures, the management plan, and the disposal of residual value.

Under Section 7, all ABS must be registered with the SEC in accordance with the Securities Regulation Code and its implementing rules. Section 8 provides that the SEC issues the order and permit to sell ABS only after compliance with registration requirements and approval of the Plan.

Where the Originator is a bank or financial intermediary supervised by the BSP, or where the SPE is an SPT, Section 9 requires BSP endorsement of the Plan before SEC approval.

The True Sale Requirement

Section 12 sets out when a transfer of assets is deemed a true sale. The transferred assets must be legally isolated and beyond the reach of the Originator or Seller and its creditors. The SPE must have the right to pledge, mortgage, or exchange the assets. The transferor must relinquish effective control, and the transfer must be by sale, assignment, or exchange on a without-recourse basis. The transferee must have the right to profits and disposition, neither party may recover the assets or the price paid, and the transferee must undertake the risks associated with the assets. The transferor may still give moral representations or warranties.

Credit Rating Requirement

Section 43 provides that no ABS shall be issued unless it has been rated by a duly accredited credit rating agency. Under Section 45, no credit rating agency may commence rate-making operations under the Act until it obtains accreditation from the SEC. Section 46 subjects credit rating agencies to SEC examination, with the SEC conducting an examination at least once every three years.

Tax Treatment and Incentives

Section 28 exempts the sale or transfer of assets to the SPE, if made in accordance with the Plan, from value-added tax and documentary stamp tax. Registration and annotation fees related to the transfer are reduced to fifty percent of the applicable fees, except for SEC registration fees. A transfer by dacion en pago in favor of an SPE is not subject to capital gains tax.

Section 29 exempts the original issuance of ABS and related securities from VAT but subjects them to DST. Secondary trades and subsequent transfers of ABS are exempt from both DST and VAT.

Under Section 30, the SPE is not classified as a bank, quasi-bank, or financial intermediary and is not subject to gross receipts tax. Section 31 provides that ABS are not deposit substitutes, and the yield from ABS is subject to a twenty percent final withholding tax, except for tax-exempt investors.

Section 33 exempts from income tax the yield or income of investors from low-cost or socialized housing-related ABS.

Frequently asked questions

What is the legal basis for securitization in the Philippines? Republic Act No. 9267, also known as The Securitization Act of 2004, provides the regulatory framework for securitization and grants exemptions from certain laws.

Who approves a securitization plan in the Philippines? The Securities and Exchange Commission approves the Plan. If the Originator is a bank or a BSP-supervised financial intermediary, or if the SPE is a Special Purpose Trust, BSP endorsement is required before SEC approval.

What is a true sale in securitization? A true sale occurs when the transferred assets are legally isolated from the Originator or Seller and its creditors, the transferor relinquishes control, and the transfer is made on a without-recourse basis, among other requirements under Section 12.

Practical takeaways

• Securitization in the Philippines is governed by Republic Act No. 9267, The Securitization Act of 2004.
• An SPE may be structured as a Special Purpose Corporation or a Special Purpose Trust, each with distinct registration requirements.
• The SEC must approve the Plan before the SPE may issue ABS, and BSP endorsement is required in certain cases.
• A valid true sale requires legal isolation of assets, relinquishment of control, and a without-recourse transfer.
• The law grants significant tax exemptions on asset transfers and ABS issuance, subject to compliance with the approved Plan.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 9267 - AN ACT PROVIDING THE REGULATORY FRAMEWORK FOR SECURITIZATION AND GRANTING FOR THE PURPOSE EXEMPTIONS FROM THE OPERATION OF CERTAIN LAWS

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.