The key to understanding how the transfer of immovable property and service provision works for specialised companies in Russia.
The maintenance activities of Russian specialised companies (SPVs) are not only limited to charter activities. This article looks at the transfer of immovable property to a SPV balance and the transfer of service provision to standby service agents in Russia.
Transfer of immovable property to a SPV balance
Traditional mortgage arrangements allow the bank (service provider) to repossess a mortgage under certain conditions such as the default on a mortgage payment of more than 90 days. Situations do however occur where the right of recovery is not realised in time and when this happens the mortgage default will remain in the SPV's balance. An example of this is when the collection of an immovable property object is drawn in favour of the mortgage agent, instead of the bank (the new owner of the mortgage). If this occurs a judicial foreclosure process will begin and the property will be sold at auction.
If the property does not get sold at auction, in order not to lose the asset, the issuer will need to put the property on their books and accept the transfer of ownership of the property.
Russian laws and regulations do not stipulate specific procedures for the above activities which can cause issues for the SPVs.
In terms of tax accounting, the SPV balance holds an asset in the form of a property tax (art. 378.2 of RF TC) payable on all real estate being held for sale. Apart from this tax, the SPV will also bear additional utility charges for the maintenance of the property.
In response to our request, the regulator explained that an issuer must separate an immovable property as a part of the mortgage collateral within two years from the date of its purchase under article 13 of the Mortgage-backed Securities Law. Any funds received from the disposal should be included in the mortgage collateral.
The regulator highlighted that the property could not be sold due to SPVs being prohibited from entering into fee based contracts with individuals. This raises two issues:
- how can a SPV effectively sell the immovable property on its balance sheet?
- what will happen when a property cannot be sold for more than two years?
Transfer of service provision to a standby service agent
"Interception" is a mechanism used to help protect a service provider from any adverse issues with a main service agent. Recently the issue of interception for the function of the service agent has ceased to be purely theoretical. When TMF Group addressed the situation, we made sure the theoretically stipulated mechanisms were not always applied. This raised some deeper issues that will require a review of the fundamental approaches within the service organisation.
In order to efficiently replace a service agent, the issuer must decide what qualification is needed and the correct way for the process to take place. In the majority of service agreements, the SPV has a unilateral refusal to execute the agreement and transfer the service obligations to a standby service agent in cases of insolvency.
Insolvency can be described as:
- the obligations of a service agreement not being executed
- the withdrawal of a license
- the introduction of protective bankruptcy measures in accordance with the Federal Law "On Insolvency (Bankruptcy)".
Protective bankruptcy measures may include:
- financial support to the servicer by participants or other entities
- a change of asset and liability structure
- various measures that are not prohibited by the legislation.
If any of these measures take place, the issuer has the right to immediately transfer the services to a standby servicer. If however insolvency has already started then replacing the servicer will cause more harm if:
- the main service agent continues to operate as usual
- the correspondent accounts haven't been blocked
- transfers from the accumulative charge accounts are operating without delays and in basic mode.
If this is the case then it is essential to:
- immediately transfer all documents and information to the standby servicer
- notify borrowers to make regular payments to a new account.
If this leads to the loss of the main servicer, the bank can protect its interests by reporting the issuer for abusing their right by acting unfairly and unreasonably. The issuer is also responsible for exercising the rights of the agreement by the due date in order to prevent negative consequences on the transaction.
The standby service agent
The availability of a standby service agent is important for maintaining an investor's interest and preventing any loss for the issuer and bondholders. However, when deciding to transfer the service portfolio, it is necessary to determine the true-to-fact presence or the absence of grounds that allow the service agent to perform its obligations. It is unwise to concentrate only on the risk of assessment and acceptance of the issuers corresponding decision. A specialised organisation is a legal instrument, responsible only for securitisation transaction purposes. Any decisions which directly affect the transaction should be made collectively with the involvement or knowledge of the investors and other beneficiaries.
The most stressful scenario for the issuer, the borrowers (individuals) and the standby servicer is once the decision to transfer the service has been agreed and the interception has begun.
In the initial stage of interception, the main issues are transferring the hard copies and documents relating to the loans portfolio (mortgage and insurance agreements), and the registration of the affected payments which the service agent reports to the standby servicer.
In accordance with the established structure of transactions, the service agent should keep hard copies of the documents. If the servicer has a network of regional offices, the hard copies can be distributed to different regions in Russia. This should be taken into account when planning the terms of document transfer and in calculating the delivery costs.
If the main service agent cooperates and is actively involved during the process of transferring then it is possible for a smooth interception to take place. If a case of insolvency does occur and the main service agent is inaccessible, an interception can only take place when the original documents relating to emission securing are transferred to and kept by a third party. At the same time, the standby service agent has to be involved during the entire data exchange process, or at least receive regular reports on the status of the transaction and the relationship with borrowers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.