Prior to the 2018 economic crisis in Argentina that led to the 2020 sovereign debt restructuring process, the securitisation of consumer loans grew solidly in Argentina on the basis of a resurgence in consumer financing (i.e., sales financing, personal loans and credit card financing). The 2018 crisis resulted in a sudden stop in the foreign financing to Argentina and a step increase in the interest rates in pesos, which have a negative impact on the consumer lending market. Since much of the financing being securitised is consumer lending, the securitisation market suffered.
Recently, the mandatory lockdown resulting from the covid-19 spread and the slowdown in the economic that followed, have added to the difficulties in the securitisation market.
Despite the current situation, securitisation structures have been very popular as a means of financing consumer spending. Securitisation structures have been used for years by the main participants in the market, such as banks, home appliance retail chains and consumer finance companies, to fund their retail financing activities and they have become the framework under which the system runs.
Several factors have boosted the use of securitisation structures in Argentina, including:
- the low real interest rates of term deposits, which led investors to seek better investment opportunities;
- the absence of a long-term credit market due because of the high and volatile cost of funding, which has led banks and companies to focus on shorter-term consumer financing;
- the option for banks and retail chain companies to transform illiquid assets into liquid assets, while at the same time obtaining balance-sheet relief;
- the possibility of transferring the collection risk from the originator of the credits to the investors;
- tax advantages that have been in place for years;
- an improvement in the mechanisms for monitoring collections; and
- cheaper funding costs.
Securitisation can be defined as a financial transaction in which assets are pooled and transferred to a trust (which serves as a special purpose vehicle) and the trustee issues securities representing interests in the pooled assets of the trust. In this way, illiquid assets are transformed into liquid assets. For example, a company that grants consumer loans aims to raise money to grant more loans. It can sell its existing loans, but it is unlikely to find a strong and liquid secondary market for those loans. A good alternative in this scenario would be to pool the consumer loans and sell securities or interests in the pool to investors, who, in turn, may find this investment more attractive than others. The debtors of the consumer loans will continue paying their debts, but these payments will flow to the investors (once expenses are paid).
In general, any class of assets with a relatively predictable cash flow can be securitised. The most common assets include automobile and consumer loans, credit cards, mortgages, corporate debt, future collections, and lease payments. However, in Argentina certain requirements are imposed in the interests of an efficient tax treatment. For example, the assets must consist of credit instruments and must be homogenous.
As a general principle, there is no specific legislative regime under which securitisations are carried out, other than regulations issued by the Central Bank of Argentina relevant to vehicles purchasing receivables from financial institutions.
However, financial trusts are used as vehicles in securitisation transactions. Financial trusts are currently governed by the Argentine Civil and Commercial Code (CCC), which entered into effect in August 2015. Additionally, when securitisation involves a public offering of securities, the offer must be authorised by the Argentine Securities and Exchange Commission (CNV), a regulatory authority created by Law No. 17,811 (subsequently superseded by Law No. 26,831).
The CCC delegates the power to regulate securitisation transactions to the CNV, therefore when trust securities are issued publicly, the provisions of Chapter IV, Title V of the CNV Rules apply.
iii Financial trusts
A financial trust is a trust established by a party (the originator, settlor or trustor) who transfers title of certain assets to a financial entity or other institution (the trustee) specially authorised by the capital markets regulatory authority.2 The trustee holds the assets off balance sheet and manages them for the economic benefit of holders of debt securities or pass-through certificates (the beneficiaries). On the expiration of a certain term or the fulfilment of a certain condition the trustee is bound to transfer those assets to the originator, the beneficiaries or to a final beneficiary.
Under the CCC, the following general requirements must be fulfilled to ensure that the trust is effective against third parties in a securitisation process, as well as to constitute the trust as a separate entity and the originator as no longer owner of the assets held in trust.
There must be an agreement between the settlor and the trustee (the Agreement), which must specify, among other things:
- a description of the assets to be held in trust, or objective parameters for their determination;
- a determination as to how other assets can be incorporated into the trust;
- the manner in which other property may become part of the trust;
- the term (in principle, no more than 30 years) and conditions to which the trust property is subject;
- appointment of the beneficiary or the criteria to appoint the beneficiary thereafter;
- the rights and obligations of the trustee and how to replace the trustee, if necessary;
- the possibility of appointing a manager to administer the assets; and
- a determination as to what will happen to any assets held in trust on termination of the trust.
In the case of financial trusts, the Agreement must also include:
- the name of the financial trust;
- the rules for decision-making by the beneficiaries, which will include provisions for the eventuality of insufficiency or insolvency of the assets held in trust; and
- the terms and conditions for the issuance of securities.
The Agreement must be registered with the relevant public registry corresponding to the purpose of the trust. In the case of public financial trusts approved by the CNV, no registration is necessary.
The trustor must concurrently, or thereafter, transfer the assets to the trustee to be held in trust, according to the rules applicable to the type of asset (for example, assignment, endorsement, public notice requirements, public deed, and delivery of possession of real goods).
The transfer of assets to be held in trust must not be fraudulent in relation to the originator's creditors.
Any individual or entity may be appointed as trustee of an ordinary trust. However, only those entities authorised by the CNV (Argentine financial institutions and other entities incorporated in Argentina) may serve as financial trustees. The trustee must comply with certain obligations imposed by the CNV Rules and the CCC. In addition, these ordinances establish a standard of conduct for the performance of the trustee, requiring trustees to act with the care and prudence of sound businesspersons and to respect the confidence with which they have been entrusted. The trustee has a legal duty to manage the trust's assets in the best interests of the beneficiaries. Generally, trustees delegate certain management functions to administer the trust on behalf of the beneficiaries according to the express terms and provisions of the trust agreement.
The CNV Rules impose certain requirements on the appointment of trustees, such as a minimum net worth of 950,000 units of purchasing value,3 which indexes the capital based on the variation of inflation.
The trustee is entitled to receive certain fees for its services and to be reimbursed for its expenses related to the trust.
v Classes of assets or receivables
The most common classes of assets for securitisation are: consumer loans; mortgage loans; credit card repayments and interest payments; commercial documents (invoices, notes and deferred payment checks); lease agreements; and tax collection.
There are no legal restrictions applicable to any class of asset. All types of receivables can be securitised, even future receivables.
vi Public offerings of trust securities
To publicly offer trust securities, an application to the CNV requesting authorisation for a public offering of securities must be filed. The filing has to include a draft of the prospectus (describing the assets, the settlor, the business, the securities and the trustee), a draft of the trust agreement and related documents (e.g., custody agreement, paying agency agreement, administration agreement, placement agreement), and copies of the trustee's corporate authorisation for the creation of the trust and the issue of securities.
After the famous Bonesi and Saturno cases, the requirements set out by the CNV Rules for the public offering of securities were increased. This change tightened the information requirements for obtaining authorisation from the CNV to offer securities; increased the liability of the trustee (as organiser or expert with responsibility for the custody of the instruments and sale of the trust property); and required the appointment of a supervisory agent to control and review both the trust assets and the obligations of the collection agent under the trust agreement.
vii Taxation of the trust
The trust will be taxed on its worldwide income. The general corporate tax rate is 30 per cent for 2020, and this would apply to the trust's net income. The corporate tax rate will drop to 25 per cent for fiscal years beginning on or after 1 January 2021. The taxable base is determined by deducting from the gross income all ordinary and necessary expenses incurred in obtaining, maintaining and preserving the taxable income.
Operating losses incurred during any fiscal year may be carried forward and set off against taxable income obtained during the following five fiscal years.
Some specific losses, such as those arising from the sale or other disposal of stock and other forms of equity, may only be set off against capital gains arising from the disposal of the same type of asset, and foreign-source losses may only be set off against foreign-source income.
Foreign paid taxes will be allowed as a tax credit against the Argentine tax liability to the extent that the foreign tax does not exceed the Argentine tax.
The law also provides for withholding tax regimes for foreign beneficiaries, which apply at different rates depending on the nature and origin of the income. These rates can be reduced by tax treaties.
Value added tax
This tax applies to the sale of goods, the provision of services and the importation of goods. Under certain circumstances, services rendered outside Argentina that are effectively used or exploited in Argentina are deemed to be rendered in Argentina and are therefore subject to value added tax (VAT). VAT is paid at each stage of the production or distribution of goods or services upon the value added during each of the stages. Thus, this tax does not have a cumulative effect.
VAT is levied on the difference between the 'tax debit' and the 'tax credit'. The tax debit is the tax corresponding to sales made by the taxpayer or services rendered by him or her. It is obtained by applying the tax rate to the price of the sales or services. The tax credit is the tax indicated in the invoices of the suppliers of goods or services contracted by the taxpayer. The difference between the tax debit and the tax credit, if positive, constitutes the amount to be paid to the Argentine Tax Authority.
Tax on debits and credits in bank accounts and other transactions
This tax is levied upon debits and credits in bank accounts and upon other transactions that, because of their special nature and characteristics, are similar to or could be used in substitution for a checking account (such as payments on behalf or in the name of third parties, procedures for the collection of securities or documents, or drafts and transfers of funds made by any means) when these transactions are performed by entities regulated by the Financial Entities Law No. 21,526.
Transfers and deliveries of funds also fall within the scope of this tax, regardless of the individual or entity performing them, when those transactions are made through organised systems of payment in substitution for checking accounts.
Argentine tax law and its regulations provide several exemptions to this tax, such as the transfer of funds to a foreign bank account belonging to the transferor.
The general rate of the tax is 0.6 per cent. An increased rate of 1.2 per cent applies in cases in which there has been a substitution for the use of a checking account. Owners of bank accounts subject to the general tax rate of 0.6 per cent are eligible for a tax credit of 33 per cent of the tax paid on credits and 33 per cent of the tax paid on debits to those bank accounts. These amounts can be utilised as a credit against income tax and the tax on presumed minimum income, and the rest is deductible for income tax purposes as expenses if it is related to taxable income. The amount used as credit is not deductible for income tax purposes.
Turnover tax is a local tax levied on gross income. Each of the provinces and the city of Buenos Aires apply their own respective tax rates. The tax is levied on the amount of gross income resulting from business activities carried on within the respective provincial jurisdictions. The provinces have executed an agreement4 to avoid double taxation on activities performed in more than one province, whereby gross income is distributed among the provinces by applying a formula based on income obtained and on expenses incurred within each jurisdiction.
This is a local tax levied by Argentine provinces and by the city of Buenos Aires. In general, this tax will be triggered by the execution of any written agreement. Legal instruments are taxed in the jurisdiction where agreements are executed or in the jurisdiction in which they have any effect. 'Effect' is defined by the legislation of each jurisdiction. Most Argentine provinces apply a 1 per cent rate on the value involved in the relevant instrument. If a deed is required for the assignment of loans, stamp taxes are due as from the execution of the deed.
viii Taxation on the investor
The Social Solidarity and Productive Reactivation Law No. 27,541, published in the Official Gazette on 17 December 2019, declared a public emergency in economic, financial, fiscal, administrative, pension, tariff, energy, health and social matters, and pursuant to article 76 of the Argentine Constitution, the Law delegates important legislative powers to the Argentine Executive, establishing different deadlines for the exercise of delegated powers. Some of its changes were regarding the tax aspect and specifically regarding the taxation of financial income.
Tax treatment of the lender and holders of certificates of participation
Dividends and other similar income (profits arising from certificates of participation), obtained by individuals and undivided estates will be taxed at the rate of 13 per cent (7 per cent during 2020) on net income. This tax will also be applicable for dividends and profits that are paid to foreign beneficiaries by way of withholdings made by the Argentine entity at the time of payment.
The Argentine-source net profits of individuals and undivided estates resulting from transfers of securities will be exempt from tax considering that the securities are listed on stock exchanges or markets authorised by the CNV. The same treatment shall apply to non-Argentine residents that do not reside in non-cooperative jurisdictions or the funds invested do not come from non-cooperative jurisdictions.
Tax treatment of the lender and holders of debt securities
Capital gains and interests
The Social Solidarity and Productive Reactivation Law establishes that for individuals who are Argentine residents, capital gains and interest received under debt securities is exempt from income tax if the securities are listed on a stock exchanges or market authorised by the CNV.
For foreign beneficiaries, there is also an exemption for capital gains and interest related to debt securities of financial trusts that are carried out through stock exchanges or stock markets authorised by the CNV. Note that these provisions apply to foreign beneficiaries on condition that they do not reside in non-cooperative jurisdictions and the funds invested do not come from non-cooperative jurisdictions.
III SECURITY AND GUARANTEES
In the most common securitisation structures, the asset being securitised is some type of credit. Therefore, the securtisation process generally involves the transfer of a credit by the settlor to the trustee, on behalf of the trust.
Such a transfer of credits is governed by the CCC. The CCC defines an assignment of credit as an agreement under which one party transfers a credit to another.5 Any type of credit can be assigned, unless prohibited by law or by the agreement that created it.6 To the extent that it is not modified by the specific regulations governing assignments of credits, the transaction will be governed by the terms of the sale agreement if the credit is transferred for a consideration.7 If the assignment is under guarantee, the relationship between assignor and assignee will be governed by the terms of the pledge.8
The agreement has to be in writing, but this does not have to be an instrument in the form of a public deed unless the assigned credit is documented in a public deed or the credit is being contested in court.9 The assignor must transfer to the assignee the documents evidencing the credit or, if the assignment is partial, a certified copy of the documents.10 The assignment will have effects in relation to third parties from the moment that the assignment is notified by means of a public deed or an instrument with a certified date.11 Any payment by the assigned debtor to the original creditor (or any other action that extinguishes the credit) made prior to the notification will be effective.12 If there are several assignees, the assignee who first notified the assignment to the assigned debtor will have priority, even if the assignment agreement was entered into after the others.13 In cases of partial assignment of the credit, the assignee does not have any preference over the assignor unless a preference is agreed.14 In the event of bankruptcy or reorganisation of the assignor, the assignment will not be effective in relation to other creditors if it is notified after the filing for reorganisation or the declaration of bankruptcy.
The assignor guarantees to the assignee the existence and enforceability of the credit as at the time of the assignment, but (in the absence of bad faith) does not guarantee the solvency of the debtor, unless it is agreed otherwise.15 If the assignor guarantees the solvency of the assigned debtor, the regulations for guarantees will apply. The assignee can only bring an action against the assignor after first pursuing the assets of the assigned debtor or if the debtor is bankrupt or under reorganisation.16
i Rules on factoring
The CCC regulates factoring agreements, which were unregulated until the enactment of the CCC. Factoring is defined as an agreement whereby one of the parties has the obligation to purchase for a determined or determinable amount of money credits originated in the ordinary course of business by the other party, by paying an advance (or not) and taking the risks of those credits (or not).17 The originator can make a global assignment of all or part of its credits, whether present or future, to the extent that they can be determined.18
The purchase of the credits can be supplemented with management and collection services and commercial, administrative and technical assistance regarding the credits.19
The agreement must include a description of the transferred credits, and the information necessary to identify the document that represents the credits – the amount, issuance date and maturity date or the elements that permit its identification when the factoring is determinable.20 Notice of the assignment of the credit has to be issued by the debtor by any means that reasonably evidences its receipt by the debtor. The factoring agreement is sufficient title for the transfer of the credits.21 The securities on assets, the personal guarantees, haircuts and the withholding of a percentage of the price are valid and are maintained until the payment of the obligations of the assignor.22 When collection of the assigned credit is not possible for any reason related to the transaction from which the credit arises, the assignor is liable for the loss in the value of the credit, even if the factoring was without recourse or guarantee.23
ii Process to assign credits
The assignment of a credit documented by an invoice must be effected through an instrument in the form of a written document that clearly identifies the credit being assigned. The document evidencing the credit must be delivered by the assignor to the assignee. If the credit is only documented in an electronic invoice, we recommend that a printed copy of the document signed by the assignor is delivered to the assignee. The assignment of the credit must be notified to the assigned debtor. To be effective in relation to third parties, the notification has to be made by means that certify receipt of the notification and the date. Traditionally, this was achieved by using a notary public, but, under the new CCC, a notice delivered by certified mail by Correo Argentino, the Argentine mail service, will be considered sufficient notice to perfect the assignment of the credit in relation to third parties.
iii Process to transfer negotiable instruments
The transfer of negotiable instruments, such as promissory notes, bills of exchange and cheques, are generally assigned by endorsement. In the event of assignment to a financial trust that has registered its securities under the public offering regime, the endorsement can be implemented through a global endorsement using a public instrument that identifies the documents being endorsed.24
The perfection of the transfer of certain assets, such as credits secured with registered pledges or mortgages, would require registration in the relevant public register.
IV PRIORITY OF PAYMENTS AND WATERFALLS
Usually financial trusts issue two types of securities, trust debt securities and certificates of participation.
Under Argentine law, there is no legal subordination. Nevertheless, there are three methods of subordination: contractual subordination, structural subordination and inter-creditor arrangements.
It is clear that the proceeds from the realisation of trust assets should be distributed to trust creditors according to the waterfall agreed under the Agreement, and the status of priority creditors should be preserved.
The most common structure is to have three tiers of securities issued by the trustee: senior debt securities, junior debt securities and certificates of participation.
In relation to the waterfall, is it common to apply all cash flow in the following order of priority: (1) payment of trust expenses, including taxes and trustee and servicing fees; (2) payment of interest on debt securities in priority order; (3) payment of principal on debt securities in priority order; (4) payment of principal on certificates of participation; and (5) reimbursement of expenses paid by the trustor.
V ISOLATION OF ASSETS AND BANKRUPTCY REMOTENESS
Under Section 1,685 of the CCC, the assets held in trust form an estate separate from the trustor's, the trustee's and the beneficiaries' estates. The assets held in trust are therefore protected from both the trustor's and the trustee's creditors, except in the event of fraud.
Additionally, because the financial trust is a separate estate, in the absence of fraud, assets transferred to a financial trust are not affected by the bankruptcy of the grantor or of the trustee.
The Bankruptcy Law No. 24,522, as modified, allows scrutiny of the originator's transactions during the period between the date of suspension of payments and the final judgment or declaration of bankruptcy (known as the look-back period). The date established for the suspension of payments cannot be earlier than two years before the date bankruptcy is adjudicated or preventive insolvency proceedings are filed.
The transfer of assets may be declared void if it is proven to have occurred to defraud creditors. Moreover, the transfer of assets may be declared void without it being necessary to produce evidence, if the transfer is one of the following:
- The advance payment of debt with maturity on the date of the bankruptcy adjudication or later – in a securitisation, this can occur if the trust securities are provided by the bankrupt's creditors through offsetting the subscription price against the receivables.
- The creation of a priority over a non-matured obligation that was originally unsecured (for example, an exchange of an obligation for trust securities that are secured by the assets held in trust, therefore sharply improving the creditor's position).
- A transfer made during the look-back period – such transfers can be declared void if the transferee is aware of the originator's suspension of payments and the transfer damaged the originator's general creditors.
To avoid a transfer being declared void, the trustee must prove that there has been adequate consideration for the transfer in trust of the relevant assets and, consequently, that the originator's estate has not been affected. This can be easily proved if trust securities were placed through public offering, as the subscription price of the securities (which generally is the consideration received by the originator) results from the interaction of supply and demand.
Argentina is undergoing a severe economic and financial crisis and is faced with the effects of a long recession, high inflation, high real interest rates, foreign exchange control. Currently, it also having to cope with the effects of the covid-19 pandemic and the sovereign debt.
In this context, the securitisation market has suffered considerably and there has been a marked slowdown in activity.
However, it is likely that securitisation will be the first financing structure to see a substantial increase in activity once the crisis has eased off. Securitisations are short term, peso-denominated and with low structuring costs, and have done well in scenarios in which short-term domestic currency financing dominates the market. In this sense, securitisations have proved to be one of the more resilient financing structures in the Argentine market.
1 Pablo Gayol is a partner and Sergio Tálamo is a senior associate at Marval O'Farrell Mairal. The authors would like to acknowledge Brian Kaplun, an associate at Marval O'Farrell & Mairal, for his help with the tax aspects of the chapter.
2 Section 1,690, Argentine Civil and Commercial Code (CCC).
3 The unit of purchasing value, or UVA, is adjusted daily with reference to an index of inflationary variation in Argentine pesos published by the Central Bank of Argentina.
4 The Multilateral Agreement, dated 18 August 1977.
5 Section 1,614, CCC.
6 Section 1,616, CCC.
7 Section 1,614, CCC.
8 Section 1,615, CCC.
9 Section 1,618, CCC.
10 Section 1,619, CCC.
11 Section 1,620, CCC.
12 Section 1,621, CCC.
13 Section 1,622, CCC.
14 Section 1,623, CCC.
15 Section 1,628, CCC. If the credit does not exist, the assignor has to reimburse the price plus interest, but if the assignor acted in bad faith, the assignor has to pay the difference between the price and the amount of the credit (Section 1,629, CCC).
16 Section 1,630, CCC.
17 Section 1,421, CCC.
18 Section 1,423, CCC.
19 Section 1,422, CCC.
20 Section 1,424, CCC.
21 Section 1,425, CCC.
22 Section 1,426, CCC.
23 Section 1,427, CCC.
24 Section 1,839, CCC as amended by Law No. 27,440.