Katherine Saville-Barwood, senior transaction manager at TMF Structured Finance Services, explores the value of an intelligent and proactive corporate services provider

Traditionally, special purpose vehicles (SPVs) established for structured finance transactions and the corporate services providers who maintain them have adhered to the mantra of being seen but not heard. However, the momentous market events of the past twelve months have altered the financial landscape immeasurably and issuers are now being called to the table and asked to speak up.

Securitisation is an invaluable financial tool which has been around since the early 1970s. A successfully structured and properly executed transaction provides an optimal result for both originator and investor.

Amongst other benefits, the originator can access cheap funding, increased cashflow and risk transfer. The investor obtains a bankruptcy remote investment, which may provide an exact asset versus liability match and, potentially, increased and cheaper credit.

The technology of securitisation has developed significantly over the past three decades. The first transactions in the 1970s were structured around financing of mortgage pools. This then extended in the 1980s to the first classes of non-mortgage loans, primarily car loans and then credit card receivables.

The 1990s saw the market moving into insurance and reinsurance and the issuance of such diverse products as catastrophe bonds and reinsurance sidecars. By December 2008, US$8.7trn of assets globally were funded by securitisation.

However, while securitisation technology has become increasingly sophisticated, the SPVs themselves have regressed. When CDOs first came to the market, the directors were required to approve via board resolution the decisions of the relevant investment manager.

This involved undertaking, amongst other tasks, qualitative decisions on SWOT analyses; a situation unthinkable in the CDO issuances of early to mid-2008. TMF Structured Finance Services (TMF SFS) was among the first corporate services provider to break into the CDO market and our managing directors have direct experience of this more skilled hands-on role.

Indeed, as time has passed all parties have continuously worked towards a situation where SPVs have only the limited substance required in their jurisdiction of issuance to satisfy structural, tax or legal requirements. The effective delegation of functions from the issuer to other deal parties has been key to a well structured deal. It was unthinkable that any of these deal parties and particularly the banks who were appointed to critical roles, such as swap counterparty, would ever make a sudden departure from the market.

Arise, the brain-dead issuer
In consideration of the increasingly limited functions of the issuer, corporate services providers have been forced to operate under fixed-fee agreements, with intense pressure from arrangers to keep such fees to a minimum. After all, if you have been successful in creating a black box issuer with minimal functionality, then why pay more than the bare minimum to set up and maintain your structure? For some parties, quality of services came a poor second to profit.

TMF SFS has always believed that this attitude is short-sighted and feels that current market conditions have proven this to be the case. There is a distinction between the issuer and the corporate services provider who stands behind it. While it may be beneficial from a structuring perspective for the SPV to be brain-dead, the party servicing it should most certainly not be!

From the initial review of transaction documents, through the lifetime administration of a deal to the close at maturity, all deal parties benefit from a quality corporate services provider who can bring some added value to the transaction. Fees should reflect this.

At the same time as being stripped of any real substance, issuers' liability has been increased. The rationale for this development lies in the limited recourse provisions of securitisation transactions.

Any claim against the SPV should be drafted as being strictly limited to the assets of the structure. Such ring-fenced protection has made it the obvious party to accept liability for matters such as the accuracy of offering documents and, indeed, to indemnify all other deal parties in carrying out their delegated functions.

However, personal managing directors' liability remains unlimited in respect of their responsibility for the proper running and maintenance of the company in the relevant jurisdiction. It is therefore important that managing directors have the proper qualification and experience to perform their role, irrespective of the safety net of directors' insurance.

The collapse of Lehman Brothers in the autumn of 2008 threw up the first real challenge of the credit crisis for issuers and the corporate services providers who maintain them. Overnight, a major market player disappeared, leaving associated securitisation transactions without a key deal party.

Lehman had worn many hats; for example, as arranger (setting up and traditionally overseeing the deal to maturity), issuer, swap counterparty, investment manager and portfolio servicer. The impact of its entrance into administration needed to be properly assessed.

The first task for corporate services providers was to identify the scale of the problem that faced them. A thorough analysis of all administered SPVs and the functions that Lehman had played had to be undertaken. This is clearly within the standard remit of the corporate services provider and posed no problem to those with good record-keeping procedures.

The next step was rather more complicated and required the sort of proactive approach and skill-set that one would not expect from a 'black box' entity; the transaction documentation had to be thoroughly reviewed and the effect of a deal party entering into administration ascertained. A thorough consideration of issuers' obligations in these circumstances was clearly key to this analysis.

Prior to the disappearance of Lehman, this analytical legal role would be -coordinated by the arranger, who would either instruct the issuer themselves using their in-house counsel or coordinate some external advice from deal counsel. However, in this new world without Lehman the issuer did not have the comfort of the guiding hand of the arranger and was forced to approach deal counsel directly.

It was at this point that issuers began to realise the true misfortune of their situation. Issuers' counsel are also typically appointed to the arranger and, when approached about acting for the issuer in these circumstances, almost inevitably cited a conflict of interest and refused to act. Counsel who were not conflicted queried how they would be paid.

Were the issuers' legal expenses included in the pre- or post-acceleration waterfall? Unfortunately, the answer to this question was frequently, "No".

So, in a situation where the issuer is left without its original counsel and/or the means to engage and pay for new counsel, what should it do? Here we see the absolute conflict between the black-box function of the issuer as carefully drafted and honed over the years and the proactive role being forced on the corporate services provider standing behind the vehicle, by the absence of an arranger with no recourse to the comfort of guidance from counsel.

For those corporate services providers, such as TMF SFS, who had been prudent enough to include lawyers on their staff, an initial in-house review of the documentation could be undertaken. The importance of this in-house functionality is particularly crucial when you consider the timing issues around some of the issuers' obligations and that the consequence of inactivity during a cure period could lead to an issuer's event of default. The plight of those unfortunate corporate services providers without such legal staff is certainly more likely to be played out in front of all of us in the courts over the next few years.

The big surprise that has come to many corporate services providers after undertaking this in-house review is just how far the obligations of the issuer extend. The drafting of the transaction documents reflects the fact that no-one thought the unthinkable; there simply is no provision in terms of issuers' protections for a deal party and particularly one of Lehman's size, carrying out the roles that it did, to disappear overnight.

Replacement and termination provisions do not provide solutions for the issuer (although they do often provide noteholders with a direct cause to demand action from the issuer). These clauses are typically drafted to refer to the delegates' obligation to select their replacement; impossible in a situation where the delegate is no longer functioning, leaving the corporate services provider on behalf of the issuer in a position of being forced to find a replacement deal party.

The concept of a corporate services provider sourcing an alternative swap counterparty, portfolio servicer or investment manager on its own initiative and using its own industry contacts would have been laughable 12 months ago, yet we have found ourselves doing just this within the last six months. Questions as to the desirability of or indeed the issuers' suitability to carry out this role seem to have fallen away as parties rush to rescue transactions with any residual value.

Should the issuer fail to source this alternative party, they will have failed to perform their contractual obligation under the transaction documents. Further, as delegation is only effective for so long as the delegate exists and, upon ceasing to exist, the obligation to perform the specified function reverts directly to the contractual party making the appointment - i.e. the issuer - the issuer finds itself potentially in default under the terms and conditions of the notes (e.g. issuer's continuing breach of obligations).

In such a situation, the issuer can only look enviously to the protections of the trustee, who will not act without a direction from noteholders and an indemnity. The issuer is, of course, protected to some extent by limited recourse.

However, reputational risk is always a concern to any quality corporate services provider and this alone is enough to give the conscientious amongst us serious cause for concern. The best an issuer can hope for in these situations is an interested party who is willing to indemnify the issuer and its agents for any actions it takes in accordance with that party's wishes. Such indemnities are being sought wherever possible as a matter of course and can also provide for the issuer to appoint and pay for counsel.

As the market situation has continued to deteriorate, the issuer has found itself being called upon to act more and more. It is no longer uncommon for a corporate services provider to receive a call or email from a noteholder directly or from a party acting on their behalf.

The proactive review of transaction documentation to assess obligations and potential liabilities, and the drafting and service of notices seems to have become commonplace. Corporate services providers are sourcing replacement account banks, directing the process of amendments via noteholder consent and indeed, with the benefit of an indemnity or a well-drafted waterfall, appointing counsel directly.

Irrespective of the level of fees initially paid, corporate services providers are now faced with an enormous gap between the un-envisaged cost in terms of staff's time spent on the above and the fees actually being paid (if indeed there is still a source of payment). As stated above, with the limitation of the issuer's functionality came an immense pressure to reduce fees to a fixed minimum and now corporate services providers are being forced to make up the difference, with no hope of reimbursement unless there is provision for time-spent fees in their appointment documentation.

The old argument that the issuer is brain dead does not wash in today's climate; issuers have obligations and interested parties will make sure that the relevant corporate services providers fulfill them. One only wonders how those who were paid peanuts have been faring in this challenging new world.

So, what does the future hold if and when the securitisation market makes a comeback? We believe that parties' experiences through the market downturn will lead to a demand for better quality services providers.

Questions will be asked about procedures, in-house capabilities and provision for the unexpected. Fee structures should be amended to reflect this, and corporate services providers should be properly rewarded in the event of being asked to take significant action on a transaction.

At the same time we believe that issuers will aim to increase protection under the deal documents. Delegation and termination provisions must be extended to cover all possible scenarios. Further, the issuer will certainly require its legal costs to be included high in the waterfall and may even start to look for provisions similar to the trustee in terms of noteholder consent and indemnification prior to taking any action.

Any issuer who does not push for these provisions clearly has not properly engaged in and learnt their lessons from this tumultuous period. Deal parties should remember that an intelligent corporate services provider, like TMF SFS really is worth the money.