Azerbaijan has proposed a legal framework for securitization that would allow creditors to receive money upfront for assets while requiring them to retain at least 5% of the risk in bonds issued against those assets.
Draft amendments to the Securities Market Law have been submitted to parliament’s economic policy, industry and entrepreneurship committee. The terms could change before adoption.
Eligible Assets
The proposal would permit securitization of monetary claims from loans, financial leases and factoring, as well as unlisted corporate bonds. The Central Bank could designate other eligible claims.
Exclusions would include certain subsidized business loans, most securities, debts owed by parties in bankruptcy, receivables without periodic payments and assets already pledged to third parties.
How the Mechanism Would Work
A creditor could sell assets to a special-purpose company below face value and receive cash without waiting for future payments. The company would issue bonds backed by those cash flows, and investors would be paid from collections on the acquired assets.
Once entered in a special register, the assets would be treated as pledged to bondholders. Each issue would require a securitization plan approved by the Central Bank, disclosing participants, assets, risks and mitigation measures, along with an independent auditor’s opinion. The company would then have 60 working days to seek state registration of the bond issue.
The 5% Rule
To discourage sellers from transferring their riskiest debts and exiting entirely, the bill would require the seller to buy at least 5% of the bonds backed by the assets and hold them to maturity. The transferred portfolio’s credit risk also could not exceed that of comparable assets remaining on the seller’s balance sheet.
Source: Vesti Baku.