Liquidating trust securitization
For creditors, there are advantages and disadvantages to being involved in a syndicate with a security trustee holding the assets.
This can be safer in some settings, as the trustee can act very quickly to address nonpayment of debt and other issues.
The ABSFA further states that: "[a] transferor in the securitization transaction ...
to the extent the issue is governed by Delaware law, shall have no rights, legal or equitable, whatsoever to reacquire, reclaim, recover, repudiate, disaffirm, redeem or recharacterize as property of the transferor any property, assets or rights purported to be transferred, in whole or in part, by the transferor." [6 Del. § 2703A(a)(2)] "[i]n the event of a bankruptcy, receivership or other insolvency proceeding with respect to the transferor or the transferor's property, to the extent the issue is governed by Delaware law, such property, assets and rights shall not be deemed part of the transferor's property, assets, rights or estate." [6 Del. § 2703A(a)(3)] The foregoing provisions facilitate reaching the conclusion that a true sale exists in the context of a securitization transaction where Delaware law applies.
A security trustee is a person or institution who holds securities in trust for a syndicate of creditors in a financial transaction like a securitization.
There are a number of reasons why debtors may choose to use a trust for raising capital and other types of finance transactions.
Asset-Backed Securities Facilitation Act On January 17, 2002, the State of Delaware enacted the Asset-Backed Securities Facilitation Act, 6 Del. The ABSFA first provides that: "[a]ny property, assets or rights purported to be transferred, in whole or in part, in the securitization transaction shall be deemed to no longer be the property, assets or rights of the transferor." [6 Del. § 2703A(a)(1)] Given the foregoing provision, to the extent Delaware law applies, the traditional legal criteria used in determining what constitutes a true sale in the context of a securitization is intended to be irrelevant.Most commonly, this approach is used when there are so many creditors involved that giving each an interest in individual securities to secure the debt would be impracticable.Debtors can put a number of different assets in trust for the purpose of securing a credit transaction.A number of issues exist that may preclude the ABSFA's application to a particular securitization transaction, including whether federal law will preempt the ABSFA in making a true sale determination and whether Delaware law generally, and the ABSFA in particular, will apply to a transfer in a securitization transaction.Although not yet judicially tested, the ABSFA is nevertheless a reason to seriously consider whether the parties to a securitization transaction should choose for Delaware law to apply to their contractual relations.
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If there is a problem, the security trustee is empowered to foreclose on the trust, liquidating it and distributing the proceeds to the creditors.