Securitizations Simplified In The Dominican Republic

Over the past decade or so, the Dominican Republic, a member of the International Organization of Securities Commissions (“IOSCO”) and one of the countries that subscribes to the Organization for Economic Cooperation and Development (“OECD”) Principles of Corporate Governance, has taken numerous steps to modernize its banking and financial systems, from updating prior legislation governing corporations to enacting a new law that established a framework for a sound, efficient and transparent stock market.

Now, the Dominican government has issued a new regulation to revitalize the Dominican stock market as well as the country’s securitization processes, which have become simpler and thus more attractive to those seeking alternative financing options.

The detailed regulation provides further assurances to domestic and foreign investors in the Dominican stock market about its stability and sophistication, and helps to eliminate obstacles to the free flow of capital from outside the Dominican Republic to the country, and from the Dominican Republic to elsewhere around the globe.

Securitization Under The New Regulation

In early December 2012, Dominican Republic President Danilo Medina issued Decree No. 664-12, entitled “Regulation for the Implementation of the Securities Exchange Act.” President Medina indicated that he issued the regulation with the stated goals of protecting investors and of reducing systemic risk – and of adopting international best practices.

One of the most significant portions of the new regulation relates to securitizations.

The securitization portion of the regulation begins by further clarifying the definition and scope of action of the various parties involved in the securitization process. As provided in the regulation, they include:

• The Originator, which is the company that sells or transfers the assets to be securitized;
• The Administrator, which is the entity that manages the underlying assets directly or through an asset manager, although the regulation clearly indicates that delegation to an asset manager does not relieve the Administrator from liability for failing to take the steps necessary to achieve the intended purposes of the securitization;
• The Securities Issuer;
• The Placement Agent, which can be a securities dealer or which can even be the Administrator;
• Investors who hold the securities;
• At least one Ratings Agency because under the new regulation, every public offering of securities in a securitization must be rated by at least one Ratings Agency; and
• A Paying Agent, which may be a central securities depository, any financial intermediary or the Administrator itself, but which may not be a representative of any of the investors.

The new regulation authorizes the securitization of a wide range of cash-flow-generating property, including but not limited to real estate, construction projects, leases, accounts receivable, financial instruments, and domestic or foreign securities “of any kind.” In addition, among the other kinds of assets that now can be securitized under the new regulation, are:

• Loans;
• Contracts that provide for the right to purchase property or assets that generate cash flow;
• Credit documents; and
• Factoring agreements.

Importantly, the new Dominican regulation limits the assets that can be securitized to assets that generate a cash flow that is mathematically determinable and measurable, and that can be calculated based on historical data or supportable projections. It also requires homogenous assets – thus, for example, all mortgage loans would be appropriate for a particular transaction but a transaction involving mortgage loans and real property leases would not be.

It also should be noted that a securitization of mortgage loans does not require the consent or notification of the underlying debtors.

Protection From Creditors

The new Dominican regulation provides that securitized assets constitute a “separate estate.” In fact, according to the regulation, the transfer of assets is “irrevocable,” and the separate estate is perfected automatically upon execution of the securitization indenture.

Moreover, the regulation sets forth the effect of the separate estate by specifically declaring that it is not subject to claims of creditors of Originators or Administrators and is subject only to the obligations incurred in the securitization process. In particular, the regulation requires that securitizations be conditioned on the complete separation of the securitized assets in a fund that is separate from the property of the Originator and Administrator. The regulation also requires that securitizations contain indenture provisions to the effect that the securitized assets are intended exclusively for payment of the obligations created by the issuance of the securitized securities and the costs and expenses associated with the securitization process, under the express terms and conditions in the indenture. Securitization documentation must limit the powers of the Administrator (and any asset manager operating on its behalf) exclusively to the activities required for the development of the securitization. In addition, as provided by the regulation, documentation must provide for expressly defined events of default.

Financial Statements

The regulation requires that an independent accounting firm be retained by the securitization’s separate estate, and that the estate’s financial statements disclose the following:

• The class of securities issued (bond or share), term, and amount;
• Characteristics of the underlying assets;
• Identification of the underlying assets with the information necessary for investors to be able to assess the risks inherent in the particular securitization process;
• Information regarding the behavior and adequacy of the cash flow from the securitized assets; and
• “Any other information” that is necessary for a proper understanding of the underlying assets and its projected cash flow.

The Public Offering

Under the new Dominican regulation, a public offering and registration of the securities issued in connection with a securitization are subject to certain requirements. Each prospectus must describe the entity’s investment policies – which are required to give priority to profitability and which are required to prohibit investments in securities rated lower than the securities issued in the securitization so as to avoid creating a mismatch in the entity’s cash flow.

Both the prospectus and the indenture must explain the methods used for valuing each securitization entity’s assets and liabilities. Importantly, however, the new Dominican regulation states that the Dominican Superintendent of Securities may require additional information for a specific valuation, albeit without assuming any legal responsibility for the valuation itself.

Limitations On Administrators

In a further effort to protect investors and provide for transparency, the new regulation limits the businesses that can operate as Administrators. For example, a company can be an Administrator only if it is constituted as a limited company in accordance with the Dominican corporations law and in compliance with additional rules to be established by the Superintendent of Securities.

Administrators may be responsible for the administration of one or more separate asset securitizations, subject to certain minimum capital rules. They must apply to the Superintendent of Securities for authorization to operate as an Administrator, must present the necessary documents and must meet specific requirements, and then must register with the Superintendent. Every Administrator’s company name must include the word “Securitization.”

The method for determining the remuneration for Administrators must be clearly disclosed in both the prospectus and indenture. In particular, disclosure must include the amount or factors on which the remuneration shall be determined as well as the time and manner in which payment is to be made.

Additionally, Administrators (and asset managers acting on their behalf) are prohibited from certain activities, including:

• Acquiring, selling, or merging separate assets of one securitization’s estate with assets of another, or with its own assets;
• Engaging in transactions with specified related entities;
• Purchasing for their own account assets that are under their management;
• Generally encumbering or pledging assets in a way that commingles separate assets they manage; and
• Guaranteeing results, performance or a specific rate of return.

The regulation also describes the activities that Administrators are permitted to take, ranging from structuring and managing the securitization process and issuing securities through a public offering to issuing bonds, managing the underlying assets that make up a securitization, and engaging in securities trading and other actions relevant to their corporate purposes.

Conclusion

The decision by the Executive Branch, which is consistent with the spirit of the existing legislation, to issue the new regulation illustrates quite well the country’s focus on expanding the opportunities for businesses and investors – both local and foreign – in the Dominican Republic in a safe, secure and well-regulated manner. As other recent legal developments in the Dominican have made clear, the country seeks to welcome corporate interests from the United States, and elsewhere, to a destination that is not only geographically close to the United States, but that also has laws and regulations that in many respects mirror those with which U.S. executives are already familiar.