Moody’s ratings agency says Cyprus' new securitisation framework will create a secondary market for loans, which in turn will support the reduction of Cypriot financial institutions' stock of nonperforming loans (NPLs).
However, the agency was uneasy about the full the extent of powers afforded the Central Bank of Cyprus in this process.
“The new legislation is credit positive for future securitisations in Cyprus because it will create an effective and transparent framework, that provides legal certainty to market participants,” said Moody’s in its credit outlook on Thursday.
“It allows the broader distribution of risk and frees up capital from originators’ balance sheets for further lending.”
The high level of problematic loans is one of the biggest challenges facing the Cypriot economy and its financial system, with nonperforming exposures remaining high at 42.5% of gross loans as of December 2017.
The new framework outlines the procedures for securitisation transactions and grants the Central Bank of Cyprus (CBC) the power to authorise, regulate and supervise securitisation activities.
“Key amendments pivotal to a sustainable securitisation market, including true sale, insolvency remoteness and set-off provisions, will provide legal certainty around the sale and transfer of assets to a securitisation special-purpose entity (SSPE).”
The legislative framework has also been amended to enable, subject to legal opinion, the transfer of credit obligations and underlying collateral free from tax, duties and other costs that would otherwise make securitisation less cost effective.
“The CBC's authority is unusual compared with other European securitisation markets because it has supervision powers over SSPEs and servicers,” said Moody’s.
The CBC also has the authority to initiate the liquidation of a SSPE and, under certain circumstances, appoint the liquidator while its consent is required in voluntary liquidations of SSPEs.
The framework also enacts additional legislative changes to insolvency procedures and foreclosure mechanisms to facilitate a well-functioning securitisation market.
It removes a clause that enabled borrowers to delay foreclosure proceeding, reduces the time frame in which notices are sent out for immediate repayment of outstanding loans, and introduces e-auctions as well as the ability of an originator to split mortgages and their underlying security into parts and register them accordingly.
Moody’s said these changes will further support the predictability of timeliness and rate of recovery from these loans.
Although financial institutions were given the necessary tools to tackle NPLs more effectively, Moody’s said “ambiguity remains around certain provisions and the powers vested to the CBC, making securitisations less appealing compared with other European securitisation markets”.
Those provisions include a requirement for the approval by the CBC of any securitisation activity (most notably, the CBC has the power to oppose a securitisation) and the notification of an intent to securitise 30 days in advance.
“Additionally, a provision to fully collateralise set-off exposures creates additional barriers to entry, costs and constraints that will make securitisation less attractive as a funding tool for financial institutions.”
