Self liquidating arbitrage loans
The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.They pay a predictable stream of principal and interest payments over a relatively short three- or five-year time horizon.A marketplace loan securitization does not raise particularly complex tax issues (unless it is backed by mortgage loans). The appeal of securitized marketplace loans is that they have the attributes of a fixed-income security with a relatively low default risk.Marketplace loans are both suitable and desirable for securitization for a number of reasons.
They have relatively high risk-adjusted interest rates and have thus far enjoyed relatively low default rates.
The asset-backed securities are issued by a special purpose vehicle (an “”) that has purchased the financial assets from the sponsor or originator and that pledges them as security for its obligations under the asset-backed securities.
The asset-backed securities consist of two or more tranches, each of which assumes a distinct credit or other risk of the securitized assets.
Another risk is that in the case of fractional marketplace loans (as opposed to whole loans), the SPV does not own actual loans, but instead holds borrower payment-dependent notes issued by a separate trust vehicle, giving the SPV a participation right that is subject to additional risks created by having an intermediate trust vehicle in the chain of ownership.
These risks may be mitigated by back-up servicing arrangements, perfection of ownership interests in the assets under the applicable uniform commercial code and other devices. Notes: For a discussion of certain securities law, investment advisory and investment company regulatory issues applicable to this industry, please see our alert entitled This publication/newsletter is for informational purposes and does not contain or convey legal advice.If the SPV is established in a bankruptcy-remote manner, and if the transfer satisfies the requirements for a “true sale”, then the securitized assets can be presumptively removed from the bankruptcy estate of the originator of the assets.