What are Bankruptcy Exemptions?

Bankruptcy isolation refers to the isolation of the risks of the underlying assets and the risks of other assets (other assets of the asset owner) in asset securitization. In order to achieve bankruptcy and isolation, first of all, "real sales." The so-called "real sale" means that a certain property is no longer in the debtor's scope through the transfer. In asset securitization, although it is in the name of "real sale", it is a guarantee.

Bankruptcy isolation

Bankruptcy Remote

Bankruptcy isolation, also known as "bankruptcy immunity" and "away from bankruptcy,"

1. Isolation from the bankruptcy of the initiator

During the date of bankruptcy declaration, the bankruptcy enterprise that sells its property at an abnormally low price shall be recovered and listed as bankruptcy property. Accordingly, as long as the promoter's sale of assets did not occur between 6 months before the bankruptcy case was accepted and declared bankruptcy, and the sale was not at a bargain price, the sale of this asset was not affected by the bankruptcy of the sponsor, and the bankruptcy with the sponsor was achieved isolation.

2) When the trust method is adopted, that is, the initiator trusts the assets to the SPV, according to the traditional idea of the civil law system, which is the "monistic ownership theory", the ownership of the trust property is still owned by the sponsor. In the event of a bankruptcy of the initiator, the asset should of course be bankruptcy property.

Note: In the new bankruptcy law, the security interest is bankruptcy property, while in the old bankruptcy law, the security property is not bankruptcy property. As a result, the use of secured financing has made it impossible to isolate the assets from the bankruptcy of the initiator.

2.Isolation from SPV bankruptcy

Under the framework of China's current "Bankruptcy Law", once the company is declared bankrupt by the court, all the company's property is bankruptcy property, which must be used to pay off the company's debt (but the creditor's right to establish a guarantee can be paid preferentially). According to this, after the SPV was declared bankrupt, the securitized assets purchased by the SPV from the promoters should also be classified as bankruptcy property, which affects the credit of the securities. In the current legal environment, the methods to solve this problem are:

1) Securitized assets are used as security for securities payment and securitized assets are used as collateral or rights pledge to ensure that securities of securities investors, ie, buyers of securities, can be paid at maturity. Because the biggest particularity of asset-backed securities is that the repayment of securities originates from the cash flow generated by the assets, the credit of securities originates from the credit of assets. According to China's bankruptcy law, the property that has been mortgaged is not regarded as bankruptcy property. According to this, if securitized assets are used as collateral for securities repayment, they can be separated from SPV bankruptcy.

2) Limit the business scope of SPV. If the business scope of SPV is extensive, the failure of other operations will lead to SPV bankruptcy. Therefore, it is necessary to strictly limit the scope of SPV's business and limit its business scope to a business of asset securitization. This is to ensure the success of asset-backed securities The key is also the practice followed by countries. Some scholars have suggested that the four major asset management companies can be SPVs when conducting asset securitization in China. Although the business scope of the Huarong Asset Management Company and Great Wall Asset Management Company includes asset securitization, there are multiple other businesses, such It is difficult to guarantee the security of securitized assets.

3. Bankruptcy isolation from SPV parent company

Securitized assets must not only be separated from the bankruptcy of SPV, but also from the bankruptcy of the parent company of SPV, because once the parent company of SPV goes bankrupt, SPV as its external investment will also be classified as bankruptcy property to repay the parent company Debt, which is a company law in China and most countries, makes securitized assets unable to be isolated from the bankruptcy of the SPV parent company, which affects the payment of asset-backed securities. As mentioned earlier, if securitized assets are used as security for securities payment, according to China's bankruptcy law, securitized assets cannot be used as bankruptcy property, thereby achieving bankruptcy isolation from the parent company of SPV.