The merits of recent South African court challenges to securitisation transactions

Abstract: Securitisation entails a process whereby an entity, known as an originator, packages its income producing assets, for example mortgage cash flow, and sells them to a bankruptcy remote special purpose vehicle (“the SPV”) by converting these assets into liquid marketable securities. To complete the process of securitisation, the securities are sold to investors. This must be distinguished from where the originator merely transfers the risks associated with the assets, which process is known as “synthetic securitization”. The present discussion only considers traditional securitisation, where the assets are sold and transferred wholly to the SPV. It further only considers securitisation by banks or banking institutions. In recent years the practice of securitisation has come under the spotlight in South African courts. The legitimacy of the process has been questioned and the courts have been called upon to establish if the securitisation transactions are valid. Securitisation will be held to be invalid in South African law if the debtor would be burdened more than he would have been had the transaction not taken place or where securitisation would deprive the debtor of defences that he would have had against the originator. This discussion considers these two instances. It further considers the merits of the mentioned court challenges against the theoretical background provided of the legal transfer of assets by cession, which is employed when the assets are transferred from the originator to the SPV.LL.M. (Banking Law