BAKU, Azerbaijan, November 3. The legal framework for securitization activities in Azerbaijan, as well as requirements for securitization companies and servicing agents, is being established by parliament, Trend’s correspondent reports from the plenary session.
This is stipulated in a draft law on amendments to the Law "On the Securities Market".
The draft law has been prepared with the aim of establishing a legal framework for securitization activities, in accordance with the "Strategy for the Socio-Economic Development of the Republic of Azerbaijan for 2022–2026," approved by a decree of the President of the Republic of Azerbaijan, while taking into account international practice, similar legislation in foreign countries, and the specific characteristics of the country's capital markets.
The draft law defines the foundations for securitization activities in Azerbaijan, including requirements for securitization companies and servicing agents, the sale of assets to a securitization company, the preparation and approval of a securitization plan, the issuance of securitized bonds, and requirements regarding risk management and transparency in securitization operations.
Securitization is a financial instrument that allows creditors to receive funds in advance against cash flows expected from their assets.
Specifically, a creditor sells the assets they hold to a securitization company at a lower price in order to obtain immediate access to the cash flows expected from those assets. The securitization company, in turn, issues securitized bonds backed by the acquired assets, with payments on these bonds being funded by the cash flows generated by the underlying assets.
The draft law establishes requirements for all participants in the securitization process, including the seller of the assets (the original creditor) and the securitization company issuing the bonds. It also sets out provisions regarding their powers, functions, and the mechanisms for implementing the securitization process.
Each securitization process is required to be accompanied by a securitization plan approved by the Central Bank. The sale of assets will be executed pursuant to a purchase-and-sale agreement concluded between the asset seller and the securitization company. The securitization plan must include information regarding the participants in the securitization process and the assets serving as the subject of the securitization, details on existing risks and methods for their mitigation, as well as an opinion from an external auditor confirming that the assets comply with legislative requirements. Within 60 business days following the approval of the securitization plan by the Central Bank, the securitization company must apply to the Central Bank for the state registration of the bond issuance.
The draft outlines several methods aimed at mitigating risks that may arise during the securitization process.
Specifically, the credit risk associated with assets sold to a securitization entity must not exceed the credit risk of similar assets remaining on the seller’s balance sheet. Furthermore, the seller of the assets is required to acquire at least 5% of the bonds issued against these assets and hold them until the end of their circulation period.
Additionally, the draft provides for mechanisms such as securing monetary claims on assets through various forms of collateral or guarantees, as well as issuing bonds in multiple tranches with varying levels of credit risk.
The regulation of securitization activities in the securities market and the implementation of this mechanism will provide market participants with an effective liquidity management tool. It will facilitate the conversion of illiquid assets into liquid securities, expand the range of financial instruments available in the securities market, and create new investment opportunities for investors.
Following discussions, the draft law was put to a vote and adopted in the third reading.
