You would think not, but then another example of best laid schemes ganging agley emerges. Back in February the EBA consulted on draft guidelines for credit risk mitigation where banks were using the IRB (the idea being to make sure that the CRR is applied consistently across the EU28), and this seemingly-obscure consultation (for transactional lawyers) actually contains a live grenade for asset finance. The CRR permits institutions to calculate their exposures taking into account eligible collateral, and Articles 192 et seq contain principles for recognising what is “eligible” or not: for example, readers know that Article 194 requires cash collateral arrangements to be “legally effective and enforceable in all relevant jurisdictions”, and banks must provide regulators on demand with any “independent, written and reasoned legal opinion” used to establish that this is the case. There are detailed sections dealing with netting and other types of collateral such as financial, real estate, receivables, and, in Article 210, moveable physical collateral, but these do not specifically require legal opinions on the priority and validity of the security. The EBA suggests that opinions should be obtained generally, and that trade association opinions (such as the ISDA opinions regarding netting) will be acceptable; all of which is common sense. But then when it moves on to considering moveable property (such as ships, aircraft, and oil rigs) as eligible collateral in paragraph 20, the EBA says that the legal opinions must cover not only the collateral owner’s home jurisdiction and governing law of the security agreement, but also “the set of jurisdictions where the collateral could move during the lifetime of the loan according to the collateral agreement”, and there is a similar point in paragraph 21 regarding leased assets.
The LMA’s reply last Friday objected to this and suggested instead that banks doing ABL are generally specialist and know what they are doing. It is apparently rare that an ABL or lease agreement will list the jurisdictions where an asset can be located (it might list certain high-risk blacklisted countries where it cannot) because it could be uncommercial to restrict an operator. And where the asset is going to be sub-leased you would need a chain of restrictions. So it generally isn’t done. ABL banks have always typically made sure their security was perfected in the likely jurisdictions (e.g. the routes a ship was likely to ply). The LMA asks for a similar common sense flexible approach rather than a straight-jacket. It also points out that the Cape Town convention (80 signatories at present, including the EU and most of the commercial world) for aircraft permits the creation of an “international interest” which is registered at the international registry in Dublin, and so where that applies it particularly makes no sense to have to go beyond that.