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On September 18, 2009, amendments to Canadian insolvency legislation came into effect. On December 22, 2009, DBRS issued a press release explaining its policy response to such amendments in connection with lease structured finance transactions. The policy response required that certain steps be taken by February 26, 2010. As we are now beyond that date, the DBRS policy is fully in effect for these transactions.

Background

The September 18, 2009 amendments to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act incorporated specific provisions permitting insolvent debtors subject to reorganization proceedings to disclaim personal property leasing contracts. In many lease structured finance transactions some or all of the rights of the party providing the financing arise under agreements which are leases of personal property. In general, DBRS will not approve transactions where (1) the rights of the financing party arise under a lease contract which may be disclaimed under an insolvency proceeding, and (2) there is a risk that the lessor will become subject to insolvency proceedings.

The DBRS policy only applies to those lease transactions which have not achieved bankruptcy remoteness after consideration of the amendments. While not specifically explained in the press release, presumably this is a reference to so called “two-step” transactions whereby the lease assets are first transferred in a sale transaction to a special purpose bankruptcy remote entity which then finances the assets. With bankruptcy remoteness achieved by the first sale, the assets are removed from the risk of the bankruptcy of the original seller. While there may still be a lease involved in the structure (the assets are often leased by the special purpose entity to another entity which in turn issues the asset backed securities), the lessor is a bankruptcy remote entity where the risk of an insolvency proceeding is not material.

The transactions which have not achieved bankruptcy remoteness are presumably “one-step” transactions where the lessor is an operating entity and so subject to the risk of an insolvency proceeding.

Requirements Under the New Policy

Lease structured finance transactions which seek to obtain or retain a DBRS rating now must meet the following requirements:

1. For an existing transaction under which there will be no future additions of assets or advances of credit, the transaction can retain its rating provided a security interest in the equipment or vehicles subject to the transaction is in place. In substance, this is a “grandfathering” provision.
2. For new transactions, or additions of assets or new financings under existing transactions, the transaction must be structured or restructured to achieve bankruptcy remoteness after taking into account the amendments. Presumably, although not explicitly, this requires the conversion to a “two-step” structure.