Tuesday, July 13, 2010

The Very Good Gets Much Better

One of the first items I discussed on this blog was the advantage of the Louisiana treatment of receivables transactions. The so-called “true sale” provision of the LA version of UCC Section 9 largely removes the potential that a purchase of receivables might be subsequently deemed a financing rather than an asset sale.

That’s a big deal and one of the reasons that TRE chose New Orleans as its headquarters.

Now that benefit has been significantly expanded and essentially “tailored” to specifically include transactions on the Exchange.

Governor Bobby Jindal took time out from his work on the BP oil spill to sign into law Louisiana Senate Bill No. 256 (Act 958) entitled the “Louisiana Exchange Sale of Receivables Act”.

The title of the law itself signals one of its principal benefits to TRE.

It does not apply to ALL transactions involving receivables sold in Louisiana. Rather, it deals only with those receivables transactions that take place “over electronic and other types of exchanges located in” Louisiana.

In other words: transactions that occur on TRE.

To make its aims quite clear, the stated legislative intent is specific i.e. “to encourage and promote businesses to offer sellers the ability to sell their receivables to qualified buyers over electronic and other types of exchanges in this state, thereby availing themselves of Louisiana civil law principles not found in common law jurisdictions…”

A few of the new advantages accorded exchange-based transactions are:

1. Clear and specific language affirming that exchange-based transactions are included under the very strong “true sale” protections already in the Louisiana law.

2. Clear and specific language affirming that exchange-based transactions will not be re-characterized as financing transactions even when seller-guarantees of repayment are provided and even when the seller might be entitled to subsequent additional payments for the receivables sold.

3. Clear and specific rejection of common law theories under which sale of receivables have been considered financing transactions in other jurisdictions.

4. Expansion of the definition of “receivable” to include other third-party domestic and international payment obligations that are not subject to the Uniform Commercial Code.

5. Provisions requiring anyone who attempts to re-characterize receivables transactions as financing transactions to pay the exchange-buyer’s costs to defend itself.

6. Clear, strong and specific language regarding the application of Louisiana law, and of these provisions particularly, regardless of the legal domicile of the seller, the buyer or the account debtor.

7. Provisions making clear the right of a buyer of exchange-traded receivables to resell the receivables purchased and to pledge or grant a security interest in the receivables purchased: in other words, facilitating a buyer’s securing financing to purchase exchange-traded receivables.

I again remind everyone that I’m not a lawyer, but as I see it there are some really big things in this bill, which should probably be titled the “Let’s Help TRE As Much As We Can ” Act.

Clarifying the “true sale” status of exchange-traded transactions is a very good thing. And this is the principal benefit discussed in the press release from TRE on this new legislation.

Specifically prohibiting re-characterization of exchange-based transactions is a good thing.

Providing for buyers’ entitlement to recover costs is a good thing.

But, from my point of view, the really BIG things in the bill are:

a) The expansion of the definition of “receivables”. This is not discussed in the TRE release but opens the door to new markets that could be of major benefit to the Exchange and its participants.

b) The specific provisions allowing exchange-traded receivables to be pledged as security. This will certainly aid those buyers looking to obtain leverage without pledging other assets as security.

c) The provisions that basically say “our law is THE law and the rest of you can go to hell”. The language of the Louisiana legislature is very strong on this point and while there has not been, to my knowledge, a test of the choice-of-law provisions in the TRE participant agreements, this language looks to have been crafted by a lawyer wanting to pre-empt any challenge of those provisions.

The “true sale” issue is obviously important but I think these three provisions might actually provide the more important springboard for TRE’s growth.

My guess is that we’ll see some creative use made of these new provisions sooner rather than later.

Congratulations, TRE! And congratulations Louisiana!

Well done.

1 comment:

  1. Great post, Chuck. Thanks!

    Drew Hofler