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Reduced credit risk to the arranger group – Another important advantage of repackaging transactions is reduced credit risk to the arranger group. Investors in structured notes issued by a corporate group issuer are exposed to the credit risk of both the arranger group (via the issuer) and reference assets that underlie the structured notes. However, in a repackaging transaction, investors are only exposed to the credit risk of the Collateral Assets. The SPV issuer is not part of the arranger group and is structured to be “insolvency remote”.
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Tackle investment restrictions – Repackaging structures may also help tackle investment restrictions imposed on the investors. Financial institutions or funds may be subject to investment restrictions, such as restrictions from making loans or investments in equity or fund products. Often they are not restricted from investing in fixed income products. Repackaging notes issued by an orphan SPV are often regarded as fixed income products falling within their investment scope.
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Others – Other key benefits of using repackaging transactions include obtaining a favourable tax treatment and avoiding conflicts of interest with an independent board in place at the SPV level.
Cons
- Costs – The main drawback of establishing a repackaging programme is cost. As it is a more complex structure than a traditional structured notes programme, there are more parties and documents involved, which will involve a substantially higher establishment and on-going maintenance cost. The list of the key parties and documents involved in a repackaging programme are described below.
- Time – It also generally takes longer to establish the repackaging programme than a traditional structured notes programme. A typical timeline for establishing a repackaging programme is described below.
We observe a trend amongst Chinese financial institutions in Hong Kong to maintain both a repackaging programme and a traditional structured notes programme, which provides the greatest flexibility to meet client and business demands.
5. How to achieve “insolvency remoteness” in repackaging transactions?
An SPV is structurally independent of the arranger group, and will not be affected by the insolvency of the arranger group.
Apart from the SPV corporate ownership independence, the programme documents will also adopt contractual “insolvency remoteness”. Common contractual provisions include:
- Restrictions on the SPV against engaging in any business (other than the issuance of notes under the repackaging programme), the disposal of assets, declaration of dividends, owning of any subsidiary or incurring of liabilities except for those contemplated by the repackaging transactions.
- “Limited recourse” language – i.e. noteholders and other secured creditors in respect of a repackaging transaction only have recourse to Collateral Assets which are subject to security for that transaction.
- “Non-petition” language – i.e. noteholders and other secured creditors agree not to take any legal proceedings or file any winding-up petition against the SPV.
6. How to achieve “ring-fencing” in repackaging transactions?
It is typical for arrangers to establish repackaging programmes such that a single SPV can enter into multiple series of repackaging transactions. It is important that each series of repackaging transaction is “ring-fenced” from all
other series, such that the collateral assets held by the SPV for a particular series are only available to the noteholders and other secured creditors for that series, and not to any other creditor of the SPV.
This is achieved by:
- “Limited recourse” language – i.e. noteholders and other secured creditors for a particular series will only have recourse to Collateral Assets which are subject to security for that series only, and not to the Collateral Assets for any other series.
- Security – i.e. security over Collateral Assets for a particular series is created in favour of the trustee, which holds it on trust for the noteholders and other secured creditors for that series only.
It is also important that the SPV is “insolvency remote” (as discussed in Section 5 above) from a ring-fencing perspective, as these ring-fencing mechanisms may not always survive in an insolvency scenario.
7. How are repackaging transactions operated in practice?
As discussed in Section 3 above, arrangers typically appoint professional corporate services providers when establishing repackaging programmes, who appoint independent directors for the SPV. The directors will be involved in signing transaction
documents and holding board meetings, but will not be typically involved in running the transactions. This means that other parties will be responsible for all structural and operational aspects of repackaging transactions, including making
all determination and decisions and taking actions.
We list out some of the most common roles in a typical repackaging transaction:
Arrangers
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Dealer
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Calculation Agent
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Originator
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Disposal Agent
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- Pre-enforcement liquidation of the Collateral Assets before redemption
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Swap Counterparty
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Arrangers will usually also appoint a professional trustee and agency services provider to perform the following roles:
Account Bank
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Custodian
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Paying Agent
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Note Trustee/ Security Agent
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Acting on behalf of the noteholders as an intermediary between them and the Issuer, representing the noteholders’ interests throughout the life of the notes
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Also holding the benefit of the security on behalf of the investors and other parties whose interests are secured
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Settlement Agent
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A key consideration for arrangers is that, while they will necessarily be heavily involved in structuring and running repackaging transactions, there are certain limits in order to retain off-balance sheet accounting treatment. For example, arrangers
should not have any control over the orphan SPV’s board of directors. The directors need to be genuinely independent directors that act in the best interests of the orphan SPV.
Voting rights in respect of the Collateral Assets should be held solely by the orphan SPV and not the arranger. As security interest over the Collateral Assets is created in favour of the trustee, the SPV usually covenants not to exercise voting
rights unless it receives a direction from the noteholders by way of extraordinary resolution.
8. What documents are required to establish a repackaging programme?
Arrangers will need to appoint a local counsel to incorporate the SPV in their jurisdiction of choice (e.g. for a Cayman SPV, Cayman counsel is required). Many such local counsel have a professional corporate services provider arm, and it is common
to appoint both of them together.
Local counsel will typically prepare the following documents:
SPV incorporation documents
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Declaration of Trust
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Administration Agreement
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To appoint the professional corporate services provider as the administrator of the SPV
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Arranger usually also signs up to bear the fees, costs and expenses on behalf of the SPV
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As your arranger and trustee counsel, we will prepare the following programme documents:
Offering Circular
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Disclosure document for the repackaging programme
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Will contain risk factors, terms and conditions, selling restrictions and any other disclosure that may be required
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Principal Trust Deed
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Agency Agreement
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Dealer Agreement
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Swap Schedule
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Form of Schedule to an ISDA Master Agreement between the Swap Counterparty and SPV
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Sets up the framework for confirmations to be entered into for any issuance
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Not always necessary to be drafted at programme establishment
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9. What licences may be required for repackaging transactions?
The following licences may be relevant to repackaging transactions under the Securities and Futures Ordinance (Cap. 571) (SFO):
Type 1
(Dealing in securities)
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Repackaging notes are typically sold to professional investors
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Type 1 licence always required when selling to corporate or individual professional investors
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The Dealer must be a Type 1 licensed entity for the SPV to rely on an exemption under the SFO
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Type 3
(Leveraged foreign exchange trading)
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Type 8
(Securities margin financing)
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Type 9
(Asset management)
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This may be relevant in “managed” repackaging transactions, where notes issuance proceeds are deposited with an investment or asset manager
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Not required for most repackaging transactions
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Type 11
(Dealing in or advising on OTC derivative products)
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There are many other regulatory considerations that may be relevant to repackaging transactions, including:
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suitability requirements when marketing to investors;
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arrangers’ liability for market misconduct and misrepresentation;
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SFC Code of Conduct requirements for complex products and derivative products; and
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regulations in relation to OTC derivatives, including reporting, margining, clearing and potential licensing issues.
This is a big topic which needs to be considered on a case-by-case basis for each transaction. We are happy to discuss further with any client on potential regulatory considerations relating to any repackaging transaction.
10. What is a typical timeline for establishing a repackaging programme?
Depending on the corporate approval process of the arranger institution (which may range from one month to up to six months or more), the set up of a repackaging programme itself can be completed within six to ten weeks. Timeline for a note issuance
drawdown under the programme varies from case to case depending on the complexity and novelty of the structure.
The programme establishment process is summarised in the chart below.

The King & Wood Mallesons’ Derivatives and Structured Finance Team advises across the full spectrum of derivatives and structured products. Our team has deep experience in establishing repackaging programmes, structuring bespoke and
complex repackaging transactions involving all types of asset classes (including bonds, equities, funds, loans and other types of assets) and innovative pay-off profiles, as well as advising on relevant regulatory issues. We have worked with
a large number of Chinese financial institution clients as arrangers on repackaging transactions and are very familiar with their commercial aims and legal needs.
We also have substantial experience in acting for the most active trustees in this market. We are able to offer a full one-stop shop service in acting as arranger and trustee counsel, thereby providing greater cost-efficiencies to clients.
For clients that are interested in PRC cross-border repackaging structures, we work very closely with our colleagues in the Mainland Chinese offices, and we have substantial experience advising in some of the most complex cross-border structured
finance transactions in the market. We will cover PRC cross-border issues in a later article of this series.
Please do not hesitate to contact us if you have any enquiries about this article or any aspect of repackaging transactions.
[1] References to “repackaging transactions” and “repackaging programmes” in this article refer to orphan SPV repackaging transactions and programmes respectively, which are distinguished
from references to “structured notes” and “structured note programmes” issued or established by a financial institution group.
[2] References to “Hong Kong” shall mean the Hong Kong Special Administrative Region of the People’s Republic of China.