A revolutionary “Heath Robinson” loan securitisation designed by Allen & Overy last month was deemed so unusual that New York-based Standard & Poor's flew its senior counsel to London for face-to-face talks before rating it.
An 18-lawyer team, led by Marke Raines, found a way for the A1/A minus-rated Japanese bank Sumitomo to raise £1.4bn in floating rate notes and still get a triple-A rating for them.
By cobbling together a series of new techniques that Raines described as “Heath Robinson devices” Sumitomo became the first bank ever to be able to issue European notes with a higher rating than its own.
The two rating agencies used – Standard & Poor's and Moody's – were initially sceptical about the structure.
Standard & Poor's took what is thought to be the unprecedented step of flying over its senior counsel Joanne Rose from New York to discuss the deal with the Allen & Overy team.
Allen & Overy took the opinion of three leading silks: Richard Adkins QC of 3-4 South Square and Richard Sykes QC of Erskine Chambers on banking matters; and Graham Aaronson QC of 1 Essex Court on tax; in addition to Reg Nock of Deloitte & Touche on stamp duty.
“It was technically one of the most difficult deals ever done in the European securitisation market,” boasted Raines.
As is usual, a special purpose vehicle – Aurora – was created to issue the notes – which are backed by Sumitomo's UK corporate loans.
In an ordinary securitisation transaction the bank keeps its legal interest in the loan, allowing it to maintain a relationship with its borrowers, but it assigns the beneficial interest to the special purpose vehicle. But this means that the notes cannot have a higher rating than the originating bank.
For the Aurora deal, Sumitomo used power of attorney and an English law trust to break the link between the bank's credit rating and that of the note.
Sumitomo also took the rare step of telling its borrowers that their loans had been securitised – the first time this has been done.
Clifford Chance, led by securitisation partner Chris Oakley, acted for a number of parties to the deal, including Lehman Brothers and various underwriters, trustee to the issue JP Morgan and debt provider Bayerische Landesbank.
Oakley said that although the trust and power-of-attorney structure had been chosen by A&O, the hedging arrangements for currency and interest rate risks and the set-off provisions could only be fully explored once his firm was involved.