IP Securitization – the case for Belgium

In the rapidly changing economy of today, the tangible property of a company is becoming less important than an intangible property which is very often a company’s most important, if not the only, valuable asset. Nora Wouters highlights the possibilities and limitations under Belgian regulatory legal framework to use IPRs as collateral or a securitisation asset.

The advantages for the debtor and the creditor when using IP rights as collateral

The UNCITRAL Legislative Guide on Secured Transactions (the ‘Guide’) emphasises the importance of IP rights in secured transactions, including the rights of a licensee under an IP licence agreement, to promote low-cost secured credit. The Guide recommends a legal regime which provides for a system where the debtor remains in possession of the secured rights in order to allow him to continue the business combined with an efficient publicity system.

A company in distress can look at its IP portfolio to create additional value and obtain cash at short notice. Credit facilities secured by IP rights allow secured creditors to access the IP portfolios of their debtors as another source of payment in case a default occurs. As in these circumstances, the risk of non-payment for the secured creditor is decreased, the availability of credit for a company in distress increases and the cost borrowing is reduced. When drafting the security documents, one must consider the issues that can arise in connection with new filings and renewals, ie, he question whether IP rights are allowed to lapse or consolidate into CTMs and seniority claims. For the secured creditors, the realisation of the IP portfolio under a pledge agreement in the event of a default is more burdensome than the realisation of financial instruments or cash.

The risk of non-enforceability of a pledge in case of a bankruptcy proceeding or a composition with creditors

In case a company is potentially liable to insolvency proceedings, the company should not enter into transactions which are ‘suspect’, and which may be perceived as harming the company’ other creditors. If a secured transaction is concluded during the preference period, the transaction will be carefully scrutinised so as to ensure that the transaction took place at arm’s length. If a credit facility is over- collateralised during the preference period, it can be declared null and void.

The formalities required under Belgian law for the pledge to be valid and enforceable against third parties

Under Belgian law, a pledge on a company’s IP rights is valid and enforceable vis-à-vis third par ties if the following formalities are satisfied:

•           A commercial pledge on royalties exists from the date of execution of the pledge agreement by the pledgor and pledgee. The pledge is only enforceable vis-à-vis the debtor of the royalties from the moment the pledge has been notified to the debtor or the pledge has been acknowledged by the debtor: the pledge can therefore remain‘silent’ until a default occurs. Such a pledge is enforceable against third par ties according the anteriority rule, which is why it is still advisable to register the pledge agreement in order to obtain a ‘date certain’.

•           A general pledge over the business, which is comparable to a ‘floating charge’ in the UK, but which in Belgium is only available to authorised credit institutions or financial institutions within the meaning of the EU Banking Directive, may include IP rights and royalties. The pledge over the business is enforceable vis-à-vis third par ties from the moment of the registration of the pledge in the mortgage register at the place where the pledgor’s business is established.
•           In order to be valid and enforceable against third par ties, according to Article 46 of the Belgian Patent Law dated March 28, 1984, as amended, a pledge on a patent or patent application must be notified to the Belgian Intellectual Property Office in writing (under a penalty of being declared null and void) and registered in a special register. A registration fee must be paid.
•           A pledge on a Benelux trademark, design or model, must in order to be valid must cover the entire Benelux territory, and be done in accordance with Article 2.33, and 3.27 of the Benelux Treaty regarding Intellectual Property of February 25, 2005 (in effect as from September 1, 2006) by registration of an extract of the pledge agreement in the register at the Benelux Office for Intellectual Property. The pledge is null and void if not done in writing and if the registration fee is not paid.

•           While the moral rights on a work of art cannot be pledged, Article 3 paragraph 1 of the Belgian Copyright Law dated June 30, 1994, as amended, allows never the less that the economic rights can be pledged. The agreement must be made in writing and, in order to be enforceable, modified to Sabam, the Belgian society of authors, composers and publishers.

Securitisation of IP rights

The definition of securitisation

A securitisation is a type of structured financing in which a pool of assets is transferred to a SPV that issues debt backed securities collateralised solely by the assets transferred and the payments derived from those assets. The securities which are issued can either be debt instruments, equity instruments or hybrids (or a combination thereof). The proceeds of the transfer may be used to repay outstanding debts.

In these transactions, a credit institution very often pre-finances part of the entire transaction.

The advantages and disadvantages of an IP securitisation

Since the World Intellectual Property Organisation (‘WIPO’) described IP securitisation in 2000 as a ‘new trend’, IP securitisation is becoming more generally accepted by the financial markets. It is proven that securitisation can offer IP holders a less expensive source of finance than high yield debt or other forms of capital. The securitisation allows raising capital without detailed prospectus disclosure as would be required for a more traditional funding. The originating company retains a subordinated position in the cash flow generated by the IP rights, so that it receives all cash flow generated by the IP rights after the debt issued by the SPV is repaid.

However, the downside of IP securitisation transactions is that these deals are relatively slow, expensive on fees from banks and lawyers and on the costs of the physical transfer of the registered IP rights.

Typical features of an IP securitisation

Compared to a traditional securitisation of receivables, the securitisation of IP rights is much more complex. A company considering a securitisation of its IP rights must first assess whether its IP portfolio is suitable for securitisation and creates sufficient revenue. To assure the success of the securitisation transaction, a finance analyst must review the ownership of IP rights, the lifetime and information on past performance of the assets to be securitised.

A rating agency must be appointed to report on the quality of the receivables that constitute the SPVs IP portfolio and the solvency risk of each type of security issued.

In particular, the following issues must be considered:

•          the ownership of the IP rights;

•          the enforceability of the IP rights, possible litigation and invalidity claims;

•          the lifetime and the market of the IP rights;

•          whether future IP rights, including improvements, should be included;

•          the terms of the licence agreements and in particular the termination clauses,        in case Of insolvency;

•           the flexibility to licence back the IP rights, in case the IP rights are used in other sectors of the originator’s business; and

•          an overview of tax issues.

The outcome of the IP due diligence shall impact the valuation of the IP portfolio, and the question whether the SPV obtains an AAA rating or not. This exercise often results in the SPV having a higher credit rating than the originating company and therefore permits the SPV to obtain extra capital at a lower cost.

The Belgian legislation on securitisation is limited to receivables

The Law of December 12, 1996 amending among others the law on financial transactions and financial markets of December 4, 1990, the Civil Code and the Companies Code, as implemented by the Royal Decree of July 8, 1997, have facilitated Belgian securitisation proceedings. The Royal Decree of November 29, 1993 on institutions for investment in receivables, as amended, governs all aspects of securitisation proceedings. The Law of July 20, 2004 on certain forms of collective investment under takings and the implementing Royal Decree of March 4, 2005 implements the UCITS III Directive into Belgian law.

The Belgian regulatory framework only applies to securitisation transactions of receivables, including royalties’ interests. In case a company envisages securitising other IP rights such as patents, trademarks, ser vices marks, designs, copyright and related rights, it might use a regular, unregulated Belgian corporate entity.

There is a strong incentive to opt for a Belgian regulated SPV in order to benefit from the regulatory and tax framework available under the Belgian legislation. The disadvantage for the transfer of IP rights as an asset class into an unregulated Belgian company is that such transfer can only take place if the formalities and restrictions mentioned above for the use of IP rights as collateral are satisfied. In addition, the transfer of IP rights as an asset class into an unregulated Belgian corporate entity requires proper portfolio management by the SPV. As a securitisation is only for a fixed term, transfer of the IP rights as an asset class at the end of the securitisation will result in extra costs.

In accordance with Article 87 § 3 of the Belgian Code on Conflicts of Law dated July 16, 2004 (similar to Article 22 of the United Nations Convention on the Assignment of Receivables in International Trade) the enforceability of the transfer of receivables vis-à-vis third par ties is governed by the law of the state in which the assignor is located.

In order to allow the securitisation of receivables, including royalty interests, the claim must be (i) freely transferable and not be intuitu personae, (ii) homogenous, and (iii) subject to clear repayment conditions i.e. value dates and the amounts must be contractually agreed.

The regulated SPV can take the form of (i) a contractual securitisation fund (the ‘Fund’) managed by a management company on behalf of the investors, or (ii) a corporate entity. The corporate entity can have a variable (open- ended) or fixed capital (close-ended). The corporate entity, on the other hand, can take the form of public limited liability company or a partnership limited by shares. Its corporate object must be limited to the securitisation transactions. The corporate entity has a separate legal personality and has a minimum share capital of €61,500 which must be fully paid-up. The corporate entity can be comprised of different compartments, each of them corresponding by operation of law to a segregated par t of its assets and liabilities, which as between investors and creditors is treated as a separate entity in case of bankruptcy. The ultimate choice will to a large extent depend on the final tax structure.

The Fund does not have a separate legal personality and does not require a minimum share capital.

The regulated SPV must have a board of directors who have the necessary professional qualifications and experience in order to carry out their functions. The SPV must appoint an auditor who must be registered with the Belgian Commission of Banking Finance and Insurance (‘CBFI’). The SPV must deposit its assets with a custodian approved by the CBFI. In the event of a public offering, a super visor y company must be appointed. The SPV can subcontract certain tasks, for example the collecting of royalties, to a third party or sometimes even to the originating company itself.

Simple or dual securitisation structure

A securitisation can take the form of a simple or a dual securitisation structure. In the case of a simple structure, the originating company sells its royalty interests to a SPV in exchange for cash. The SPV issues securities which are sold to investors in the form of a private placement or a listing on a stock exchange. The royalty interests are used as collateral for the issuing of the securities. In the case of dual structure two SPVs are used. The first SPV buys the royalty interests and the second SPV buys the securities. The latter grants a secured loan to the first SPV.

Public or private regulated SPV

Public SPVs must obtain authorisation of the CBFI prior to commencing any transaction. The articles of association or the management rules, the prospectus as well as the intervention of all operators in the transaction must be approved by the CBFI. If the SPV only places securities by way of private placement, the approval of the CBFI is not required, but the SPV must be registered with the Minister of Finance and listed on the list of investment under takings that deal with qualified investors, as defined by the Law of July20, 2004.

A regulated SPV is a bankruptcy remote vehicle

The transfer of the assets to the SPV, removes the assets from the balance sheet of the originating company, and isolates the assets in a bankruptcy remote vehicle. The transfer of the assets from the originating company to the vehicle must be enforceable against the originating company, its liquidator or third par ties. The bankruptcy court will look at the securitisation transaction to determine whether it was a true sale or a mere loan. The royalty interests in the SPV are used as collateral for issuing securities. If the SPV defaults on its payments, the underlying royalty interests are transferred to the bondholders, who have a preference above the unsecured creditors.

In addition, in order to protect the investors’’ positions in the pool, a number of different credit enhancement techniques could be utilised such as third party or parent guarantees, over-collateralisation and subordination.

The tax neutral treatment in the case of assignment to a Belgian regulated SPV

The tax neutral treatment is key for the securitisation to be used as a workable tool for acquiring cash at short notice. A tax on the SPV or in relation to the securitisation increases the overall cost of the transaction and reduces its effectiveness. Adverse tax consequence also impacts the rating of the securities.

No capital duty and no withholding tax are due if the receivables are assigned to a Belgian regulated SPV. The transfer of receivables to the SPV qualifies as a VAT exempt transaction. If the SPV is a corporate entity, it is subject to a standard corporate income tax rate of 33.99%, but the tax liability is reduced as commitments towards investors and creditors are fully deductible.

The income received by the Fund is deemed to be attributed directly to its investors, who are taxed on their share in the profit.


It is a generally accepted practice in Belgian law for a company to provide IP rights as collateral in order to facilitate obtaining credit at a lower cost. If a company envisages a securitisation, the Belgian regulatory framework only applies to securitisation of receivables, including royalty interests under an IP licence agreement. Other IP rights, including patents, trademarks, service marks, designs, copyright and related rights, can be securitised as an asset class using an unregulated Belgian corporate entity, although in the case of the securitisation of IP rights as an asset class, the benefit of the current Belgian regulatory framework regarding securitisation is lost and the tax neutral treatment of the securitisation transaction might be challenged. In addition, the costs involved in the physical transfer of the registered IP rights are very high and the management of the SPV must be under taken by managers able to manage an IP portfolio.

Nora Wouters, Partner McKenna Long & Aldridge LLP




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