Briefly Speaking: An Introduction to Bankruptcy Remote Entities (BREs)

Briefly Speaking: An Introduction to Bankruptcy Remote Entities (BREs)


CSC’s annual Briefly Speaking webinar series helps legal professionals tackle challenges facing the industry. Join us for a 101-style introduction into the common practice of forming bankruptcy remote entities (BREs).

During this 30-minute webinar, our panel of experts will cover key BRE concepts, including structure, limitations, enforcement, and relevance. You’ll gain a better understanding of and rationale for using BRE structures in commercial real estate loans and other asset-backed securities transactions.

Webinar Transcript:

Annie: Hello, everyone, and welcome to today's webinar, "Briefly Speaking: Introduction to Bankruptcy Remote Entities." My name is Annie Triboletti, and I will be your moderator. Joining us today are Michelle Dreyer, Jason Cummings, and Helena Ledic.

Michelle is the managing director of CSC Global Financial Markets and its subsidiary, Delaware Trust Company. She oversees independent director services and default administration services.

Jason is a senior independent director contract specialist with Global Financial Markets. In his position, Jason analyzes and negotiates organizational agreements, contracts, and associated documents from various types of commercial transactions involving independent director engagement and compliance with bankruptcy remote entity provisions.

Helena is the Associate General Counsel for CSC in the Chicago office. She is a business attorney advising senior management and law firms on strategy, business, legal, and technology matters.

And with that, let's welcome Michelle, Jason, and Helena.

Helena: Thanks, Annie. And first, a little bit about CSC. We're the business behind business. We're the world's leading provider of business, legal, tax, and digital brand services to companies around the globe. We work with more than 10,000 law firms and 180,000 corporate clients. We protect more than 65% of the 100 best global brands in the world. We've been named a top workplace for 13 consecutive years. And we provide financial solutions to more than 3,000 financial market customers and serve more than 90% of the Fortune 500.

Jason and Michelle are going to walk us through the bankruptcy remote entity. They'll talk about the evolution and benefits, the components, and who uses bankruptcy remote entities. And now, Michelle is going to get us started.

Michelle: Thank you, Helena. Many borrowers use a special purpose or single purpose entity to own properties as a method to separate assets and their associated liabilities from the greater corporate organization, even if it is not required by lenders.

A bankruptcy remote entity is a type of special purpose entity used to hold and protect a defined group of assets as required by a lender. The concept of a bankruptcy remote entity was created by the rating agencies in connection with the commercial mortgage-backed securitization, or CMBS, market. And these structures have been a requirement since the inception of CMBS.

The example on this slide illustrates how the bankruptcy remote entity is the middleman between the ultimate ownership of an asset, in this example, an office building, and the lender.

Jason: Evolution of bankruptcy remote entities. Originally, bankruptcy remote entities were a creation by rating agencies for commercial mortgage-backed securities, or CMBS. Now, they're using borrowing structures for other asset classes called asset-backed securities.

Your CMBS securities are generally your office spaces, your hotels, your retail spaces, like shopping malls. Your ABS securities are consumer mortgage loans, home mortgages, credit card receivables, or other expected cash flows, individual securities that can be gathered into tranches or groups with similar ranges and maturities and delinquency risks that are grouped together to then sell.

Michelle: You may still be wondering why lenders require bankruptcy remote entities and why borrowers are willing to jump through the hoops of creating them. There are multiple benefits for all parties involved.

For the lenders, bankruptcy remote entities are required by rules governing the securities markets. They make the assets being financed more attractive to commercial lenders, they protect the asset for the lender, and it offers investment-grade ratings for bonds issued.

As I mentioned earlier, this requirement has been a part of CMBS since its inception, and as Jason mentioned, it is used in other types of securitizations as well. It's now expected by bond buyers, and it impacts the ratings of the securities by the rating agencies. Not utilizing bankruptcy remote entities will have a negative impact on the ratings of the bonds issued.

For the borrowers, the use of bankruptcy remote entities enhances the "financeability" or "desirability" of their asset, creates greater access to capital markets as there will be more lenders to choose from, generally reduces the interest rates for conduit loans, and it increases liquidity for the company.

Jason: Just jumping off of what Michelle said, yes, for the lender and the borrower, it's a win-win. The lenders want to lend their money, but they want their interest protected. Whereas for the borrower, they can generally see interest rate reductions by having an independent director appointed to their asset. So it's a win-win for both parties.

The components of a BRE. To qualify as a bankruptcy remote entity, each entity must have the following. They need to have organizational documents that provide references to asset finance. They also need to have organizational documents that reference the scope of BRE activities. The special purpose entity must have a special purpose. It cannot be incorporated for any lawful purpose. It needs to have a special purpose. Then you have organizational documents that must also reference the independent director or special member requirements.

Michelle: We will now spend a few minutes talking about the role of the independent director.

Each lender does have some of their own requirements for bankruptcy remote entities, and specifically for the independent director and who is eligible to serve. However, most do require the independent director have prior experience as an independent director. The independent director is appointed through a nationally recognized service provider, and the independent director cannot be affiliated in any way with the corporate group.

The independent director is not involved in the day-to-day operations of the bankruptcy remote entity, but its role is limited to those actions set forth in the organizational documents of the BRE. Those actions typically include reviewing certain amendments to the bankruptcy remote's organizational documents and certain other actions, such as selling all or substantially all of the assets of the company, filing for bankruptcy, or appointing a receiver. Each of these actions is most often defined as a material action.

The independent director can approve or deny the action they are considering. However, the action is not duly authorized without the approval of the independent director.

Jason: The role of the springing member. The springing member has many names. It can be a springing member, a special member, a springing limited partner, depending on the organizational type. The independent director may also act as a springing member or special member.

This role is only applicable to certain types of entities, such as a partnership or an LSA. The role is even more limited than an independent director, as the springing member role has no voting duties. The only function is to perpetuate the entity should the member or limited partner cease to be a member of the company through a member cessation event.

Basically, the springing member is there to keep the lights on. They are a seat warmer until another member can be appointed to keep the company in existence and, again, protect that asset.

Michelle: We talked about why to use a bankruptcy remote entity and its components, but we have not talked about who uses bankruptcy remote structures.

We chatted a bit about commercial mortgages, which are utilized by companies that invest in or develop real estate. All types of real estate companies, both REIT and non-REIT companies, will use bankruptcy remote entities. Real estate attorneys will be engaged to structure bankruptcy remote entities and engage independent director services on behalf of their clients.

Non-real estate companies will also use BREs for their ABS transactions, in connection with whole-business securitizations, receivables, and IP financings.

In connection with the ABS transactions, capital markets attorneys will engage bankruptcy remote entity services as well.