ARM ASSET BACKED SECURITIES S.A. (“ARM”)

Frequently asked questions

ARM is a securitisation undertaking governed by the Luxembourg law of 22 March 2004 on securitisation (the “Law”). It has been issuing bonds from Luxembourg since 2006 pursuant to a base prospectus first approved for the purposes of the prospectus directive 2003/71/EC on 3 August 2007 by the Irish Stock Exchange (and amended by subsequent base prospectuses issued and approved since that date). However, ARM has never obtained a licence from the CSSF nor been subject to its prudential supervision.

Securitisation undertakings governed by the Law must be authorised and supervised by the Commission de Surveillance du Secteur Financier (the “CSSF”) if they fulfill the criteria of the Law, i.e. as soon as they issue securities to the public on a continuous basis.

Before applying for the legally required licence, ARM had been issuing bonds to the public for over 2 years (the “Application”) without having the required authorisation by the CSSF.

The CSSF then instructed ARM to stop issuing further bonds, pending its decision as to ARM’s Application. However and despite the CSSF’s instruction, ARM had continued to collect monies from new investors (the “Pending Investors”).

When ARM was informed by the CSSF that it would not be in a position to grant a licence, ARM committed to relocate within a short period of time to Ireland where, according to ARM, a licence would not be needed. However, as of the date of the Decision, as defined below, such relocation has still not occurred.

In July 2011, ARM was unable to honour redemption/refund requests and was late on coupon payments.

On 29 August 2011, the CSSF decided to refuse to grant a licence to ARM as a regulated securitisation undertaking under the Law (the “Decision”).

The Decision entails a suspension of any payment by ARM and prohibition for ARM, under penalty of voidance, to take any measures other than protective measures, unless otherwise authorised by the CSSF acting as supervisory commissioner (“commissaire de surveillance”).

There are various types of suspension of payments. Generally speaking, a suspension of payments is only a temporary measure the purpose of which is to postpone or delay all payment obligations of a person/company until further notice.

In the case of ARM, the suspension of payments is an automatic legal consequence of the CSSF Decision and designed to ensure equal treatment of all of ARM’s investors and creditors, until the appointment by the court of a liquidator.

In practice, this means that no coupon payments will be made, nor any redemption/refund requests paid until after the court has appointed a liquidator.

Provided the CSSF Decision is not challenged, the Luxembourg public prosecutor will request the court to appoint a liquidator one month after the CSSF Decision has become final. It will become final one month after it was served to ARM (which occurred on 29 August 2011).

If the CSSF decision is challenged, a liquidator will only be appointed if and after the administrative courts confirm the CSSF Decision. The court process could take several years.

The CSSF would expect the court appointed liquidator to take into consideration the specific nature of the underlying assets of ARM’s portfolio, i.e. senior life settlement policies, and to propose an adequate liquidation process to the court taking this feature into consideration, thus applying for an orderly wind-down of ARM’s portfolio, akin to a restructuring within ARM, or a transfer of ARM’s assets into a new entity, via a restructuring.

The CSSF considers that the conditions for granting a licence were not fulfilled for the following reasons :

• the extended issuing activity in breach of legal and regulatory provisions ;
• ARM’s inability and/or unwillingness to comply with prudential and legal requirements ; the CSSF’s prudential concerns related among others to the adequacy of ARM’s liquidity risk management and the lack of a permanent liquidity facility ;
• the continued collection of new investor funds after the CSSF’s prohibition to issue new bonds and its consequences as described in the next item ;
• uncertainty as to the rights of Pending Investors, including the nature thereof, and the resulting concerns as to an appropriate use of Pending Investors’ funds in the past ;
• ARM’s fee structure which the CSSF considers to have been detrimental to its financial position and the non-transparent disclosure thereof ; and
• the deteriorated financial situation which has had as a consequence the late payment of the July 2011 coupons and the incapacity to honour redemption/refund requests which fell due on 1 July 2011 .

The CSSF considered taking its Decision very carefully, including the potential effect on investors. The scale of the prudential and legal issues identified by the CSSF and the need to safeguard existing and Pending Investors’ assets and ensure an orderly wind down or transfer of ARM’s business under the control of the court meant that taking the Decision was deemed to be the best course of action in order to protect the interests of all investors, i.e. the existing bondholders and the Pending Investors.

Due to the multijurisdictional implications of the file, the CSSF, the Financial Services Authority (FSA), the Central Bank of Ireland (CBI) and the Malta Financial Services Authority (MFSA) have been and keep working in close cooperation.

In this context, the CSSF would like to draw your attention to the following :

ARM is a company whose bonds are listed on the Irish Stock Exchange (which is a regulated stock exchange) and therefore subject to all applicable rules and regulations of the market abuse directive 2003/6/EC of 28 January 2003 on insider dealing and market manipulation and the relevant national implementing laws.

Thus the CSSF is not in a position to disclose any confidential information exchanged with ARM to any third parties.

ARM and Insetco have informed investors that on 26 August 2011, they entered into a conditional sale and purchase agreement which is subject inter alia to positive feedback of a majority by value of all of ARM’s investors. To that end, ARM intends to issue a consultation paper to its investors (the “Consultation”).

However, the CSSF would like to stress that ultimately, the acceptance of the proposed Insetco deal will be within the court appointed liquidator’s remit, once appointed, who will have to decide inter alia on all questions that arise in relation to ARM and its business, in accordance with his judicial mandate.

As a consequence of the above, the CSSF is and will not be in a position to express any opinion on the proposed Insetco deal. Further, the CSSF needs to carefully assess any disclosure by ARM to its investors and, as the case may be, ensure it is based on proper legal advice, in order to avoid communication of any incomplete, misleading or incorrect information.

The CSSF is therefore actively liaising with ARM on a daily basis, to ensure that any communication by ARM to its investor community, and in particular the Consultation, is
factually correct in all aspects. The CSSF can also confirm that a meeting with representatives of ARM and Insecto plc did take place.