Special purpose vehicles and securitisation in Jersey
07 December 2015
This briefing relates to the use of Jersey companies as special purpose vehicles ("SPVs") specifically established for the purposes of securitisations and other structured financing transactions.
Over the past twenty five years, Jersey has consistently been selected as the jurisdiction to locate SPVs. There are many commercial purposes that can be met by the use of a Jersey SPV. Examples include:
- issuing and repackaging debt securities;
- securitisation (asset backed securities, mortgage backed securities, collateralised bond obligations, collateralised loan obligations, and collateralised debt obligations);
- synthetic securitisation;
- conduits (asset backed commercial paper ("ABCP")/purchasing vehicles/receivables trusts);
- credit default and total return swap structures/ credit-linked notes;
- catastrophe bonds and insurance risk securitisation;
- tier 1 capital structures;
- investments made "off balance sheet";
- tax driven structured financings/debt defeasance structures; and
- restructuring of security arrangements ancillary to bank financing.
Key benefits of using Jersey
Some of the key advantages to Jersey as the jurisdiction in which to establish an SPV include:
- Jersey is a world-class offshore finance centre and enjoys political and economic stability;
- the convenient local infrastructure with many established and experienced professional service providers able to provide a high degree of expertise and efficiency in connection with the creation, management and administration of SPVs;
- the favourable tax neutral treatment of SPVs;
- Organisation for Economic Co-operation and Development ("OECD") membership and Financial Action Task Force ("FATF") recognition, but outside the European Union ("EU");
- widespread acknowledgement (for example, by leading investors, investment banks, supra-national bodies, and rating agencies) of Jersey's credibility in cross-border finance transactions;
- costs - establishment costs for Jersey SPVs are low and there are no ongoing regulatory costs for Jersey SPVs;
- located offshore UK/Europe, Jersey is within the GMT time zone and has good communications to UK/Europe;
- strong legal opinion - Jersey has a strong modern framework of statutory laws and a creditor friendly legal system which provide flexibility and certainty in structuring transactions using Jersey SPVs and a legislature committed to developing that framework as necessary in response to commercial/prudential needs;
- Jersey has a network of sophisticated regulatory laws and an efficient financial services regulatory authority committed to protecting the interests of Jersey and those transacting business in Jersey whilst providing an environment in which business can develop to meet the demands of investors and arrangers. Regulation of SPVs is non-intrusive. The Jersey Financial Services Commission (the "JFSC") continues to assist in initiatives to improve the use of Jersey SPVs for capital market related activities;
- no foreign exchange controls; and
- over the past twenty five years, Jersey has been selected as the jurisdiction for premier arrangers to locate SPVs involved with some of the most innovative transactions in the capital markets.
A 0% general rate of corporate income tax was introduced with effect from the 2009 year of assessment replacing the previous exempt company regime.
From 1 January 2009, all companies resident in Jersey (i.e. which are incorporated in Jersey or are managed and controlled in Jersey or have a permanent establishment in Jersey) and which are not a "financial services company" (i.e. licensed by the JFSC to carry out investment business, trust company business, fund services business as an administrator or custodian in relation to an unclassified or unregulated fund, deposit taking business, or certain collective investment fund functionaries) or a utility company (i.e. Jersey's water, gas, electricity, telephone and postal companies) will be charged to tax in Jersey at 0%. The applicability of the new 0% tax rate is no longer dependent upon the absence of Jersey resident beneficial owners.
Under the new tax regime, Jersey companies will not be obliged to make any withholdings on account of tax from any interest payments made by them to any person.
- Thus, there will typically be no adverse taxation consequences for the SPV as a matter of Jersey law. It can issue, pay interest on and redeem or exchange its securities without any liability to taxation in Jersey.
- There are no capital gains or inheritance taxes in Jersey. There are no stamp or documentary taxes in Jersey on executing documents material to SPV structures or issuing, redeeming, exchanging or otherwise transferring securities issued by an SPV. Jersey does, however, have a new sales tax regime which levies a 5% charge to Goods and Services Tax ("GST") on the supply of goods and/or services in Jersey. On payment of an annual fee of £200, an SPV can opt for "international services entity" status in order to ring-fence itself from GST (with the consequence that if such status is secured, the SPV will not have to pay or charge GST).
- On request, the Comptroller of Income Tax in Jersey will issue tax clearance letters on a transaction by transaction basis confirming to interested parties the Jersey tax treatment of the proposed structure.
Jersey has a modern, sophisticated network of regulatory laws. There is a single regulatory authority, the JFSC, with an experienced team dealing specifically with securitisations and complex structured finance transactions.
Where particular Jersey regulatory consents are required in relation to the issuance of securities, before establishing the SPV, the JFSC must approve the identity of the arranging institution and may seek to review certain material documentation (generally, only offering documentation, if any) in connection with the SPV and the proposed transaction. The initial proposals (usually with a term sheet prepared by the arranger) are ordinarily put to the JFSC for an "in principle" consent following which draft documentation may be submitted for review. The JFSC has committed itself to responding to applications within five working days at the latest (in practice, clearance is often obtained more quickly).
In considering the terms of the material documentation, the JFSC will be concerned with the prudential aspects of the transaction and Jersey's reputation as a premier finance centre. These issues will be considered in the context of the nature of the proposed investors.
In the case of a public offer of securities (broadly, an offer to more than fifty persons), the SPV will be issuing a "prospectus" within the meaning contained in the Companies (Jersey) Law 1991, as amended (the "1991 Law"), and the company must therefore be incorporated as a public company for Jersey law purposes. The 1991 Law imposes stricter filing requirements for public companies than for private companies, the most important distinction being that in the case of public companies audited accounts must be prepared and filed annually, together with the auditors' report thereon.
Jersey company law imposes certain requirements as to the content of a prospectus issued by a Jersey company. Those requirements are likely to be met if a listing of the securities is to be sought on a recognised stock exchange and the prospectus complies with the relevant regulations. A copy of the prospectus signed on behalf of all directors of the company must be filed with the registrar of companies (the "Registrar") in Jersey and his consent must be obtained before the prospectus can be circulated in Jersey or elsewhere. There are no statutory requirements as to content of offering material (or filing) where the offer is by way of private placement limited to fewer than fifty persons.
A regulatory consent for issuance of the relevant securities will be required by the SPV pursuant to the Control of Borrowing (Jersey) Order 1958, as amended, (assuming that the number of persons in whose name the securities are or are to be registered (or, in the case of bearer securities, are or are capable of being held) exceeds ten).
When satisfied with the submissions made in respect of the proposed transaction, the JFSC will grant a formal consent for the company to raise up to a specified amount of money by issuance of the relevant securities. That consent will usually impose certain standard conditions enabling limited ongoing regulatory monitoring.
Use of SPVs for issuing catastrophe bonds and/or insurance/reinsurance securitisations may also have regulatory/capitalisation implications under the Insurance Business (Jersey) Law 1996. These implications are outside the scope of this briefing.
There is no minimum legal requirement for capitalisation of SPVs. Jersey has no "thin capitalisation" laws for such vehicles which are typically structured with a £2 paid-up share capital.
It is often crucial that the SPV is not owned or controlled by the arranger, promoter, originator or any of the other participants of the transaction. In these circumstances, a Jersey law orphan general charitable trust structure established by a third party may be employed to hold the entire issued share capital of the SPV. The trustee of the charitable trust would typically be provided by the Jersey service provider appointed to administer the SPV. The terms of the charitable trust will typically provide that the trustee cannot dispose of the shares in the SPV or exercise its rights as shareholder so as to cause a breach of, or interfere with, the obligations of the SPV under the relevant transaction documents during the period of the transaction. A charitable trust can be established quickly and does not require consent of the regulatory authorities in Jersey. Transactions are typically structured to ensure a minimum level of profit retained in the SPV (for corporate benefit reasons and to provide some return capable of being distributed to the charitable trust in due course). The separation of the trustee from trust assets is provided for by statute and, in the event that the trustee of the charitable trust becomes bankrupt, the assets of the trust will not be available to the creditors of the trustee in its insolvency (further enhancing the "bankruptcy remoteness" of the SPV).
Non-petition, limited recourse and contractual subordination provisions are common features of transaction documentation entered into by SPVs. The principal purpose behind these provisions is to maintain the bankruptcy remote nature of the SPV. The structuring of bankruptcy remote vehicles in Jersey is well established and strong legal opinion can be obtained on the efficacy of such provisions.
The securities of a Jersey SPV may be listed on a recognised stock exchange whether in bespoke transactions to suit investor requirements, or in order to facilitate secondary market dealings in the securities and it is not uncommon for securities issued by Jersey SPVs to be listed on the major international stock exchanges. A listing may also be made on the Channel Islands Securities Exchange Authority Limited (the "CISEA"). The CISEA has gained international recognition from HM Revenue and Customs which has designated the CISEA as a recognised stock exchange under Section 1005 of the Income Tax Act 2007, the effect of which means that debt securities listed on the CISEA may qualify as quoted Eurobonds for UK tax purposes enabling interest on them to be paid gross.
The implementation of the EU Prospectus Directive as of December 2003 has increased debt listings in the less prescriptive regime of CISEA and other non-EU stock exchanges.
Standard & Poor’s rating agency has given a sovereign rating for Jersey which gives a AA+ rating ceiling for the securities issued by Jersey SPVs.
Validity of security
Pursuant to Article 13 of the Security Interests (Jersey) Law 2012 (the "2012 Law"), a company incorporated in Jersey is deemed to have capacity under Jersey law to grant security governed by a foreign law over property situate outside Jersey. A Jersey company may grant security over Jersey situate intangible assets in accordance with the 2012 Law. Strong legal opinion can be obtained on effectiveness of security accordingly.
All companies incorporated in Jersey must prepare and maintain annual accounts. As a matter of Jersey company law, only public companies are required to have their accounts audited and to file audited accounts with the Registrar. SPVs will generally only be formed as public companies where there is to be a public offer of their securities.
Annual statutory costs
An annual return fee of, currently, £150 is payable to the Registrar each year at the time of filing the annual return (the annual return is filed by every Jersey company made up to 1 January in each year and records, inter alia, the names of the shareholders of the company at the time of filing). A fee of £25 is also payable by public companies at the time of filing their annual audited reports.
There are no ongoing costs payable to the regulatory authorities in Jersey following incorporation of the SPV.
International standing - OECD/EU/FATF
Jersey is a member of the OECD but is not a member state of the EU (being treated as one member state together with the UK for the purposes of free trade but not for matters such as fiscal harmonisation and financial services). Securities issued by a Jersey SPV are regarded as having been issued by an OECD domiciled issuer.
The Jersey authorities believe that it is vital for the future of Jersey as an international finance centre to meet the threat posed by money laundering, be recognised worldwide as a jurisdiction that is applying international standards of financial regulation and anti-money laundering measures, and be able and willing to co-operate in the pursuit of all those who engage in financial crime.
Company law regime
The Jersey company law regime permits flexibility in structuring of financing transactions. A summary of some of the principal features which may be of interest in the structuring of these transactions is set out below:
- Ultra Vires - there are no statutory limits on the capacity of a Jersey company to undertake business transactions. It is common, however, for the memorandum and articles of association of an SPV to limit expressly the authority of the directors to the specific purposes for which the SPV has been established.
- Share Capital - a Jersey company may issue shares with a par value or with no par value, and the shares may confer limited or unlimited liability. A Jersey company may also admit guarantor members. A company's par value share capital may be denominated in any currency and different classes of shares may be denominated in different currencies. Shares may be issued fully, partly or nil paid, or at a premium. There is no limit on the par value of any individual share. There is no limit on the permissible premium. Fractional par value shares may be issued provided they are fully paid and the total number of shares in issue is a whole number.
- Register of Members - every Jersey company is required to maintain a register of members which must be open to public inspection at an address in the Island. Details of the registered members must be filed with the Registrar as at 1 January each year. The names and details of holders of securities issued by a Jersey SPV will not, however, be a matter of public record.
- Directors - every Jersey company must have at least one director. A corporate body may act as a director. It will typically be a condition of the Jersey regulatory consents issued to the SPV that there be at least one Jersey resident director on the board of the SPV.
- Secretary - every Jersey company must have a secretary. A corporate body may act as company secretary.
- Registered Office - every Jersey company must have a registered office at an address in Jersey.
It would be normal to appoint a locally based corporate services provider to provide ongoing administrative services to a Jersey SPV. The corporate services provider will typically contract to provide directors, secretary, registered office and ensure compliance with the SPVs statutory and regulatory obligations in Jersey.
Corporate governance in relation to SPVs is coming under ever increasing international scrutiny, calling for ever higher standards of due diligence and ongoing management services. Jersey is well served by a significant number of professional experienced service providers able to meet these demands through the provision of sophisticated directors/management, accounting and related functions.
Asset securitisation was first introduced in the UK in the mid 1980s (with the first UK mortgage backed securitisations). Jersey has been at the forefront of providing an offshore base for creation of SPVs in the context of such transactions since that time. Asset securitisation began in the US with the sale of bonds backed by residential mortgages (in the case of the Fannie Mae issues in the early 1970s). The US (and now European) market has developed exponentially since that time (by asset class, geographical spread and transaction volumes) and many different financial asset types having a certain or predictable income flow have been securitised, ranging from consumer loan/hire purchase receivables through to credit card receivables, trade receivables, insurance risks, aircraft lease receivables and even future receivables. The complexity and innovativeness of such financings is continually developing as are legal techniques (with traditional true sale transfers now giving way to synthetic securitisation and "whole of business" securitisation in certain sectors). Jersey has proved that it is well placed to provide a convenient finance centre in which to structure such transactions.
The principal benefits of securitisation transactions from the originator's point of view are likely to be:
- the removal of the financial assets (or risks) from their balance sheet, and consequent management/control of capital adequacy/risk ratios;
- converting illiquid assets into marketable securities;
- funding diversification - sourcing funds from the capital markets rather than depending on more traditional (and expensive) forms of bank funding;
- separating financial assets from originator credit and other risk;
- fee income to the originator in terms of providing a "service" in relation to the administration of the receivables in question (i.e. the originator will often continue servicing the collection of the relevant receivables). Surplus profit (excess spread) can be extracted in a number of ways: the aim is generally to ensure a minimum level of profit retained in the SPV;
- ability to maintain existing relationships with their customer base through provision of a servicer function; and
- branding - market perception of the originator with securities which may be rated higher than the rating of the originator itself.
From the noteholder's point of view, the principal benefits are likely to be:
- investment diversification;
- the noteholder will be investing in securities issued by the SPV. The credit risk the noteholder will be taking will be restricted to the performance of the underlying assets (as enhanced by whatever credit enhancement features are put in place) rather than the originator itself;
- the SPV may access the swap markets to permit income streams on the securities to be tailored to the investors' requirements; and
- rating agency scrutiny.
The primary risks that securitisation structures need to address are credit risk (default on underlying assets), liquidity risk (underlying assets not paying enough in time), interest basis/currency risk (different basis of calculation of interest and/or different currency between the underlying assets and the securities issued) and reinvestment risk (application of receipts on underlying assets pending application in paying on the securities issued). The directors of the SPV will address the question of what safeguards (in the form of "credit enhancement" measures or otherwise) are being put in place to enable the Jersey company to meet its obligations under the terms and conditions of the securities in question. In addition, express pass-through/limited recourse provisions will usually be included. The SPV itself will not usually be in a position to take any credit risk on the underlying assets.
Bedell Cristin is ranked by the UK Legal 500 and Chambers as a leading first division Jersey law firm in structured finance/securitisation. The partners in the group are also individually recognised as leading practitioners in their field by the principal legal directories.