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Securitization markets in United Kingdom
This page updated regularly deals with securitization developments in United Kingdom. If you have any data, developments or contributions to make to this page, please write to me. Your contribution shall be acknowledged with credit to you.
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More on UK securitisation
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Late breaking additions
This page was comprehensively edited/ enlarged on 19th
Feb 2002.
For a detailed treatment of the mortgage-bonds market in UK, please do see this article on this site - click here.
Added 2nd Feb., 2000:
Keele University UK securitised its rent receivables from students in a path breaking transaction - click here for the news.
Securitisation is increasingly being used in United Kingdom as a financing mechanism. UK contributed transactions worth about USD 26 billion in 1999. It was at top position in 2000 as well, but in 2001, for some time, Italy seems to have overtaken UK. This might well be a transient phenomenon as some big deals emerged from Italy (INPS-II) during the first half of 2001.
By the end of year 2001, UK was on top position in Europe - in fact, UK's contribution was about 35% of total European securitization in 2001, though the percentage was 44% in 2000..
UK can well be regarded as the securitisation laboratory of the World. For whatever reasons, lots of innovative applications of securitisation emerge from the UK. Securitisation transactions conducted in UK are more complex than those in any other part of the world. And the number of legislative considerations involved in UK is simply mind-boggling.
Exploring the reasons as to why UK has experimented with so many different innovative applications, Hilda Mak and John Deacon in an article titled Developments in UK Securitization obseve that the reason lies in a stagnant mortgage market during the early 1990s as a result of a general downturn in mortgage business, because of which securitisation could not progress in its traditional mainstay - RMBS.
UK is not only the largest market in Europe: it is also giving a number of innovative deals. The range of assets which have been the subject of securitisation in the UK is growing rapidly. Some of the recent transactions involving securitisations would give an indication of the spread of activity:
- National Westminster Bank's securitisation of $10bn (£6.25 bn) of corporate loans;
- Nomura's acquisition of Inntrepreneur, Spring Inns and William Hill, funded by means of a securitisation;
- Stagecoach's issue of £368m of bonds to be serviced by rental income from leases of trains to the train operators;
- the London branch of Sumitomo Bank raising £1.4bn from the securitisation of bank advances, undrawn loan facilities and bank security; and
- Canary Wharf Finance raising £500m by a securitisation of leases of properties at Canary Wharf.
Other securitisations have involved credit cards, auto loans, receivables from pubs, and equipment leases. Sections of the media and entertainment industry are seeking to securitise royalty streams from completed films and TV programming, and from music publishing and recording.
Mortgage-securisations in UK in 1998 grew substantially. Telephone receivables and internet receivables were also securitised. In May 1999, securitisation of TV rights revenues of Formula One racing business made history with USD 1.4 billion issue.
Whole business securitisation:
One of the typical UK innovation is securitisation of whole business cashflows, also known as principal finance, or securitisation of operating company cashflows. This device largely goes to the credit of Guy Hands of Japanese investment bank Nomura. For more on Guy Hands, see our report here and for more on whole business securitisation, see our page here.
Legal Systems and initiatives:
English legal system is known world over as common law. English common law distinguishes between tangible and intangible property - choses in possession and choses in action. The latter are transferable only by a written conveyance. Thus, the Law of Property Act 1925 required a written agreement to transfer actionable claims. Notice to debtors was also required.
However, traditional English law has always recognised equitable transfers, that is, transfers that do not comply with the legal requirement of law, but would be recognised as setting up a legal relationship between the transferor and transferee. Equitable transfers do not result into a right against the world at large, but a personal right - what this means is that the right of the assignee under an equitable transfer is a right against the assignor, and not a independent right against any and all.
No specific legal amendments have been carried out to this age-old law.
SPV structures:
In most UK securitisations, the SPV is structured as "an orphan subsidiary" with the shareholding transferred to a charitable trust. Therefore, even though there is no direct control of the originator on the SPV, it is a matter of common knowledge that the SPV is a figment of the originator. The originator does maintain operational control over the SPV.
This ownership structure of the SPV is devised to avoid consolidation, both from bankruptcy as well as accounting viewpoint. For more on consolidation, see our page here. However, as far as accounting consolidation is concerned, IASB's SIC 12 has given an interpretation according to which a consolidation is almost inevitable if the originator provides credit enhancements in form of subordinate securities as well. See our news on SIC 12 here.
To avoid consolidation from legal and accounting viewpoint, the originator must hold no equity interest, and no residual interest in the SPV. Therefore, very convoluted methods are followed in UK practice for extraction of the originator's profit from the transaction. These include: deferred consideration, an intermediary trust holding legal interest on behalf of both the originator and the issuing SPV, interest swap, retained interest, management fee, brokerage, etc.
Taxation:
Stamp duty:
Another issue for securitisation transactions in UK has been the stamp
duty issue. A stamp duty of 3.5% to 4% is payable on assignment of receivables.
There is no stamp duty on sale of mortgage receivables, but there is one on sale of non-mortgage receivables.
Parties normally contrive to avoid this by executing documents outside the jurisdiction, as the duty is payable at the place where the agreement is executed. However, there is a common stamp law provision that if an agreement executed outside the country but relating to property in the country comes to the country after execution, it will be stampable then. Thus, execution of the agreement outside the country defers the stamp duty implication till it is necessary to bring the document into the country for the purpose of enforcement.
Stamp duty relief can also be obtained by a transfer within the group, that is, by estalishing the SPV as a subsidiary of the originator.
In UK practice, however, stamp duty is not paid, as most securitization transactions are structured as equitable assignments and not perfected legal transferes. Nevertheless, if and when the transaction were to be perfected into a full fledged sale of receivables, the document will attract stamp duty: therefore, the originator is required to provide for full payment of duty. But this is usually regarded as a theoretical tax - very rarely have circumstances arisen where the duty has actually become payable.
For more on stamp duty on securitisations, see our page here.
Withholding taxes:
Two kinds of withholding taxes affect securitization vehicles in the UK: the MIRAS system in case of mortgage payments, and withholding tax on interest in case of other receivables.
As far as withholding tax on interest is concerned, the payer of interest is required to withhold tax at the basic rate, unless the lender is a bank. Since securitisation SPVs are not banks, transfer of loans to SPVs surely gives rise to the problem of withholding tax. In answer, a number of securitisation transactions in the past were structured as "participation" transfers, rather than true sales.
However, the Budget 2001 proposed exemption from withholding tax in case the recipient was an entity within the UK tax jurisdiction.
Value added tax
VAT is not applicable on sale of receivables.
Income-tax rules
There are no pre-defined income-tax rules on securitization in the UK but the tax treatment is understood with reference to general tax law and practice.Originator taxation:
The basic question to be decided for the originator is whether the disposition
of the receivables will be taken as a sale or financing. The question
would, in most cases, be decided by reference to the originator's accounting
treatment. If the assets in question are business assets, and they are
being transferred, business profits/loss may arise.
In certain cases, the asset being transferred may be held as capital assets - for example, in case of lease transactions. Ideally, in such cases, the physical asset and the receivables therefrom should be split, and the receivables should only be transferred rather than the physical asset.
The other significant tax issue is the deductibility of the initial fees of the issue. Incidental costs of raising finance may, if properly structured, be deductible by the issuer under the FA 1996 rules. Accounting Standard FRS4 will generally require issue costs, and thus the tax deductions, to be amortized over the period of the notes.
Investors' taxation:
An investor's UK tax position will be reasonably straightforward. Notes
will generally fall within the withholding tax exemption for quoted Eurobonds.
In general, it is believed that the accounting method employed by the investor for books will be adopted for taxation too.
SPV taxation:
A proper structuring of the SPV is crucial: the objective of all concerned
parties is to ensure a tax transparent SPV. This can be ensured only by
matching incomes and expenses. The payments made by the SPV will be principal
and interest on the bonds, of which interest will be tax deductible -
principal will not be.
Interest paid by the SPV on a participating loan, that is, a loan with a right to participante in profits (normally given by the originator as his contribution) is not tax deductible. Such interest is also not taxable in the hands of the originator.