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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: alternative finance: investment bond arrangements: conditions: bond assets

Identifying and managing bond assets

Bond assets

‘Assets’ in CTA09/S507 takes the widest possible meaning, and includes tangible and intangible assets, rights under contracts, and choses in action. (A ‘chose in action’ is a legal term meaning a right of which a person does not have present enjoyment, but may take legal action to recover it.) S507(2)(b) makes it clear that the bond-issuer does not have to have exclusive legal title to the bond assets. Bond assets may include an interest in co-owned assets, or an interest in a partnership that holds particular assets.

In some cases, an issuer may use the sukuk subscription proceeds immediately to acquire assets, which are then held until the arrangement ends. In other cases the identity of the assets may change over the life of the arrangements. In yet other cases, there may be a Declaration of Trust that gives wide discretion as to what assets are held. For example, the arrangements may provide for plant or machinery to be acquired and then leased to a trading company for the purposes of its business, without specifying the exact nature of such plant.

These differences are immaterial for the purposes of the legislation. Bond assets may be identified specifically, or as a class. And they may be acquired before the issue of the sukuk, at the time of issue, or subsequently.

Bond assets: example 1

An oil company wishes to raise finance in order to construct an extensive new pipeline. It commissions contractors to construct the pipeline. It sets up a vehicle company to issue sukuk, and enters into an agreement under which, as each section of pipeline is completed, it is sold to the sukuk-issuing company, which then leases it back to the oil company. The subscription proceeds of the sukuk are kept in a bank account until they are used to pay for successive tranches of pipeline. Receipts under the pipeline lease agreement are used to make the ‘additional payments’ to sukuk holders. The sukuk issuing company makes a declaration that the bank account; completed lengths of pipeline, including those to be delivered in the future; and the benefit of the forward purchase and lease agreements, are all held in trust for certificate holders. All of these things are ‘bond assets’ under CTA09/S507.

Bond assets: example 2

An airport operator decides to finance the construction of a new runway and terminal building through sukuk. A vehicle company issues the sukuk, and enters into an agreement with the operating company under which it contributes the sukuk issue proceeds in return for a 90% share in the newly-constructed assets. It is also entitled to 90% of the landing fees and other income generated by the assets, but out of this retains only enough to make the required payments to sukuk holders, returning the remainder to the operating company as an ‘incentive fee’. The issuing company’s 90% share in assets, and the right to income from them, constitute ‘bond assets’. It does not matter that the company does not own 100% of the assets.

Management of bond assets

Just as ‘assets’ takes a broad meaning, so does ‘management’. The nature of the management activities will depend on the nature of the assets. For example, if the bond assets consist of real property, the sukuk issuer may let it on a tenant’s repairing lease and may then need to do very little more. There is no requirement in the statute for the issuing company to undertake the management itself; it will frequently appoint an agent to do this.

S507(2)(d) makes it explicit that ‘management’ includes disposal. Bond assets might, for example, include a portfolio of quoted shares, which are regularly bought and sold, with additional payments to bond-holders being made out of capital gains. This would all be part of management activity.