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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: securitisation: background: true sale/asset-backed securitisation

Basic structure: true sale securitisation

The originator sells a homogenous set of assets that have a predictable stream of income. Examples include a rental income stream, mortgage debts and credit card debts.

This is a genuine sale with title passing to the issuer SPV. The SPV is usually entirely separate from the originator. The commercial reason for the sale to this separate entity is to protect the third party investors against any claims being made by creditors of the originator. Also, it enables the regulators and credit ratings agencies to assess the financial and commercial status of the Issuer without any reference to the status of the originator. The Issuer SPV is usually described as ‘bankruptcy remote’, as the liquidation of the originator will not impact on the assets and their income stream in the SPV. See the diagram at CFM72040.

The separation of the SPV from the originator also means the third party investors have no recourse to the originator if the SPV is unable to meet its liabilities to them, aside from any separate security or credit enhancement included in the securitisation (CFM72090).

The SPV acquires the underlying assets from the originator at an arm’s length price. One reason for this is to prevent the originator’s creditors from being able to challenge the sale of the assets as a ‘preference’, should the originator go into liquidation.

The SPV raises finance by issuing bonds on the commercial market. These bonds are usually given a credit rating by the credit rating agencies.

The SPV is basically a conduit for raising funds and using cash flows from the securitised assets to pay interest and instalments of principal on the funding and incidental costs. Any amounts that remain in the SPV after making all of these payments will normally be utilised:

  • to retain a nominal residual profit for the SPV, and
  • if there is then still any remaining cash, to pay it to the originator as interest on subordinated debt, or as deferred consideration, or by some other mechanism (a process commonly referred to as profit extraction (CFM72090).

Servicing agreement

The customers will be probably unaware that their debt has been ‘securitised’. Generally, the originator will enter into a servicing agreement with the asset-holding SPV, whereby the SPV pays a regular fee to the originator to continue servicing the underlying asset pool such as collecting the income, managing the SPV’s cashflows on its assets and funding, and pursuing defaulted debts. This has advantages for both originator and SPV:

  • it enables the originator to retain the customer and the openings for possible further business, and
  • it is the originator who has the expertise and organisation to ‘service’ the assets. In particular, the originator will have the computer systems that are required to carry out the cash management and to monitor the performance of the securitised assets (thereby identifying any need for debt collection),