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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: background: whole business and other types of securitisation

Other types of securitisation

Whole business securitisations

‘Whole business securitisations’ (WBS) or ‘operating asset securitisations’ are a new variant of securitisation, but the primary purpose is still the raising of finance. The main difference is that rather than the securitised assets being assigned to an SPV which is isolated from the originator, they are usually instead assigned to an SPV within the originator group, which is funded by a secured loan from an Issuer SPV (the latter normally being formed outside the group in the usual way). Apart from these reorganisation steps, the originator group continues to make use of the operating assets in the business in much the same way as before the securitisation (subject only to any constraints imposed by the terms of the security).

Future income stream securitisations

Future income stream securitisations are based on assets that have not yet come into existence, but are expected to in the future. Examples include export-related receivables, airport landing fees, and other future receivables.

The typical structure involves the sale of a future product or receivable by an emerging market originator to an offshore SPV which is funded to pay for the assets by a loan from another SPV that issues the securities. The asset-holding SPV will then use the cash flows from the assets (as and when they come into existence) to make interest payments and repayments of principal to the Issuer SPV. This enables emerging markets to tap into international markets for finance, while insulating the investors as respects the cashflows.

Synthetic securitisations

Synthetic securitisations are issued by banks in order to manage their regulatory capital. In these the assets are typically investment grade debt whose yield is sufficient to cover the costs of securitisation, but whose retention on the balance sheet is unattractive because of regulatory capital requirements. See the diagram at CFM72080.

These securitisations combine securitisation arrangements with credit derivatives. In these transactions, the portfolio of assets (the Underlying) is not sold to the SPV. Instead the originator enters into a credit default swap (CDS) or similar arrangement with the SPV, under which

  • the SPV agrees to make payments on the occurrence of credit events affecting the Underlying, and
  • the Originator agrees to pay periodic premiums to the SPV.

The SPV raises funds by an issue of bonds and invests the issue proceeds in a deposit with an institution having the highest available credit ratings (that deposit being the Collateral). If there is a specified credit event, e.g. a certain level of defaults on the Underlying assets, a payment will be due under the CDS from the SPV to the Originator. The SPV will make that payment using funds drawn from the Collateral. On the repayment of the bonds, the investors are only entitled to receive an amount equal to any remaining Collateral.

The bonds carry an enhanced interest rate to reflect the risk to the investors of losing the Collateral in whole or in part. The Issuer meets these interest payments using interest that is received on the Collateral plus the premiums that it receives under the CDS.

Unlike other types of securitisation, the purpose of these structures form the Originator’s perspective is not to raise funds. In many cases, the structures in practice provide bank Originators with credit protection which allows them to free up regulatory capital and use such capital to back up fresh investments.