Securitisation in an Offshore Context

June 2000

Conceptually, securitisation involves the conversion of a future income stream into immediate cash. The word “securitisation” literally means, “to turn into securities” where the securities are liquid, negotiable, highly rated and are backed by a specific pool of assets.

Securitisation is not confined to utilising rental streams. It is equally applicable to any situation where the owner of assets has a cash flow stream such as that from trade debts, a loan portfolio or royalty receipts as a means of reducing the cost of funds, diversifying funding sources, improving financial ratios (off balance sheet financing) or gaining access to capital markets.

Factors to Consider

Prior to looking seriously at putting any securitisation structure in place there are a number of factors which should be considered, which impact on the jurisdiction you might choose:

Property Structure 

Securitisation a very useful tool in project financing. In the context of real property, it can be used securitisation structures in both Hong Kong and the UK to convert future property rental income streams into immediate cash. A typical structure involves a property owner assigning for value the “blue chip” rental income stream from various properties owned by the property owner to an International Business Company (“IBC”). The IBC would then approach a rating agency and request a rating for the purpose of the issue of bonds or other commercial paper. The IBC can then float the bonds/paper. The coupon rate applicable to the bonds will reflect the rating which the rating agency has provided. The funds which are raised as a result of the bond issue can then be used in a variety of ways depending on the circumstances of the entities involved and will often involve a combination of uses, such as:

In many cases the IBC will be owned by a BVI purpose trust and therefore, there will be no beneficial owner. If the management and control of the IBC is located offshore, then the IBC will not be considered a subsidiary of the property owning company.

Additional Components

The property owning company and the IBC may consider entering into an administration agreement with respect to the collection of the rentals and the enforcement of the terms of the leasing agreements by the property owning company.

The property owning company may also consider taking out insurance against any credit risk posed by the IBC (bearing in mind that the IBC is likely to have minimal net assets). This can be done using an offshore captive insurance company and again, if structured correctly, can provide the property owning company with tax relief.

Advantages

What are the advantages of putting such a structure in place offshore as opposed to, for example, incorporating a domestic company and assigning the rental stream to it. One immediately thinks of the reduction of tax as being the main advantage but this is not necessarily the dominant motive. Indeed, it is becoming increasingly less so.

Regulation

The use of an offshore structure provides the flexibility and ease of administration provided by the relevant offshore legislation. IBC’s are very flexible, provide confidentiality and are easily administered. Put in another way, you are not subject to the extensive regulatory framework that you find in the UK, United States and elsewhere in Europe. From a business point of view, this converts to a faster and more cost effective method of doing business. With increasing regulation in the UK, United States and Europe, offshore jurisdictions such as the BVI become increasingly attractive. As said by Bob Perlman, Vice President of Taxes of Intel Corporation before the US Senate Finance Committee: “If I had know at Intel’s founding what I know about the international tax rules I would have advised that the parent company be established outside the U.S.”.

Tax

Tax advantages can also be gained by the utilization of an offshore structure. If the offshore structure is set up correctly, it will not be subject to tax in the home jurisdiction and it certainly will not be subject to tax in the offshore jurisdiction. 

In the context of the property structure outlined above, in a UK context, if the IBC loans funds to the property owing company it can do so at a rate which is greater than the cost of raising finance through the bond issue. The result will be a tax deduction to the property owing company while the income received by the IBC will not be subject to tax either in the UK or in the BVI.

A Further Example

A UK domestic company with trade debts could factor those debts to an IBC which could, in turn, issue paper to the market to raise finance on the strength of the trade debt, much in the same way as was explained earlier in relation to the rental income. 

The UK domestic company would benefit in several ways:

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