CFM20010 - Securitisation: background
Background
Securitisation is essentially a method of raising debt finance.
However, it can also aid management of capital requirements (for
regulatory and balance sheet purposes) and risk.
It is a mechanism whereby assets (loans, receivables etc) are
used as collateral backing for the issue of securities to third
party investors. As part of the process the assets are transferred
to a special purpose vehicle that is normally separated from the
borrower and can thus obtain a better rating from credit rating
agencies, than the borrower could. The basic structure of a
securitisation is described at
CFM20030.
The following guidance provides background information about
securitisations and how companies involved in the process are taxed
for accounting periods beginning before 1 January 2005. Guidance on
the taxation of securitisation vehicles for accounting periods
beginning on or after 1 January 2005 is at
CFM20200 onwards.
Securitisation originated in the US. The first major UK
securitisation was in 1987 (involving residential mortgages). The
assets originally used were debt assets that generated a flow of
income, such as mortgages. More recently a wide variety of assets
have been used ranging from credit card receivables and rental
streams to future income streams and whole business income streams
such income from pub chains and football stadiums.
Securitisation structures are quite complex, so they tend to
be used to raise substantial amounts of finance. Banks and
financial institutions regularly securitise loan and mortgage books
with values in excess of £1bn (thus freeing up capital for
further lending), and single whole business or income stream
securitisations in other industries can exceed £2bn.
Securitisation is used as a method of funding for three main
reasons:
- it is an effective way of raising finance at a competitive rate that is generally less than traditional bank lending or bond issues;
- it can help the originator to meet regulatory capital requirements, and thereby free up working capital for further core business – an important commercial driver in the financial sector;
- and it improves the funding options of the borrower (diversification) – a securitisation enables an entity to benefit from capital market financing which it would otherwise not have access to because its overall credit rating is not strong enough.
The precise structure of a securitisation is determined by the
relative importance of several factors: the specific commercial
purpose of the securitisation, the relevant accountancy treatment,
and the judgement and influence of industry regulators (who can be
particularly demanding in the banking and insurance sectors) and
credit ratings agencies. As securitisations are all about obtaining
finance, the credit ratings of the deals are all important.
Securitisation deals are normally commercially driven, rather
than tax driven. However, tax and its impact will be a
consideration for credit rating purposes (and from the perspective
of an originator expecting to receive profit extraction from the
structure), and there are some tax compliance risks associated with
these deals. The specific tax issues are covered in detail at
CFM20060.
