CFM20460 - Securitisation: taxation: periods beginning on or after 1 January 2007: the regulations: commercial paper funded companies

Commercial paper funded company: regulation 9

The fifth type of company defined in the regulations is a ‘commercial paper funded company’. This is a company that was an asset-holding company or intermediate borrowing company but whose liabilities to the note issuing company or, in the case of an asset-holding company, to an intermediate borrowing company, have been replaced by liabilities to a bank.

Commercial paper is normally issued by large-scale finance companies (‘CP issuers’). The business of such a company typically consists solely of issuing commercial paper to market investors and using the proceeds of issue to make secured loans to a wide range of companies carrying on financial or non-financial businesses (‘originators’) in order to provide such companies with working capital, either directly or via an intermediate special purpose company (an ‘intermediate CP lender’). These ‘originators’ and ‘intermediate CP lenders’ may fall within the definition of ‘commercial paper funded company’, as set out in the regulations.

For the purposes of the regulations, a CP issuer will potentially be a note-issuing company and an intermediate CP lender will potentially be an asset-holding company or an intermediate borrowing company. The originator may be an asset-holding company if it carries on a financial business, but not if it holds non-financial assets or carries on any other type of non- permitted activity ( CFM20400).

Because the funding of CP issuers depends on rapidly revolving issues of short-term paper to market investors, they are always exposed to the risk that, on any given repayment date, they may be unable to refinance an existing tranche of commercial paper in the market. In order to provide against this risk, a CP issuer will typically establish bank ‘liquidity facilities’ under which a bank or banks will undertake to refinance the CP issuer with loans if and to the extent that, and for so long as, the CP issuer is unable to refinance itself in the commercial paper market. Liquidity facilities may also be provided at the level of the intermediate CP lender or originator, in which case, in the event of a failure by the CP issuer to refinance itself in the CP market, the intermediate CP lender or originator will draw under its liquidity facility in order to fund a loan repayment to the CP issuer.

The intention of including the ‘commercial paper funded company’ category in the regulations is to ensure that an intermediate CP lender which has qualified as an intermediate borrowing company, or an originator which has qualified as an asset-holding company, will not cease to qualify as a securitisation company solely because the structure includes liquidity facilities as described above and there are drawings under those facilities. The definition of ‘commercial paper funded company’ (as respects the intermediate CP lender or originator), and also the definition of ‘note-issuing company’ (as respects the CP issuer), will be construed so as to allow for the ways in which genuine asset-backed commercial paper programmes are commonly structured as a matter of market practice.

In practice, security over the assets underlying the capital market arrangement may be granted by the originator to the commercial paper funded company and by that company to the CP issuer, whilst the CP issuer itself does not grant security to the commercial paper holders. This will not itself debar the CP issuer from being a note-issuing company, provided it meets the other conditions for being a note-issuing company.

Nor will either the CP issuer or the commercial paper funded company be treated as failing to meet the relevant conditions on account of the existence or utilisation of bank liquidity arrangements. Where the bank liquidity facilities are provided to the CP lender or the originator, the creation and utilisation of those facilities will be specifically covered by the definition of ‘commercial paper funded company’. Where the bank liquidity facilities are provided to the CP issuer, the creation and utilisation of those facilities will be regarded as falling within the reference to ‘incidental activities’ in the definition of ‘note-issuing company’.

Non-resident note commercial paper funded companies

Commercial paper issuers are often non-resident and outside the charge to corporation tax. This does not prevent them from being ‘note-issuing companies’ (see CFM20380), and a pre- existing commercial paper issuer does not need to make an election under regulation 13 in order to come within the definition of a ‘note-issuing company’.

(In addition, like any other note-issuer which is outside the charge to corporation tax, a non- resident commercial paper issuer does not need to satisfy the ‘retained profit’ condition ( CFM20470) or the ‘payments condition’ ( CFM20490) in order to be a ‘note-issuing company’.)