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JERSEY GUERNSEY LONDON BVI SINGAPORE

JERSEY BRIEFING December 2015

Special purpose vehicles and securitisation in Jersey

This briefing relates to the use of Jersey as special purpose vehicles ("SPVs") specifically established for the purposes of securitisations and other structured financing transactions.

Introduction professional service providers able to Over the past twenty five years, Jersey has provide a high degree of expertise and consistently been selected as the jurisdiction efficiency in connection with the creation, "widespread to locate SPVs. There are many commercial management and administration of SPVs; acknowledgement (for purposes that can be met by the use of a – the favourable tax neutral treatment of example, by leading Jersey SPV. Examples include: SPVs; , investment – issuing and repackaging debt securities; – Organisation for Economic Co-operation banks, supra-national – securitisation (asset backed securities, and Development ("OECD") membership bodies, and rating agencies) mortgage backed securities, collateralised and Financial Action Task Force ("FATF") of Jersey's credibility in obligations, collateralised loan recognition, but outside the European cross-border finance obligations, and collateralised debt Union ("EU"); transactions" obligations); – widespread acknowledgement (for – synthetic securitisation; example, by leading investors, investment – conduits (asset backed commercial paper banks, supra-national bodies, and rating ("ABCP")/purchasing vehicles/receivables agencies) of Jersey's credibility in cross- trusts); border finance transactions; – credit default and total return swap – costs - establishment costs for Jersey SPVs structures/ credit-linked notes; are low and there are no ongoing regulatory – catastrophe bonds and insurance risk costs for Jersey SPVs; securitisation; – located offshore UK/Europe, Jersey is within – tier 1 capital structures; the GMT time zone and has good – investments made "off balance sheet"; communications to UK/Europe; – tax driven structured financings/debt – strong legal opinion - Jersey has a strong defeasance structures; and modern framework of statutory laws and a – restructuring of security arrangements creditor friendly legal system which provide ancillary to bank financing. flexibility and certainty in structuring transactions using Jersey SPVs and a Key benefits of using Jersey legislature committed to developing that Some of the key advantages to Jersey as the framework as necessary in response to jurisdiction in which to establish an SPV commercial/prudential needs; include: – Jersey has a network of sophisticated – Jersey is a world-class offshore finance regulatory laws and an efficient and enjoys political and economic services regulatory authority committed to stability; protecting the interests of Jersey and those – the convenient local infrastructure with transacting in Jersey whilst many established and experienced providing an environment in which business bedellcristin.com JERSEY BRIEFING 2

can develop to meet the demands of supply of goods and/or services in Jersey. investors and arrangers. Regulation of SPVs On payment of an annual fee of £200, an is non-intrusive. The Jersey Financial SPV can opt for "international services Services Commission (the "JFSC") continues entity" status in order to ring-fence itself to assist in initiatives to improve the use of from GST (with the consequence that if such Jersey SPVs for related status is secured, the SPV will not have to activities; pay or charge GST). – no foreign exchange controls; and – On request, the Comptroller of Income Tax – over the past twenty five years, Jersey has in Jersey will issue tax clearance letters on a been selected as the jurisdiction for premier transaction by transaction basis confirming arrangers to locate SPVs involved with some to interested parties the Jersey tax 0% of the most innovative transactions in the treatment of the proposed structure. A general rate of corporate capital markets. income tax was introduced Regulatory controls with effect from the 2009 Structural considerations Jersey has a modern, sophisticated network of year of assessment Taxation regulatory laws. There is a single regulatory replacing the previous A 0% general rate of corporate income tax authority, the JFSC, with an experienced team exempt regime. was introduced with effect from the 2009 dealing specifically with securitisations and year of assessment replacing the previous complex structured finance transactions. exempt company regime. Where particular Jersey regulatory consents From 1 January 2009, all companies resident are required in relation to the issuance of in Jersey (i.e. which are incorporated in Jersey securities, before establishing the SPV, the or are managed and controlled in Jersey or JFSC must approve the identity of the have a permanent establishment in Jersey) arranging institution and may seek to review and which are not a "financial services certain material documentation (generally, company" (i.e. licensed by the JFSC to carry only offering documentation, if any) in out investment business, trust company connection with the SPV and the proposed business, fund services business as an transaction. The initial proposals (usually with administrator or custodian in relation to an a term sheet prepared by the arranger) are unclassified or unregulated fund, deposit ordinarily put to the JFSC for an "in principle" taking business, or certain collective consent following which draft documentation functionaries) or a utility may be submitted for review. The JFSC has company (i.e. Jersey's water, gas, electricity, committed itself to responding to applications telephone and postal companies) will be within five working days at the latest (in charged to tax in Jersey at 0%. The practice, clearance is often obtained more applicability of the new 0% tax rate is no quickly). longer dependent upon the absence of Jersey resident beneficial owners. In considering the terms of the material documentation, the JFSC will be concerned Under the new tax regime, Jersey companies with the prudential aspects of the transaction will not be obliged to make any withholdings and Jersey's reputation as a premier finance on account of tax from any interest payments centre. These issues will be considered in the made by them to any person. context of the nature of the proposed investors. – Thus, there will typically be no adverse taxation consequences for the SPV as a In the case of a public offer of securities matter of Jersey law. It can issue, pay (broadly, an offer to more than fifty persons), interest on and redeem or exchange its the SPV will be issuing a "prospectus" within securities without any liability to taxation in the meaning contained in the Companies Jersey. (Jersey) Law 1991, as amended (the "1991 – There are no capital gains or inheritance Law"), and the company must therefore be taxes in Jersey. There are no stamp or incorporated as a for Jersey documentary taxes in Jersey on executing law purposes. The 1991 Law imposes stricter documents material to SPV structures or filing requirements for public companies than issuing, redeeming, exchanging or for private companies, the most important otherwise transferring securities issued by distinction being that in the case of public an SPV. Jersey does, however, have a new companies audited accounts must be sales tax regime which levies a 5% charge to prepared and filed annually, together with the Goods and Services Tax ("GST") on the auditors' report thereon. bedellcristin.com JERSEY BRIEFING 3

Jersey company law imposes certain the Jersey service provider appointed to requirements as to the content of a administer the SPV. The terms of the "Use of SPVs for issuing prospectus issued by a Jersey company. Those charitable trust will typically provide that the catastrophe bonds and/or requirements are likely to be met if a of trustee cannot dispose of the shares in the insurance/reinsurance the securities is to be sought on a recognised SPV or exercise its rights as so as securitisations may also exchange and the prospectus complies to cause a breach of, or interfere with, the have regulatory/ with the relevant regulations. A copy of the obligations of the SPV under the relevant capitalisation implications prospectus signed on behalf of all directors of transaction documents during the period of under the Insurance the company must be filed with the registrar the transaction. A charitable trust can be Business (Jersey) Law 1996. of companies (the "Registrar") in Jersey and established quickly and does not require These implications are his consent must be obtained before the consent of the regulatory authorities in outside the scope of this prospectus can be circulated in Jersey or Jersey. Transactions are typically structured to briefing." elsewhere. There are no statutory ensure a minimum level of profit retained in requirements as to content of offering the SPV (for corporate benefit reasons and to material (or filing) where the offer is by way of provide some return capable of being private placement limited to fewer than fifty distributed to the charitable trust in due persons. course). The separation of the trustee from trust assets is provided for by statute and, in A regulatory consent for issuance of the the event that the trustee of the charitable relevant securities will be required by the SPV trust becomes bankrupt, the assets of the pursuant to the Control of Borrowing (Jersey) trust will not be available to the creditors of Order 1958, as amended, (assuming that the the trustee in its insolvency (further number of persons in whose name the enhancing the "bankruptcy remoteness" of securities are or are to be registered (or, in the SPV). the case of bearer securities, are or are capable of being held) exceeds ten). Bankruptcy remoteness Non-petition, limited recourse and When satisfied with the submissions made in contractual subordination provisions are respect of the proposed transaction, the JFSC common features of transaction will grant a formal consent for the company to documentation entered into by SPVs. The raise up to a specified amount of money by principal purpose behind these provisions is to issuance of the relevant securities. That maintain the bankruptcy remote nature of the consent will usually impose certain standard SPV. The structuring of bankruptcy remote conditions enabling limited ongoing vehicles in Jersey is well established and regulatory monitoring. strong legal opinion can be obtained on the efficacy of such provisions. Use of SPVs for issuing catastrophe bonds and/or insurance/reinsurance securitisations Listing may also have regulatory/capitalisation The securities of a Jersey SPV may be listed on implications under the Insurance Business a recognised whether in (Jersey) Law 1996. These implications are bespoke transactions to suit outside the scope of this briefing. requirements, or in order to facilitate dealings in the securities Capitalisation and it is not uncommon for securities issued There is no minimum legal requirement for by Jersey SPVs to be listed on the major capitalisation of SPVs. Jersey has no "thin international stock exchanges. A listing may capitalisation" laws for such vehicles which also be made on the Channel Islands are typically structured with a £2 paid-up Securities Exchange Authority Limited (the capital. "CISEA"). The CISEA has gained international recognition from HM Revenue and Customs Ownership which has designated the CISEA as a It is often crucial that the SPV is not owned or recognised stock exchange under Section controlled by the arranger, promoter, 1005 of the Income Tax Act 2007, the effect of originator or any of the other participants of which means that debt securities listed on the the transaction. In these circumstances, a CISEA may qualify as quoted Eurobonds for UK Jersey law orphan general charitable trust tax purposes enabling interest on them to be structure established by a third party may be paid gross. employed to hold the entire issued share capital of the SPV. The trustee of the The implementation of the EU Prospectus charitable trust would typically be provided by Directive as of December 2003 has increased bedellcristin.com JERSEY BRIEFING 4

debt listings in the less prescriptive regime of as a jurisdiction that is applying international CISEA and other non-EU stock exchanges. standards of and anti- money laundering measures, and be able and Ratings willing to co-operate in the pursuit of all those Standard & Poor’s rating agency has given a who engage in financial crime. sovereign rating for Jersey which gives a AA+ rating ceiling for the securities issued by Company law regime Jersey SPVs. The Jersey company law regime permits flexibility in structuring of financing Validity of security transactions. A summary of some of the Pursuant to Article 13 of the Security Interests principal features which may be of interest in (Jersey) Law 2012 (the "2012 Law"), a the structuring of these transactions is set out "All companies incorporated company incorporated in Jersey is deemed to below: in Jersey must prepare and have capacity under Jersey law to grant – Ultra Vires - there are no statutory limits on maintain annual accounts. security governed by a foreign law over the capacity of a Jersey company to As a matter of Jersey property situate outside Jersey. A Jersey undertake business transactions. It is company law, only public company may grant security over Jersey common, however, for the memorandum companies are required to situate intangible assets in accordance with and of an SPV to limit have their accounts audited the 2012 Law. Strong legal opinion can be expressly the authority of the directors to and to file audited accounts obtained on effectiveness of security the specific purposes for which the SPV has with the Registrar. SPVs will accordingly. been established. generally only be formed as – Share Capital - a Jersey company may issue public companies where Accounts shares with a par value or with no par value, there is to be a public offer All companies incorporated in Jersey must and the shares may confer limited or of their securities." prepare and maintain annual accounts. As a unlimited liability. A Jersey company may matter of Jersey company law, only public also admit guarantor members. A companies are required to have their company's par value share capital may be accounts audited and to file audited accounts denominated in any currency and different with the Registrar. SPVs will generally only be classes of shares may be denominated in formed as public companies where there is to different currencies. Shares may be issued be a public offer of their securities. fully, partly or nil paid, or at a premium. There is no limit on the par value of any Annual statutory costs individual share. There is no limit on the An annual return fee of, currently, £150 is permissible premium. Fractional par value payable to the Registrar each year at the time shares may be issued provided they are fully of filing the annual return (the annual return paid and the total number of shares in issue is filed by every Jersey company made up to 1 is a whole number. January in each year and records, inter alia, – Register of Members - every Jersey the names of the of the company is required to maintain a register company at the time of filing). A fee of £25 is of members which must be open to public also payable by public companies at the time inspection at an address in the Island. of filing their annual audited reports. Details of the registered members must be There are no ongoing costs payable to the filed with the Registrar as at 1 January each regulatory authorities in Jersey following year. The names and details of holders of of the SPV. securities issued by a Jersey SPV will not, however, be a matter of public record. International standing - OECD/EU/FATF – Directors - every Jersey company must have Jersey is a member of the OECD but is not a at least one director. A corporate body may member state of the EU (being treated as one act as a director. It will typically be a member state together with the UK for the condition of the Jersey regulatory consents purposes of free trade but not for matters issued to the SPV that there be at least one such as fiscal harmonisation and financial Jersey resident director on the board of the services). Securities issued by a Jersey SPV are SPV. regarded as having been issued by an OECD – Secretary - every Jersey company must have domiciled issuer. a secretary. A corporate body may act as company secretary. The Jersey authorities believe that it is vital – Registered Office - every Jersey company for the future of Jersey as an international must have a registered office at an address finance centre to meet the threat posed by in Jersey. money laundering, be recognised worldwide bedellcristin.com JERSEY BRIEFING 5

It would be normal to appoint a locally based – converting illiquid assets into marketable corporate services provider to provide securities; " in ongoing administrative services to a Jersey – funding diversification - sourcing funds from relation to SPVs is coming SPV. The corporate services provider will the capital markets rather than depending under ever increasing typically contract to provide directors, on more traditional (and expensive) forms international scrutiny, secretary, registered office and ensure of bank funding; calling for ever higher compliance with the SPVs statutory and – separating financial assets from originator standards of due diligence regulatory obligations in Jersey. credit and other risk; and ongoing management – fee income to the originator in terms of services. Jersey is well Corporate governance providing a "service" in relation to the served by a significant Corporate governance in relation to SPVs is administration of the receivables in number of professional coming under ever increasing international question (i.e. the originator will often experienced service scrutiny, calling for ever higher standards of continue servicing the collection of the providers able to meet due diligence and ongoing management relevant receivables). Surplus profit (excess these demands through the services. Jersey is well served by a significant spread) can be extracted in a number of provision of sophisticated number of professional experienced service ways: the aim is generally to ensure a directors/management, providers able to meet these demands minimum level of profit retained in the SPV; accounting and related through the provision of sophisticated – ability to maintain existing relationships functions." directors/management, accounting and with their customer base through provision related functions. of a servicer function; and – branding - market perception of the Securitisation originator with securities which may be Overview rated higher than the rating of the Asset securitisation was first introduced in the originator itself. UK in the mid 1980s (with the first UK mortgage backed securitisations). Jersey has From the noteholder's point of view, the been at the forefront of providing an offshore principal benefits are likely to be: base for creation of SPVs in the context of – investment diversification; such transactions since that time. Asset – the noteholder will be investing in securities securitisation began in the US with the sale of issued by the SPV. The credit risk the bonds backed by residential mortgages (in the noteholder will be taking will be restricted case of the issues in the early to the performance of the underlying assets 1970s). The US (and now European) market (as enhanced by whatever credit has developed exponentially since that time enhancement features are put in place) (by asset class, geographical spread and rather than the originator itself; transaction volumes) and many different – the SPV may access the swap markets to financial asset types having a certain or permit income streams on the securities to predictable income flow have been be tailored to the investors' requirements; securitised, ranging from consumer loan/hire and purchase receivables through to credit card – rating agency scrutiny. receivables, trade receivables, insurance risks, aircraft lease receivables and even future Risks receivables. The complexity and The primary risks that securitisation structures innovativeness of such financings is need to address are credit risk (default on continually developing as are legal techniques underlying assets), liquidity risk (underlying (with traditional true sale transfers now giving assets not paying enough in time), interest way to synthetic securitisation and "whole of basis/currency risk (different basis of business" securitisation in certain sectors). calculation of interest and/or different Jersey has proved that it is well placed to currency between the underlying assets and provide a convenient finance centre in which the securities issued) and reinvestment risk to structure such transactions. (application of receipts on underlying assets pending application in paying on the securities Benefits issued). The directors of the SPV will address The principal benefits of securitisation the question of what safeguards (in the form transactions from the originator's point of of "credit enhancement" measures or view are likely to be: otherwise) are being put in place to enable – the removal of the financial assets (or risks) the Jersey company to meet its obligations from their balance sheet, and consequent under the terms and conditions of the management/control of capital securities in question. In addition, express adequacy/risk ratios; pass-through/limited recourse provisions will bedellcristin.com JERSEY BRIEFING 6

usually be included. The SPV itself will not usually be in a position to take any credit risk on the underlying assets.

Bedell Cristin is ranked by the UK Legal 500 and Chambers as a leading first division Jersey law firm in structured finance/securitisation. The partners in the group are also individually recognised as leading practitioners in their field by the principal legal directories.

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For further information, please contact:

Jersey

Alasdair Hunter Partner T +44 (0)1534 814270 E [email protected]

© 2009 Bedell Cristin The information contained in this briefing is intended to provide a brief update in relation to the topics covered. The information and opinions expressed in this briefing do not purport to be definitive or comprehensive and are not intended to provide legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained. No responsibility or liability is accepted in connection with the content of any bedellcristin.com websites to which you may gain access from this briefing.