With spreads tightening and less money to be made, securitization professionals are increasingly looking to reduce costs. This environment has driven market players to look for structuring alternatives that help run programs as cheaply as possible. Offshore centers have responded to the call with clever structuring that provides some cost saving alternatives.
Maples and Calder said that among the securitization-related trends they're seeing more of is the use of segregated portfolio companies (SPCs) in asset-backed programs. Traditionally, these vehicles have been used for insurance purposes but have more recently been utilized for repackaging asset vehicles to cut down costs.
Graham Lockington at Maples and Calder said that he has seen the increased use of SPCs for structured funds in the last two years. The appeal is that issuers can segregate assets and liabilities into separate portfolios under the same vehicle. The segregation of assets and liabilities within portfolios does not create any new legal entity - the SPC remains a single legal entity and any segregated portfolio within an SPC does not constitute a legal entity separate from the SPC itself. Therefore, only one set of registration and annual fees applies to the SPC and it is only necessary to administer one corporate entity, rather than several.
Although it is one corporate entity, the SPC binds non-consensual third parties as well as consensual third parties under Cayman Islands law and effectively treats each pool of assets and liabilities of an SPC as a separate legal entity. This means that Cayman Islands corporate rules that would otherwise be applied on a per entity basis, are applied on a portfolio basis as in the case of calculating profits for dividend purposes.
"The rating agencies are happy with segregated portfolio companies because its not given credit as separate legal entities - issuers still need features that allow the structure to function as a conventional vehicle," said Lockington.
In the U.S., these vehicles have gained popularity because of the cost advantages they offer. On the tax side, these vehicles effectively attribute a separate legal personality for each asset and enables issuers under U.S. tax jurisdiction to argue that each one be treated as a separate cell. Lockington added that, at the moment, there has been greater use of SPCs in synthetic as well as static cash CDOs.
Paul Govier at Maples and Calder said that the incentive to use SPCs in Europe is similar - the tax driver is broadly the same across the pond. "If you run a platform with bespoke note tranches, which we are seeing more of in CFOs you can run various features via an SPC," Govier said.
Jersey has stepped in with its latest version of this tax efficient vehicle - the Jersey Protected Cell Company (PCC). Similar to the aforementioned Cayman Islands-based SPCs, PCC also offers tax savings for issuers but takes the concept of incorporated cells a step beyond the Cayman Islands-based vehicles. Jersey has sought to modernize the concept by tailoring it to the needs of the capital markets. It has introduced an enhanced protected cell company structure, free of some of the limitations that have hampered those companies in other jurisdictions. "PCC has a twist on SPCs - each cell has a separate legal personality, although still within the same structure," explained Robert Hickling, a partner at Mourant du Feu & Jeune.
A Jersey protected cell company is a single legal entity and its individual cells do not have a legal personality. Hickling explained that this segregation of assets will mean that a creditor of a cell company who deals with a particular cell within that entity will only have a right of recourse to the assets of that individual cell and - unless the constitutional documents provide otherwise - will have no right of recourse to the assets of any other cell within the cell company nor any of its other non-cellular' assets.
The Jersey PCC legislation came into force last Feb. 1. Shane Hollywood, a partner at Bedell Cristin Jersey Partnership, said that the firm formed the first PCC registered on the day the law came into force for MARS Capital Management, an investment fund structure in which different cells were being used to pursue different investment strategies.
"There has been significant interest in using these vehicles in the securitization and capital markets sector," Hollywood said. "To my knowledge, no PCC has yet been established in Jersey for such purposes, although we are in discussions (which are at various stages of advancement) with a number of clients who are looking to establish structures using such entities."
Hollywood said that Guernsey is now looking to implement similar legislation that allow for similar structures. "Jersey took some time to introduce its legislation as it was very careful to look at the perceived flaws in the entities offered by other jurisdictions and to address particular issues that have arisen by carefully framing the statutory regime in Jersey," he said.
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