Structured finance: Sanne

Throughout the last twelve months, we have seen continued growth in the number of asset managers, investment funds and investment banks establishing special purpose vehicles (SPVs) on a standalone basis as well as within more elaborate fund structures in key jurisdictions, including Ireland, Luxembourg, the Channel Islands and the UK. The use of SPVs allows these market participants to retain two key elements in achieving their investment strategies; i) tax neutrality of the relevant structure and ii) in many cases, bankruptcy remoteness to the arranging party.

Focusing on the standalone SPVs, from a structured finance point of view, these entities are not only utilised to purchase assets but they are also able to issue notes in order to raise finance. One ongoing trend is the use of either Section 110 companies in Ireland (110 companies) or securitisation vehicles in Luxembourg to provide a viable alternative to traditional fund structures. In many instances, these entities can achieve the same result as funds but with a reduced AIFMD (alternative investment fund managers directive) regulatory burden. This cuts down on the costs of maintaining the vehicles and creates efficiencies, for instance, around the set up and management of the structures.

Given the wide ranging possibilities in terms of structures and jurisdictions for the purposes of this article, we focus our attention on Irish section 110 companies.

WHAT ARE SECTION 110 COMPANIES?

In Ireland, section 110 of the Taxes Consolidation Act, 1997 provides a clear and transparent tax regime for structured finance transactions once certain legislative conditions are met. We will expand on this further on but of particular interest is the breadth of assets that can utilise the section 110 regime. Our experience shows how flexible the structure is, having seen 110 companies used for real estate, aviation assets, leveraged loans, distressed debt, peer-to-peer lending programmes, as well as more traditional asset backed securitisations such as auto loan ABS and property MBS.

In addition, 110 companies may be used within a more complex fund structure and in conjunction with other jurisdictions to maximise access to investors from different countries as well as ensure the most efficient tax planning. 
 
KEY CRITERIA 
 
In order to qualify for the relevant tax and legislative advantages, the 110 company must be tax resident in Ireland and carry on the business of holding or managing what are known as qualifying assets.
 
The definition of qualifying assets includes a wide range of financial and other assets such as shares, bonds, other securities derivatives, loans, deposits and insurance contracts. The 2011 Finance Act extended this to include plant and machinery (including aircraft and ships), leased assets and commodities.
 
The value of these qualifying assets must be a minimum of €10 million on day one. Apart from activities ancillary to the holding or managing of the qualifying assets, the company should carry out no other activities. 
 
THE BENEFITS
 
The essence of the 110 company is that it is flexible and operates efficiently, whilst being relatively straight forward to set up. Over the life of the structure, the 110 companies often incur lower ongoing running costs compared to different solutions in other jurisdictions. Since an orphan structure is often used, the 110 structure enables the arranging party to ensure the assets held by the entity are ring-fenced as the company is bankruptcy remote from the arranger.
 
From an AIFMD point of view, establishing a section 110 company and registering it as a financial vehicle corporation for European Central Bank statistical reporting purposes provides clarity that the entity will not be subject to AIFMD regulation.
 
Section 110 companies offer flexibility around the type of security they can issue. For example, the company can issue quoted Eurobonds, which offer liquidity and are subject to an exemption from withholding tax. We have also seen issuance by way of profit participating notes, loans, floating rate notes and derivatives (total return swaps, interest rate and FX swaps).
 
With effective structuring a section 110 company should be tax neutral due to the ability to distribute all money left in the vehicle to the investors. The entity can further take advantage of the exemptions from withholding tax on interest and dividends payments thanks to Ireland’s extensive double taxation treaty arrangements. There are currently 72 signed agreements in place, 70 of which are active.
 
Other direct cost savings arise owing to the following:
– The cost of funding and related expenditure is tax deductible;
– There is an exemption available from stamp duty arising from the issue and transfer of notes;
– VAT exemptions are available for most activities and in many cases, even if there is a VAT expense, it may be recovered. 

IRISH ASPECT
Taking the regulatory and legal environment into consideration, Ireland is a highly regarded onshore location and a member of both the EU and OECD. As highlighted, the country currently has 72 double tax treaties in place offering withholding tax exemptions across key investing jurisdictions. Ireland offers the opportunity to a European passport, i.e. securities issued by an Irish SPV may, once the prospectus has been approved by the Irish Central Bank, be accepted throughout the EU for public offers and/or admission to trading on regulated markets under the EU prospectus directive. From a legal point of view, the country is a common law jurisdiction since the Irish legal system is derived from the English legal system.
 
Tax advantages have been highlighted within the benefits of using a section 110 company, however it should also be noted that there is a clear and transparent tax regime under section 110 of the Taxes Consolidation Act, 1997. 
 
Finally, Ireland contains a large pool of quality, experienced professionals such as corporate administrators, lawyers, auditors, tax advisors and other service providers with proven expertise and experience in legal, tax and accounting matters. Culturally, this pool of people are aligned with many asset managers and banks in the USA and UK given that Ireland is English speaking and in a convenient time zone that bridges the USA and Asia.

Sanne Group plc is a specialist global provider of outsourced corporate and fund administration, reporting and fiduciary services. With over €100 billion of assets under administration, our private debt & capital markets division provides fund and corporate administration services to many of Europe's major banks, asset managers and other global financial institutions.

The division's capital markets offering provides corporate services to a range of SPVs across a range of jurisdictions, with asset class experience covering a complete range of capital markets transaction structures including European medium-term note programmes, collateral loan obligations, asset-backed securities and repackaging transactions. The division's private debt fund team covers the main private debt fund asset classes including real estate finance, leveraged loans, non-performing loans, structured finance and infrastructure debt.

This article is sponsored by Sanne. It first appeared in the April 2016 issue of Private Debt Investor.