The popularity of Ireland as a location for the establishment of special purpose vehicles (SPVs) for securitization, repackaging, collateralized debt obligations (CDOs), warehousing and other structured finance transactions has grown hugely in recent years. Since Ireland first emerged in the global securitization and structured financing market, it has developed a highly regarded regulatory regime, and has consistently introduced and refined its legislation dealing with structured finance transactions.

As the global market in structured finance has become more sophisticated, Ireland as a jurisdiction has constantly responded, in terms of its legal and tax framework, in order to continue to position itself as the location of choice for issuers of debt securities. At the end of 2006, another record breaking year for the structured finance industry in Ireland, some changes were made to Irish law which will make it easier and more efficient than ever to organize securitization transactions through Ireland. This article summarises those changes and also examines some recent trends in securitization transactions in Ireland.

The 2006 Act

The Investment Funds, Companies and Miscellaneous Provisions Act 2006 was passed into Irish law on December 24 2006. As the rather snappy title would suggest, the 2006 Act covers a miscellany of areas under Irish law. Outlined below are the areas most relevant to structured finance transactions.

Issuers as private companies

Perhaps the most significant development from a structured financing perspective is that the 2006 Act enables Irish SPVs involved in the issuing of debt securities to be set up as private companies.

This has the following two benefits. First, there is an upfront transaction cost saving of €40,000 ($52,500). Prior to the passing of the 2006 Act an arranger structuring a CDO, ABS or other securitization transaction in Ireland had an upfront cost of approximately €40,000 in order to satisfy a minimum capitalization requirement of public companies – there is no such requirement for private companies

Secondly, there is a time saving of almost two weeks. It takes just short of three weeks from the date of filing incorporation papers to the date of issuance of a certificate of commencement to trade for public companies. Private companies can be up and running in five days.

The changes to Irish law enabling the use of private companies as SPVs for structured finance transactions are quite technical and involve the interpretation of several provisions of pre-existing company law and prospectus law.

Before the 2006 Act, section 33 of the Companies Act 1963 stipulated that a private company must, under its articles of association: (i) restrict the right to transfer its shares, (ii) limit its members to 50 and (iii) prohibit any invitation to the public to subscribe for any of its shares or debentures. Debenture includes debt securities such as bonds or notes issued by securitization SPVs. Before the implementation of the Prospectus Directive (PD) Section 33 functioned well and did not prevent private companies from engaging in traditional private placements.

The law which transposed the PD into Irish law requires the publication of a prospectus by any company which (i) offers securities to the public or (ii) seeks to list its securities on a regulated market such as the official list of the Irish Stock Exchange. The meaning of "offer of securities to the public" is extremely broadly defined. It means:

"a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities or apply to purchase or subscribe for those securities"

This potentially includes all communications by issuers of securities in any form and by any means to any person so as to enable that person to decide whether to purchase the securities.

The combination of this very broad definition and the pre-existing provisions under Section 33 (particularly that which prohibited any invitation to the public to subscribe to any of its debentures) meant that many Irish SPVs engaged in what was traditionally regarded as private placements were incorporated as public companies due to lack of clarity.

The 2006 Act makes several changes to Section 33. The most significant change for Irish SPVs is that the offering of the type of securities that such vehicles generally issue will not be regarded as falling within the prohibited activities of private companies. A list of various types of offerings which may be made by private companies is contained in the table below.

The most common type of securities issued by an Irish SPV are quoted Eurobonds with a minimum denomination of at least €50,000 (securities which are listed on a stock exchange which is recognized by the Irish tax authorities). The 2006 Act provides specifically for private companies to be permitted to issue such securities. The net effect of this is that the vast majority of CDOs and ABS transactions can now be implemented using an Irish private company.

Structuring issues

The fact that it is likely that many securitization SPVs will now be private companies will require some planning when the transaction is being structured. An individual cannot be a director of more than 25 private companies. While there are exceptions to this rule there may be scope to increase this cap in future legislation. For the moment it will be important to check that a director has not exceeded the 25 limit before appointing them to the board of an SPV.

Another point to consider at the outset is how the SPV will fund its winding up expenses. The funding used to capitalize public companies was often set aside to defray against winding up costs of the SPV. Since there will be effectively no capitalization funds for SPVs established as private companies, corporate services providers and directors will be concerned that liquidation costs are adequately provided for in the transaction documents.

Business as usual

It goes without saying that private companies are, for purposes of structured finance transactions, regulated in the same manner as public companies. In addition, private companies have exactly the same benefits as public companies as regards access to taxation treaty benefits. In other words there are no special requirements or obstacles for private companies and, apart from the benefits that the 2006 Act brings, it is business as usual.

Welcome back monolines

Monoline insurers provide guarantees to issuers, often in the form of credit wraps, that enhance the credit of the issuer. These insurance companies regularly provide credit enhancement for bonds issued by SPVs, such as mortgage backed securities and collateralized debt obligations.

The legislation implementing the PD in Ireland made guarantors responsible in certain circumstances for the contents of a prospectus. An unintended consequence of this was that monoline insurers feared that they would be held liable for any untrue statements in, or omissions from, a prospectus. As a result many wrapped transactions (transactions in which the SPVs credit rating is enhanced by a monoline insurance policy), which would have been structured through Ireland went elsewhere.

Following the enactment of the 2006 Act monoline insurers may limit their responsibility to the parts of a prospectus which relate specifically to the monoline insurer itself or the insurance policy provided by such insurer.

Expert reports

The 2006 Act has also clarified some uncertainty regarding the requirement to obtain the consent of experts as to the inclusion in a prospectus of reports prepared by such experts. For example, it should now no longer be necessary under Irish law to obtain the consent of an auditor as to the inclusion of historical financial information in a prospectus where such information was not prepared for the purpose of inclusion in the prospectus.

More US deals

One notable feature of structured financing in Ireland is the increasing number of SPVs being incorporated to act as a securitization vehicle for US originated transactions. Traditionally US deals, such as CDOs, were almost exclusively structured through the Cayman Islands.

There are several factors motivating the usage of Irish SPVs. First there is the general trend of moving investment vehicles onshore. Secondly, there is an increased appetite for marketing US originated deals to European investors and, indeed, an increased interest from European based investors in such US originated transactions. A European SPV is seen as more appropriate for these transactions and, as such, Irish SPVs are a natural choice.

A critical aspect of any structured finance transaction is the taxation analysis. In addition to the above factors, the Irish taxation analysis of SPVs appeals to US originators and arrangers and has led to more and more US deals coming to Ireland. Irish tax law contains special provisions for what it refers to as "qualifying SPVs" (and what are referred to locally as 'Section 110 companies'). In short, where an SPV qualifies under these special provisions, it will be effectively a tax neutral vehicle. This means that all payments under the securities and fees to service providers are deductible so that the annual taxation payable by the SPV is usually very small.

In addition, there are a variety of ways to ensure that withholding tax does not arise on interest payments (for example, through the usage of quoted Eurobonds or via Ireland's large and growing tax treaty network). One relatively recent change to Irish tax law which prompted increased activity from the US, was the extension in 2006 of the quoted Eurobond exemption from withholding tax to non-bearer securities. Until 2006, Irish issuers had to put in place cumbersome depository structures in order to sell securities to investors based in the US. This is no longer necessary.

An alternative to quoted bonds

Another trend worth mentioning is the increased usage of wholesale debt instruments (also called the two-year commercial paper) as an alternative to quoted Eurobonds. These are particularly useful for single issuance vehicles where a listing of the securities is not required by investors. The two-year commercial paper has been a feature of Irish tax law since 2003 but it is only in the last 12 to 18 months that SPVs have begun to issue such securities on a regular basis.

In order to make use of the withholding tax exemption on the two-year commercial paper the note issued by the SPV must:

• contain an obligation to pay a specified amount;

• carry a right to interest or be issued at a discount or at a premium;

• mature within two years of the date of issuance;

• have a minimum denomination of not less than €500,000 (in the case of an instrument denominated in euros), $500,000 (in the case of an instrument denominated in dollars) or an amount equivalent to €500,000 (in the case of an instrument denominated otherwise than in euros or dollars); and

• be held in a recognised clearing system (such as Euroclear, Clearstream or DTC – there is no need for it to be held in any more than one clearing system).

If the paying agent of the note is located outside of Ireland and the above requirements are fulfilled, no withholding tax will arise. If the paying agent is located in Ireland, certain additional requirements must be complied with by the paying agent in order to attain the exemption from withholding tax.

As regards the requirement to hold the note in a clearing system, this will operate in a similar manner to the book entry clearance and settlement of quoted Eurobonds. The note will be issued with an ISIN and will be issued in the name of a nominee and deposited with a common depository for the clearing systems. The clearing systems are used to dealing with quoted Eurobonds and it has taken some time to streamline the process of clearing these relatively new notes. However, as more and more SPVs issue these notes and the clearing systems become familiar with the issues involved, the potential of the two-year commercial paper as a cheaper alternative to quoted Eurobonds may be realized in the months and years ahead.

By Garry Ferguson and Christian Donagh, Matheson Ormsby Prentice