Two articles in the November 1996 edition of International Financial Law Review featured structures for securitization and repackaging of assets which are increasingly being located in and partly governed by the laws of Jersey. The articles entitled 'Emerging markets cash flow securitizations take off' and 'Asset repackaging wins further followers' dealt with a wide range of assets which can be repackaged or securitized, often through an offshore SPV, with the funding contributed by a medium-term note or a short-term commercial paper issue.
Jersey-based SPVs and receivables trusts have been used for many such transactions over the last three or four years. The article by Christopher Lewis of Simmons & Simmons described a structure and documentation which will be familiar to many lawyers practising in this field and which are commonly found in Jersey schemes. The types of assets to which he referred were nearly all financial assets. However, the point was made that any asset which generates a predictable cash-flow or a fixed future value capable of being swapped into a cash-flow is suitable for repackaging or securitizing through an SPV.
Probably a majority of the underlying assets of recent Jersey securitization transactions have involved cash-flow receivables. These are by no means limited to receivables due to an originator in an emerging market. While securitization has historically been strong in the US and, since the mid 1980s, in the UK, other EU countries such as France and Italy are becoming increasingly involved in this market. Examples of receivables securitized through a Jersey SPV include:
- credit card receivables;
- aircraft and motor lease finance receivables; and
- receivables due from customers of a wide range of industrial and commercial companies including computer companies, electricity supply companies and travel companies.
The sale of the receivables often takes place through a receivables trust and the originator may continue to hold legal title to the asset or receivable concerned (and remain responsible for day-to-day collection of the receivables) while equitable title to the receivable passes to the receivables purchaser who is also the trustee of the interests held in the receivables under the terms of an English law trust. The beneficiaries of this trust will typically include the SPV/issuer, the originator and sometimes the note or commercial paper holders. Apart from this refinement the basic structure and the documents required are very similar to these listed in Lewis's article.
Some of the reasons for using Jersey as a base for the SPV issuer and/or the trustee of the receivables trust include:
- A jurisdiction whose principal commercial laws are reasonably familiar to UK lawyers and where the courts will tend to recognize and uphold a choice of English law as the law governing the material documents. Comprehensive legal opinions can also be obtained on all aspects of the structure.
- A wide range of experienced trust and company administrators who can handle all aspects of the management and administration of SPVs. Points worth highlighting in this connection are: the need for independent directors of the SPV to ensure the SPV is managed and controlled offshore to reduce any withholding tax problems on the cash-flow (and support the off-balance sheet treatment when the SPV is structured as an orphaned entity); the possibility of arranging for the monitoring of receivables collections and payments by and to issuers to be undertaken in Jersey rather than in, say, London by the arranging bank; if the receivables trustee is a Jersey company (often itself a special purpose trust company) then it may make good sense to delegate this part of its duties and functions to a bank or firm of accountants in Jersey. Several firms provide such a function for many securitization structures.
- The likelihood that ring-fencing of underlying assets in multiple issue (multi-conduct) programmes will be recognized and upheld by the Jersey courts. This may involve separate security documentation including appropriate limited recourse provision and/or, where appropriate, having a separate receivables trust for the different pools of receivables being acquired and being used for the notes or paper issued by the SPV.
- The likelihood that contractual subordination mechanisms on which the payment applications made by such SPVs are often based will be upheld by Jersey courts.
- Where the arranging bank and the originator are European, as is increasingly the case, a convenient time zone location.
- The special Jersey tax treatment which is usually accorded to such SPVs/trusts generally means that these vehicles can be established in Jersey without any Jersey taxation impact.
- The availability of two-tier structures of the type described in the article by Douglas Doetsch whereby European receivables may be repackaged through a Jersey issuer which issues a note to a single holder, namely a US SPV commercial paper issuer or a US Master Trust. such a two-tier structure allows European originators easier access to the US domestic commercial paper market and may avoid US tax and bankruptcy issues as described in the article by Doetsch.
- The ability to use a charitable or purpose trust to own the shares in the SPV or the receivables trustee to assist in off-balance sheet accounting treatments.