Apparently, very frequently! It’s a complex but very important issue for the European economy. The broad category of ‘non-CIVs’ highlighted below generates huge amounts of investment in Europe as well as promoting savings, economic growth and capital markets efficiency. However, there is concern that such non-CIVs may be subjected to restrictive and inappropriate anti-tax abuse measures that would greatly dampen investment activity and hurt the European economy.
The OECD is currently mulling over the definition and tax treaty entitlement of non-CIVs and the outcome will be strategically very important for Europe. We cannot assume that the right result will be achieved, as the EU has already applied onerous capital charges on securitised assets, part of a series of measures that have all-but killed a sector that is widely seen to be essential to any properly-functioning economy.
The UCITS and AIFM directives address two substantial, fairly homogenous and well-defined categories of CIV with large bodies of regulation. However there is a third category of ‘unrecognised CIVs’ or non-CIVs that includes many types of securitisations, private equity, venture capital, real estate, private debt, pension fund, infrastructure and other investment vehicles that are also widely held, are highly varied in structure and asset classes, and are regulated by diverse frameworks that are tailored on a country-by-country basis.
Like UCITS and AIFs, these non-CIV structures are created for genuine commercial reasons, and have the critical pooled-investment characteristics of a CIV. Investment activity in these structures is dominated by institutional investors such as pension funds, private equity, insurance, sovereign funds, local authorities and charitable endowments.
It is important that these non-CIVs enjoy tax neutrality in the country in which they are established in order to avoid double taxation and maintain the same tax situation for investors as if they had invested directly in the underlying assets. Our view is that this should not be confused with ‘treaty shopping’ and any tax deferment issues should be dealt with by the investor’s home country.
It is difficult to defend the potential application of special anti-abuse measures - such as Limitation of Benefits (LOB) and the Principal Purpose Test (PPT) - to these non-CIVs when they are almost identical to AIF CIVs. Rather than focusing at the investor level, it is hoped that a well-defined list of eligible types of non-CIVs will be developed by the OECD, that can be self-certified as ‘deemed compliant CIVs’ and, like AIFs and UCITS, will not be subject to harsh anti-abuse measures. We suggest that in-country supervisory bodies be asked to provide rulings on the eligibility of particularly complex or non-standard structures. The results of the OECD’s work are awaited with a more than a little trepidation..
QSV Group will be participating in the Global ABS conference in Barcelona from 14 to 16 June 2016. This is the 20th anniversary of an event that brings together more than 4,000 investors, analysts, investment structuring specialists, lawyers, tax advisors, regulators and other professionals to discuss the state of the securitisation industry and to promote the role of a properly-functioning securitisation market in restoring economic growth and prosperity.
Kieran Desmond, Managing Director, QSV Group's Irish office will be attending. If you would like to meet up at the conference, please get in touch by email: email@example.com or by phone: +35316491988.
For more information about Global ABS 2016, please go to www.imn.org
Hope to see you there!
After years of discussion and debate, the European Commission put forward proposals to promote 'simple, transparent and standardised' (STS) securitisation in September 2015. The main objectives were:
On 10 March, the ECB responded to worryingly low European growth and the growing prospect of several months of negative European inflation by cutting its main refinancing rate to zero and expanding its quantitative easing program. These are new dramatic, unprecedented steps in the battle to urgently revive growth in Europe.
In sharp contrast, the European Parliament is not in a hurry to progress the STS legislation. Paul Tang, the Dutch member of the European Parliament’s socialist group, who is heading the review of the STS proposals, has set out a timetable that will see the Parliament voting on the STS proposal at least nine months from now, in December 2016. In view of the current state of the European economy and the paucity of funding available to SMEs, many will regard this long delay as irresponsible and unacceptable.
The institutions of the European Union need to act together effectively, decisively and with agility in times of crisis. If not, the likelihood that Europe will break apart will surely increase further.
European Collateralised Loan Obligations (CLOs) securitise European corporate senior secured loans, providing a valuable alternative source of funding when banks are trying to re-capitalise, or expand their lending activities. In Europe, this route is particularly important because 80% of total long-term lending to corporates is through banks, whereas bank lending represents only about 20% of total financial intermediation in the U.S.
European CLOs issued prior to the financial crisis (known as 1.0 CLOs) proved very robust during the downturn and experienced extremely low default rates - far lower than their US counterparts. This success is due in part to conservative structuring but also to active portfolio management. Post-crisis 2.0 CLOs in the US and Europe were self-modified by the market to give even greater comfort to investors, with the structural changes providing for less leverage, less complexity and greater transparency.
Given the de-leveraging of European bank balance sheets over recent years, the need for new CLO issuance has never been greater. European corporates urgently need capital to grow their businesses. And yet, EU regulators punished CLOs as well as the broader European securitisation market with relatively indiscriminate, harsh risk-retention measures and capital charges. And, as a final coup de grace, actively managed CLOs are currently excluded from the proposed EU categorisation of high-quality securitisations (known as Simple, Transparent and Standardised securitisations).
Where does this leave European corporates? The larger corporates have been able to issue bonds directly in the market. Private equity firms have increased their direct lending activity to larger corporates and the number of direct lending funds has also risen sharply. Yes, this means that European banks’ share of new lending to European corporates is decreasing. However, the total amount of funding available remains woefully inadequate and European SMEs are taking the brunt of the suffering.
In contrast, the US actively facilitated the re-building of the US CLO market with a more reflective and cautiously-paced approach to the introduction of new regulatory measures on CLOs. The Barr-Scott bill (titled ‘Expanding Proven Financing for American Employers Act’) will be shortly be sent to the full House of Representatives and the bill proposes reduced risk-retention thresholds for high-quality (qualifying) CLOs, i.e. 5% of the CLO equity rather than 5% of all issued notes.
The impressive rebound in US CLO issuance over the last five years has undeniably been a significant contributor to US corporate financing and the US economic recovery, a place where this source of financing receives widespread recognition and support. We all hope that Europe will follow suit.
Countries with banking systems weighed down by large NPL portfolios will be monitoring the introduction of an Italian State guarantee (Garanzia Cartolarizzazione Sofferenze - GACS) later this year. The government guarantee will only apply to eligible investment-grade senior notes in NPL securitisations, and it is expected that the fee to be paid for the government guarantee will be priced at arm's length and will therefore not be classified as State aid. The goal of the guarantee scheme is to maximise the value of the NPLs being securitised, especially when compared with the unattractive alternative of a fire sale of the distressed assets. However, it remains to be seen whether the pricing of the transferred NPLs will be attractive enough to generate sufficient investor appetite in the junior tranches. If this mechanism proves successful, it may prove to be an interesting model for other countries....
A number of countries have successfully used government guarantees to improve banks’ access to funding, and to support the proper functioning of their national securitisation markets - primarily in mortgage-backed securitisations. These include Canada, the USA and the Netherlands. In the Netherlands, the fear of having to sell a home while in negative equity is eased in many cases by the National Mortgage Guarantee, which covers the borrower’s residual debt, subject to a maximum of €245,00 (€225,000 from 1 July 2016).
Ireland is one of the early adopters of the OECD Common Reporting Standard (CRS) for the automatic exchange of tax information, and Irish implementing legislation is in effect since 1 January 2016. The first CRS annual reporting by financial institutions/Irish Section 110 companies, relates to the 2016 calendar year and the returns will need to be filed by end-June 2017. I am sharing here some personal thoughts on the impact of CRS on Irish Section 110 SPVs from a corporate services provider perspective; please consult with a tax advisor for formal guidance.
The CRS framework is broadly similar to the recently implemented reporting requirements of the US Foreign Account Tax Compliance Act (FATCA), with some notable differences:
QSV Group will be providing SPV management services for Irish-domiciled securitisations, aviation leasing structures and other Section 110 entities from the beginning of March 2016.
Kieran Desmond, QSV Group's managing director said:
"We are delighted to announce that QSV Group will be launching SPV management services from its new Dublin offices. QSV Group will bring a unique blend of quality, service and value to SPV management in the Irish market. A team of experienced structured finance accountants and compliance professionals will deliver a highly-competitive, reliable and responsive service in the heart of Dublin's International Financial Services Centre (IFSC). We look forward to supporting Ireland's growing success as the location of choice for international debt capital markets structures. "
Ireland is the location of choice for domiciling international debt capital markets structures, winning a larger share of new SPVs relative to its main competitors – The Netherlands and Luxembourg.
Why is this? All three countries are attractive in terms of tax neutrality and also provide access to a wide array of double taxation treaties to ensure that the returns to investors are paid free from withholding tax, to the extent possible. Let's skip lightly over these complexities!
The additional factors that tend to differentiate Ireland from its two main rivals are as follows:
Legal infrastructure: Ireland is a common law jurisdiction with a robust legislative infrastructure for securitisation transactions (Section 110, TCA). This degree of certainty provides increased clarity and assurance for investors.
Cost: Ireland tends to be a less costly location than its main rivals for setting up and maintaining securitisation transactions. SPV management fees and auditor costs are typically lower in Ireland than in Luxembourg or The Netherlands. SPV capitalisation in Ireland can be as little as one euro and corporate income tax is negligible because profits can be fully swept to investors. In comparison, Luxembourg securitisation companies may be subject to significant minimum capital requirements and minimum corporate income tax.
Efficiency: Establishing an Irish SPV is a quick process and Irish-based legal and tax advisors are highly-regarded internationally for their expertise, cost-competitiveness and responsiveness. In addition, the Irish Stock Exchange is a European leader in terms of quality and efficiency in listing debt securities.
Linguistic and cultural affinity with the US and UK: These subtle factors tend to favour Ireland over Luxembourg and the Netherlands in some circumstances.
While these are just a few of the factors that are helping Ireland to win securitisation structures, they do make a significant contribution to Ireland's attractiveness. Should you need additional information, please do not hesitate to get in touch with the Dublin team at QSV Group Limited - specialists in SPV management services.
Managing Director, QSV Group Limited