Capital Market Transactions through Jersey SPVs

Capital Market Transactions through Jersey SPVs

In recent years, Jersey companies and trusts have frequently been established as special purpose vehicles (SPVs) for financial structuring transactions. This paper examines the types of transactions arranged through SPVs in Jersey, the benefits of using Jersey entities as SPVs and the regulation of SPVs in Jersey. It also explains how Volaw Trust Company and Voisin can assist in establishing and managing SPVs and it gives an indication of the probable costs.

EXAMPLES OF STRUCTURES AND OF TRANSACTIONS

SPVs are generally established either as subsidiaries of large corporations – often financial services groups – or as ‘off-balance sheet’ or ‘orphan’ companies. The issued equity capital of an orphaned company will commonly be owned by trustees of either a charitable trust or a non-charitable purpose trust. An orphaned company is thereby legally separated from its promoter by the trustees and therefore (depending upon the financial reporting requirements in its country of incorporation) the promoter may not have to report the assets or liabilities of the SPV. Most SPVs are established as limited liability companies but some SPVs are established as unit trusts or as limited partnerships.

SPVs can be used for a variety of capital market transactions, for example:

  • Repackaging of securities: a transaction under which the SPV buys one type of security (the ‘underlying security’) issued by another entity (which might itself be an SPV) and issues its own debt or equity securities (the ‘repackaged securities’) which allow the benefits of the underlying security to flow through to the holders of the repackaged securities;
  • Raising new capital: offshore SPVs are frequently used for raising new capital through the issue of certain types of preferred securities. Recently, some commercial banks have raised considerable amounts of Tier 1 capital using Jersey based SPVs;
  • Asset securitisation: asset securitisation programmes are commonly established through ‘off-balance sheet’ companies. Such programmes are intended to help the promoter to manage its balance sheet, by selling certain assets to an SPV, which finances the purchase through an issue of debt securities. Offshore SPVs will generally be used for securitising assets whose income and capital flows are not subject to withholding tax on payment to the SPV, thereby avoiding the complexities of taxation in an onshore SPV. Trade receivables are an example of assets falling in this category.
  • Debt defeasance: a transaction under which the promoter causes a future liability or debt to be removed from its balance sheet by conveying it to an SPV and amortises the costs over a period of years. Such transactions may be undertaken using both offshore companies and/or trusts.

Some SPVs are established as ‘multi-issue’ vehicles, involving the SPV in a number of separate security issues relating to distinct transactions. In such instances, it is usual to ‘ring fence’ the assets relating to each issue. In certain cases, the SPV will issue distinct classes of shares or, in the case of a trust, units.

In some instances, the securities issued by SPVs will be listed on a recognised stock exchange, so enabling a market to be made in those securities and allowing institutions that are not permitted to purchase unlisted securities to participate in the issue. The establishment in late 1998 of the Channel Islands Stock Exchange is likely to lead to a growing number of SPVs listing their securities on that exchange.