Securitization: Establishing a Special Purpose Vehicle in Guernsey

April 2006

Gsy00009SturFin/9549429

Briefing Securitisation - Establishing a Special Purpose Vehicle in Guernsey C

lient briefing

Preface This memorandum has been prepared for the assistance of clients considering incorporating a company under the laws of Guernsey. It is intended to provide only a summary of the main legal requirements and general principles applicable to the establishment of a company in Guernsey and it is not intended to be comprehensive in its scope. It is recommended that a client seeks legal advice on any proposed transaction prior to taking steps to implement it. A series of briefings on other aspects of Guernsey law have been produced by Ogier and are available on request. This memorandum has been prepared on the basis of the law and practice as at 1 March 2006. Constitutional position of Guernsey Guernsey is a self-governing dependency of the British Crown and does not form part of the United Kingdom. By constitutional convention established over some 900 years the Island has complete autonomy in all matters of internal government, including taxation. The legal system is derived in part from the customary laws of Normandy but has been strongly influenced by English law in company and commercial matters and the Judicial Committee of the Privy Council remains the Island’s ultimate court of appeal. The Island’s special constitutional position has been recognised by the European Union in a protocol (No.3) attached to the United Kingdom’s Act of Accession to the EU. The protocol provides that the Treaty of Rome shall apply to Guernsey only to the extent necessary in relation to the arrangements for the free movement of goods. Accordingly, European Union directives on fiscal

harmonisation, financial services and company law do not have effect in Guernsey. The Island has as a result of its constitutional position developed into a leading international finance centre. Introduction This memorandum is intended to provide those involved in the establishment of a vehicle or programme for the issue by an off-balance sheet Guernsey special purpose corporate vehicle (‘SPV’) of securities (a ‘Securities Programme’) with an outline of the structural and regulatory issues which will need to be addressed, together with an indication of some of the basic costs. The memorandum is prepared on the assumption that the securities (whether they be notes, bonds or other instruments) will be issued by the SPV in one or more tranches to a number of prospective investors by means of a prospectus or other offering document and the proceeds of issue will be invested in the purchase of assets which will be capable of meeting the coupon and repayment obligations on the securities. Although reference is made in this memorandum to a “Securities Programme” it is equally applicable to structures which involve a single issue of securities. We have not addressed such issues as security over the assets and protection from creditors. Structure In order for the SPV to be off-balance sheet, the shares in the SPV will normally be held by a charitable trust (the ‘Trust’) established for the purpose. The trust deed will, inter alia, set out the purposes of the Trust and include obligations on the trustees to establish and maintain the SPV,

Briefing Securitisation - Establishing a Special Purpose Vehicle in Guernsey

GUERNSEY-9549429-1

Client briefing

and to procure that the SPV acts in accordance with the Securities Programme documentation. The Trust will require funding in order to be able to subscribe for shares in the SPV and to pay the legal costs of establishing the Trust. It may also be necessary to fund the incorporation costs of the SPV through the Trust although it is possible for these costs to be funded by the SPV itself on establishment of the Securities Programme. This funding will normally be provided to the Trust by the promoter of the Securities Programme, or if there is a sensitivity regarding this, it may be possible to arrange for funding to be provided via an existing Ogier & Le Masurier controlled charitable trust which will act as the settlor of the Trust. Shares in the SPV may be denominated in any unit of currency and a minimum of two shares must be issued. We would normally recommend that the Securities Programme provides for the generation and retention of sufficient funds in the SPV to enable an annual dividend to be paid to the Trust for distribution to charity. The purpose of this is to support the charitable nature of the Trust and to help defeat any suggestion by the revenue authorities of any jurisdiction that the Trust is not independent of the promoter of the Securities Programme or is otherwise in any way a sham. We would normally suggest that an annual dividend of £500 should be made, although this can vary on a case by case basis. The Trust will also require sufficient funding to pay annual trustee fees and this can either be paid out of dividend income from the SPV or initial settled funds. If this method of funding the Trust is not acceptable, it may be possible to deal with this in other ways. With effect from 6 February 2001, it has been possible under Guernsey law for an SPV to be a ‘protected cell company’. In essence, a protected cell company is a single legal entity which consists of a “core” and one or more separate “cells”. The assets attributable to a particular cell benefit from statutory segregation and protection from not only the general liabilities of the protected cell company (i.e. the liabilities of the core), but also from the liabilities attributable to any other cell. A protected cell company which is used as an SPV will be subject to all the provisions of the protected cell company legislation and, importantly, will provide all of the same benefits of protected cell company status. Accordingly, assets in one particular cell of a

protected cell company are not subject to the claims of creditors of any other cell of the protected cell company. Therefore, in the securitisation context a protected cell company provides a statutory means of ring-fencing separate series or classes of assets and liabilities within a single legal entity thereby offering the possibility of simplifying the structure of many conduit programmes and reducing the risk of “contagion” or “cross class leakage”. We have a separate memorandum which focuses specifically on the formation, operation and legal issues relevant to protected cell companies Operation of the SPV The SPV will normally require a minimum of two directors and, for tax purposes, it will usually be necessary for a majority of the directors to be resident in Guernsey. Corporate directors may be used in a Guernsey SPV. If there is particular sensitivity regarding the SPV being treated as UK tax resident, its Articles of Association can include provisions designed to reduce to a minimum the possibility of the SPV being treated as resident in the UK. The SPV will also require administration services to be provided to it to enable it to fulfil its obligations and exercise its rights under the Securities Programme documentation and monitor the performance of the Securities Programme on its behalf. There are a number of firms in Guernsey which are experienced in providing such services and we are able to arrange appropriate introductions. The administrator would generally be responsible for providing secretarial services to the SPV, including filing statutory returns, the holding of annual general meetings and preparing appropriate board minutes. If a SPV fulfils certain criteria, the Guernsey Financial Services Commission (the ‘Commission’) may agree to it having un-audited status. Tax Status of the SPV A SPV will usually apply for ‘Exempt Company’ status upon incorporation. An Exempt Company is treated as being non-resident in Guernsey for taxation purposes. It is not subject to income tax (except on profits of any trade carried on in Guernsey) and is liable only to pay an annual Exempt Company fee of £600 (or in the first year


GUERNSEY-9549429-1

Client briefing

a monthly fraction of £600 from the date of incorporation). It is not possible to prepay the Exempt Company fee for future years and so the SPV will need to be able to fund this annual fee. Exempt Company status is applied for in Guernsey on a year by year basis. Interest and dividends are paid gross by the SPV without need for deduction of tax. There is no capital gains or analogous tax in Guernsey. Structural Issues Limited Recourse: In order to avoid the occurrence of a technical insolvency the liabilities of the SPV will generally be expressed to be limited in recourse to designated assets. Non-consolidation: Accounting advice will generally be required to confirm that the SPV will not be consolidated onto the balance sheet of the arranger or originator. Regulatory Regime (a) COBO The issue of securities by the SPV will require the prior consent of the Commission under the Control of Borrowing (Bailiwick of Guernsey) Ordinances, 1959 to 1989 (‘COBO’). Similarly, the circulation of a prospectus or other offering document in relation to those securities will require prior consent of the Commission. COBO provides for the regulation in Guernsey of the raising of money, the issue of securities and the circulation of offers for the subscription, sale or exchange of securities. The consent, if granted, pursuant to COBO, will specify the maximum number and value of shares or securities which may be issued, although generally it is only a formality to increase such limits subsequently. The consent will also be conditional on no changes being made to the documents or principal parties without further approval. Annual accounts will usually be required to be filed with the Commission. There are few other reporting requirements. (b) POI Law A ‘licensee’ providing services to the SPV from within Guernsey will require a permit under the

Protection of Investors (Bailiwick of Guernsey) Law, 1987 (‘POI Law’). A “licensee” for these purposes will include an administrator, manager, custodian, trustee and registrar. Once licensed to carry out a particular activity, that person may provide such services to any SPV without further reference to the Commission. Licensees are subject to certain rules that are available on request. Costs It is difficult to generalise on the costs of establishing a Securities Programme as to a large extent this will depend upon the complexity of the Securities Programme, the volume of documentation and the nature of the assets to be acquired/securitised. However, we have set out below the statutory costs together with an indication of the other costs (other than for administration) which are likely to be involved. We can arrange for quotations for administration costs to be obtained from prospective administrators in relation to the establishment and administration of a Securities Programme. Statutory and Establishment Costs Constituting the Trust £1,000

Formation of Guernsey company to act as SPV. Includes checking on availability of names and reservation; preparing standard Memorandum and Articles of Association; preparing application for incorporation as a limited liability company; filing documents with the Registrar of Companies (and payment of minimum statutory fees); obtaining Certificate of Incorporation and Control of Borrowing Consent; supply of corporate seal and company books.

£1,150

Take-on fee payable to administrator

TBA

Annual Administration Costs Annual trustee fees for administration of the Trust

TBA


GUERNSEY-9549429-1

Client briefing

Suggested minimum annual distribution for charitable purposes

£500

Annual administration fee and directors’ fees

TBA

Annual Statutory Fees Annual Return fee £100

Annual Tax Exempt Company fee £600

It is essential that adequate provision is made in the structure for the costs of the SPV and the Trust to be made during the lifetime of each. Provision should also be made for the costs of winding up the SPV at the end of its life. Legal Fees The legal fees will depend on the complexity of the Securities Programme and the extent of the documentary review and drafting required. They will also vary depending on the level of liaison and negotiation with the Commission that is required. We would be pleased to provide estimates of legal fees for a particular Securities Programme, on receipt of basic information. Steps to be Taken Once the decision has been made to establish a Guernsey vehicle, the following steps need to be taken:

Action Responsibility

1. Select a trustee (and agree terms of appointment)

P/T

2. Select an administrator (and agree terms of appointment)

P/A

3. Select directors and auditors (if any) (and agree terms of appointment)

P/A/O

4. Provide Securities Programme documentation to Ogier

L

5. Submit Securities Programme documentation and licence applications (if any) to the Commission to obtain Commission’s views

O

6. Agree tax status of SPV and name of SPV

O/P/L

7. Agree form of trust deed for the Trust

O/L

8. Agree form of Memorandum and Articles of SPV and provide information necessary for incorporation of SPV

O/L

9. Agree form of administration agreement for administrator

O/A/L/P

10. Agree amount of initial settled funds for the Trust and provide funds to trustee

P/O/T

11. Hold board meeting of trustee and execute trust deed

T

12. Incorporate SPV

O

13. Draft board minutes of SPV approving Securities Programme documentation

O/L

14. Obtain consent and licences from the Commission

O

15. Hold board meetings of SPV to establish the SPV and approve Securities Programme documentation

O


GUERNSEY-9549429-1

Client briefing

16. Execute Securities Programme documentation and issue securities

O/L/P

17. File final documentation with the Commission

O

Key O

Ogier

P

Promoter/Agent

A

Administrator

T

Trustee

L

Lawyers

Timing It is possible to establish a Securities Programme within a very short time-scale. In particular, regulatory approvals from the Commission should be obtainable within two weeks and, if required, it is possible to shorten that period. A particular matter which needs to be addressed early on is the selection and appointment of an administrator, particularly if the role of the administrator is more than simply the provision of basic secretarial/administration services. General The above is intended to provide an outline of the various issues to be addressed in relation to the establishment of a Securities Programme through a Guernsey SPV together with a summary of the steps to be followed. However, each Securities Programme will necessarily be different from the next and it is therefore essential to seek advice at an early stage as to how the above issues will apply to the particular programme. Services Offered by Ogier Ogier is the largest legal practice in the Channel Islands with associated offices in both Jersey and Guernsey. The firm has substantial experience in advising on structured finance transactions involving corporate and trust structures and is organised to produce innovative structures to meet business needs. During 2000 the firm acted and advised in relation to

securitisation/capital markets transactions having an aggregate principal amount exceeding US$50 billion. Ogier is able to deliver high quality and cost effective legal advice in all aspects of structuring and documenting asset securitisation transactions. If you would like further information about our Structured Finance Group and the services we can provide. About Ogier Ogier is one of the world's leading providers of offshore legal and fiduciary services employing over 700 professional and support staff. The group has a presence in nine jurisdictions around the world, namely the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, Ireland, Jersey, London, Montevideo and New Zealand. Ogier provides advice on all aspects of BVI, Cayman, Guernsey and Jersey law and associated fiduciary services through a global network of offices that cover all time zones and key financial markets including the rapidly growing Asian and Chinese markets. Ogier continues to be recognised as a leading law firm by the leading legal directories, including Legal 500 and Chambers.


Client briefing

www.ogier.com

Contact details Guernsey Legal: William Simpson +44 (0) 1534 504264 [email protected] Fiduciary: Chris Le Tissier +44 1481 737169 [email protected] Jersey Legal: Chris Byrne +44 1534 504264 [email protected] Fiduciary: Peter Gatehouse +44 1534 504288 [email protected]

This client briefing has been prepared for clients and professional associates of the firm. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations. Ogier includes separate partnerships which advise on BVI, Cayman, Guernsey and Jersey law. For a full list of partners please visit our website.

Business

Securitization: Establishing a Special Purpose Vehicle in Guernsey