CFM72430 | Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: the asset-holding company: subordinated debt

The asset-holding company: subordinated debt

In the second condition, the test is that the asset-holding company must owe its loan relationship liabilities ‘wholly or mainly’ to the note-issuing company or intermediate borrowing company. This test will normally be applied by reference to the value of the liabilities in question, measured according to the carrying value of those liabilities from time to time in the company’s accounts.

In many securitisations, the SPV to which the assets are transferred from the originator company will issue some subordinated debt to the originator, which will not itself be a note-issuing company or an intermediate borrowing company. The existence of this subordinated debt will not lead to the asset-holding company failing this test, so long as the subordinated debt in question (together with any other debt of the asset-holding company which is held otherwise than by a note-issuing company or an intermediate borrowing company) does not represent the greater part by value of the asset-holding company’s loan relationship liabilities.

Amortising debt

Subordinated debt is typically paid down only after all other debt of the debtor company. Consequently, since the ‘wholly or mainly’ test is applied on an accounting period by accounting period basis, an asset-holding company could find that it fails the ‘wholly or mainly’ test if a point is reached where it has paid down its senior debt (that is, that which is ultimately sourced from the capital markets) to a level where the carrying value of that debt is less than carrying value of its outstanding subordinated debt.

To prevent this happening, the Taxation of Securitisation Companies (Amendment) Regulations 2007 (SI2007/3339) amended Regulation 6 so that it refers to the company’s ‘initial’ liabilities under debtor relationships. In other words, an asset-holding company that satisfies Condition B in Regulation 6 in respect of the debtor relationships it enters into at the commencement of the capital market arrangement, will continue to satisfy Condition B if at a later date the subordinated debt comes to exceed the amount owing to the note-issuer.

‘Initial liabilities’ in this context will be taken as including all debtor relationships which the company enters into in connection with the set-up stage of the capital market arrangement, regardless of the exact chronological order of those debtor relationships coming into existence. For example, if a prospective asset-holding company raises a loan from the originator to pay its incidental expenses, and draws down under that loan before it receives a loan from the note-issuing company, both of those loans will be included in the ‘initial’ liabilities of the company for this purpose. Moreover, ‘initial liabilities’ will be identified on a capital market arrangement by capital market arrangement basis.

This also applies to an intermediate borrowing company (CFM72440).