British Virgin Islands
A Legal Road Map for Securitisation of Assets and other Structured Finance Transactions in the British Virgin Islands
Companies
A Legal Road Map for Securitisation of Assets and other Structured Finance Transactions in the British Virgin Islands
Introduction
The last couple of years have witnessed a formidable increase in the number of securitisation transactions completed in the British Virgin Islands, and there is much hope that the market share of the jurisdiction in the industry of offshore securitisations and structure finance transactions will continue to growth as it did its market share in the global investment funds industry.
Essentially a securitisation of assets is a rather complex financial transaction that involves the conversion of almost any kind of asset capable of generating future cash flows (a bunch of mortgages, other corporate debt, credit card or export receivables, etc.) into marketable securities.
The fact that the assets to be converted into marketable securities must be able of generating future income streams is a key aspect of every securitisation essentially because those cash flows will be then used to pay the fees of all the parties involved (trustee, lawyers, banker) and more importantly to generate an income or profit for the investors and/or the originator (who may or may not hold a debt instrument subordinated to those issued to the investors).
The basic elements of this special type of structured finance transaction are as follows:
• the incorporation of a special-purpose vehicle (SPV) that will purchase the assets to be securitised from the originator;
• the issuance of a debt instrument by the above SPV which payment will be secured by the above assets; and
• the financing to be provided by third parties to the SPV through the purchase of the debt instruments in order for the SPV to acquire such assets.
The other key feature of a securitisation of assets is the fact that the assets assigned to the SPV will not appear in the balance sheet of any of the parties involved in the transaction. In common law offshore jurisdictions, for this to be achieved the shares of the SPV are held by an “orphan” trust with the interests of the investors as beneficiaries.
The purpose of a securitisation for an originator is to achieve advantageous accounting treatments (accelerating the recognition of income and loss; improving the return on assets and capital asset calculations) and regulatory capital relief (the removal of the underlying assets from the balance sheet). From the point of view of an investor, it may give him the opportunity of investing in certain types of assets or in certain jurisdictions that are preclude for him to invest pursuant to local regulatory laws. For many reasons that we will refer to further below, it is increasingly common to structure this type of transactions through offshore jurisdictions like the Cayman Islands, the Channel Islands (especially Jersey but also Guernsey) and the British Virgin Islands.
All of the above jurisdictions have shown to the global community that they are very well regulated investor-friendly international financial centres. Transactions then benefit from well developed legal structures and concepts, sophisticated and experienced service providers and a reputation for flexibility and responsiveness.
Even though the purpose of this article is to outline the potential legal and regulatory issues relating to a British Virgin Islands securitisation some of the information contained herein remains valid for the other jurisdictions above mentioned.
Attraction of the Offshore Jurisdictions in general and the British Virgin Islands in particular
All of the jurisdictions mentioned in the previous section are built on the following factors (listed in alphabetical order):
• a flexible and innovative creditor’s and investor’s friendly legal environment;
• a high degree of confidentiality (in the British Virgin Islands, for example, unless the transaction is rated or publicly announced, securitisations remain confidential to the originators and the investors);
• bankruptcy remote vehicles can be established;
• close proximity to onshore financial centres (Cayman Islands and the British Virgin Islands are close to the United States and Latin American whereas the channel Islands are close to the UK and western Europe);
• economic, political and financial stability;
• no applicable taxes; and
• the high degree of professional expertise of service providers (lawyers, accountants and especially professional trustees).
Structuring a securitisation transaction and other structured finance deals in the British Virgin Islands
As it was stated before, the British Virgin Islands has seen a huge increase in the number of structure finance and securitisation transactions in which it participates. Its role has developed as new law firms with expertise in those transactions have been set up and also as a consequence of the opening of offices in the territory of most of the leading Cayman Islands law firms. As we will see later on, some changes in the legislative scenario have also encouraged the use of the British Virgin Islands in securitisation.
British Virgin Islands law is essentially based on the English common law system so that the central issues of corporate power, directors’ fiduciary duties, corporate personality, limited liability and corporate benefit are in all substantive respects the same as the position under English common law. At the same time, however, British Virgin Islands commercial legislation benefits from being much less cumbersome in many of the areas that have caused considerable difficulty and uncertainty under the corresponding English statutes. In fact, there is no regulation directed specifically at a securitisation transaction. The only regulation which impacts on the transaction is the requirement that the trustee, if it is a British Virgin Islands trustee, holds a licence from the British Virgin Islands Financial Services Commission (FSC). No other party to the transaction requires any licence or recognition from the FSC. There is no minimum capitalisation requirement for the SPV and no audit requirement. No government authorisations or licenses are required in respect of the issuance of debt or equity by the SPV and there is no need to file or even draft an offering document. On an on-going basis, there are no annual reporting requirements other than the payment of government fees on an annual basis.
In a British Virgin Islands securitisation the SPV will be an orphan company owned by a share trustee under the terms of a trust deed (the shares being held on trust), thus ensuring the transaction is “off the balance sheet” of any party to the transaction. As in some other jurisdictions, a British Virgin Islands SPV can be set up in less than 24 hours. It must of course have a registered agent and office in the British Virgin Islands.
The SPV must keep a register of shareholders and directors either at its registered office, but this register is not available for inspection by the public.
There are no restrictions relevant in securitisation transactions in respect of the SPV; under British Virgin Islands law it can lend, borrow or issue debt securities without being required to be licensed under local law.
Even though there is no minimum capital requirement for the SPV, it is normal practice for the SPV to have an issued ordinary share capital of US$1,000 held in a charitable trust, and it is this sum which at the end of a transaction is available for distribution to the beneficiaries of the charitable trust. Having said that, not always a charitable trust is used. Sometimes a purpose (if allowed by applicable legislation) or a VISTA Trust (as defined below) are better options. One advantage that the British Virgin Islands offer is that the territory remains relatively inexpensive (particularly as compared with, for example, Cayman Islands or the Channel Islands. Fees payable to the British Virgin Islands Government (on incorporation and then annually) are US$ 350 per annum. Registered office fees, local administrator’s fees and legal fees are also relatively inexpensive.
As a tax-neutral jurisdiction, the British Virgin Islands imposes no corporation taxes on any company carrying out either domestic business or offshore business. Also, there is no withholding tax on any payment of principal or interest made by a British Virgin Islands SPV and there is no stamp duty on documents executed by British Virgin Islands SPVs. Even though the British Virgin Islands do not have its own stock exchange, companies incorporated in the territory have been successful in listing its shares on exchanges including NYSE, TSE, Dublin, Singapore, Luxembourg, the Cayman Islands and Bermuda.
Trust law in the British Virgin Islands
In addition to the advantages set out above, in March 2004, the Virgin Islands Special Trust Act 2003 (‘VISTA’) came into force. The VISTA introduced a special type of trust (a ‘VISTA Trust’) that provides a viable alternative to utilising purpose trusts in securitisation structures.
With introduction recently of the latest trust legislation, it has been said by leading trust practitioners that the British Virgin Islands has the most modern and coherent trust legislation globally.
Core features include of a VISTA Trust include:
• the management of a company whose shares are held in trust is the responsibility of the company’s directors and the powers of the trustee in that respect are limited (in fact, the trust instrument may specify that the trustee will only intervene in the business of the company in certain circumstances);
• the rule developed by the English Courts and known as the “prudent man of business rule” does not apply to the VISTA Trusts (as a consequence of which the trustee of a VISTA Trust is allowed to hold shares in a company without a duty to preserve the assets);
• new provisions strengthen the protection of trust funds against forced heirship were included; and
• there is a clear separation between ownership of the trust assets, control of the company’s business activities and economic interest.
Other structure finance transactions
Trusts, and especially purpose trusts in the jurisdictions that permit them, play also an important role in other structure finance transactions, like project financing deals, asset financing and subordination trusts. Even thought the focus of this article is the securitisation of assets, it worth to mention the main features of the above types of transactions.
Project Financing:
• this type of transaction involves one or more lenders that provide financing to a borrower for a specific project. Since the borrower must provide with a security to such lender(s), which in large scale projects it is rather difficult, a security over the cash flows to be generated by the project once completed may be structured. The structure will be much more complicated than a standard or syndicated loan and will require somebody to manage payments from users of the projects, etc. Hence, a trust is frequently structured and the borrower will assign to the trust its rights to collect a portion of those cash flows. This structure is very common, for example, in large construction projects;
Asset Financing:
• this type of transaction involves the acquisition or leasing of a revenue-generating asset (i.e. an aircraft) and the structure is similar to thatdescribed in (a) above; and
Debt Subordination:
• this structure sometimes combined with the previous two or even with a securitisation of assets, is useful when there are different groups of lenders that finance a project in different phases. Because generally insolvency laws determine that if a company goes bankrupt its assets will be divided pro rata among all unsecured creditors (which is not something the lenders who participated at the very beginning of the transaction will always accept), a trust may be established in favour of all lenders so that the income generated by a project, asset or assigned credits will flow directly to the trust (and not to the originator, project operator, etc.), which will include provisions that will prioritise payment to certain loans over others.
Latin American Structure
Because of the proximity to the territory, the lower costs we have already referred to and the fact that the British Virgin Islands is in the same time zone in respect of various countries in Latin America, the jurisdiction is commonly used for securitisations or other structure finance transactions involving Latin American parties. As most of the countries in Latin America have blacklisted offshore jurisdictions and restricted the right of their individuals or corporation to invest in shares or sometime even debt instruments issued by offshore vehicles, in order to create a structure that fits well in the objectives of the Latin American originators or investors one or more pass through vehicle must be formed (most likely in the State of Delaware or the UK). In some other cases, like in the case of Mexico, the notes issued by the SPV must be publicly traded for a local resident to be able to invest in such instrument. In other countries such limitation does not exist.
