Special friends

Ireland’s popularity as a location for finance special purpose vehicles (SPVs) continues to soar. This is evident from the 2006 Thomson Financial European Capital Markets Review, in which leading Irish law firms were ranked as legal advisers to issuers of international debt, with issuance proceeds of $47.7bn (£24.51bn) and issuers for international collateralised debt obligations (CDOs), with issuance values of $34.4bn (£17.68bn).

Evolution of the market
Since the inception of the Irish finance vehicle regime in the late 1990s (now contained in Section 110 of the Irish Taxes Consolidation Act 1997), the purpose to which SPVs have been put has increased enormously. Initially SPVs were used for more traditional receivables-backed securitisations, but with the introduction of the Section 110 regime in 2003 Ireland has become an increasingly popular jurisdiction for the establishment of SPVs for a greater variety of finance transactions, particularly for synthetic and cashflow CDOs, collateralised loan obligations, credit default swaps, credit card receivables, mortgages, loan participation note structures and a host of other receivable financing transactions.

The continued evolution of the market is highlighted by a number of the recent transactions that have been conducted in Ireland in the past 12 months.

In February 2006 Ireland’s first commercial mortgage-backed securitisation was undertaken. It took the form of a e375m (£256.28m) seven-year senior loan and a e50m (£34.17m) junior loan to subsidiaries of Real Estate Opportunities, a property investment group with property assets of more than e850m (£580.89m), partly owned by Treasury Holdings. The loans were secured on 14 properties, all of which were transferred into new property-owning SPVs. The senior loan was securitised into four tranches of securities rated from AAA to BBB and issued by Irish SPV Opera Finance (CMH).

April 2006 saw Start Mortgages conclude Ireland’s first securitisation of sub prime residential mortgages. Sub-prime mortgages are mortgages that are provided to borrowers who for various reasons are not in a position to obtain mortgages from high street banks and building societies. Pursuant to this transaction, Irish SPV Lansdowne Mortgage Securities No. 1 raised e370m (£252.86m) through the issuance of bonds that were backed by the cashflows from a portfolio of sub-prime mortgages.

It is anticipated that these transactions will open the door for similar transactions to be undertaken in the future.

The Irish government’s commitment
The Irish government has reaffirmed its commitment to the financial services industry in a report entitled ‘Building on Success: International Financial Services Industry in Ireland’.

Rather than being a roll-call for what has been achieved to date, the report is a blueprint for how the industry can be maintained and developed in the short, medium and long terms. The report’s central vision is for Ireland to “be a major player in international financial services focused on niche opportunities, recognised as being a world class location for innovation and transaction execution by leveraging key competitive strengths”.

The Irish government identifies one of the key issues as the need for “a modern and up-to-date legislative framework and a tax environment focused on the realities of international finance”.

Recent legislative developments
In the past 12 months the Irish government and revenue commissioners have introduced a number of significant changes in law that reflect their commitment to developing and maintaining a market-friendly regime for SPVs. The following is a brief summary of some of the more important changes that have been implemented.

Finance Bill 2007 – stamp duty changes
In the recent Finance Bill published on 1 February 2007, it was announced that stamp duty on the creation and transfer of mortgages and charges would be abolished with respect to security documents executed on or after 7 December 2006. While technically this provision will be enacted into law only once the Finance Act 2007 is passed, for practical purposes this provision is effectively already in place. While the tax saving resulting from this change is small (the stamp duty was previously capped at e630 (£430.55)), the abolishment of this provision will ease the administrative burden and costs for SPVs.

Finance Act 2006
The Finance Act 2006 contained a number of positive provisions for SPVs. One of the key features to the success of any jurisdiction as a location for structured finance vehicles is the availability of exemptions from withholding tax on interest payments made by the vehicle. In Ireland the main exemption used by SPVs is the ‘quoted eurobond’ exemption. Prior to the enactment of the Finance Act 2006, SPVs were able to avail themselves of the quoted eurobond exemption from withholding tax only if the security that was issued by the SPV was quoted on a recognised stock exchange, was in bearer form and carried a right to interest.

As a result of the requirement that the securities be in bearer form, SPVs had to put in place complex depository structures so as to be in a position to issue into the US (and certain other jurisdictions), given that for US tax and security law purposes US investors needed to hold their securities in registered form. As a result of the abolishment of the requirement, there has been a reduction in the administrative complexity for SPVs and a considerable increase in the volume of securities issued by SPVs to investors in the US.

The Finance Act 2006 also removed a potential unintended exit charge that was imposed on SPVs that invested in Irish money market funds. This exit charge previously resulted in tax leakage for SPVs.

Investment Funds, Companies and Miscellaneous Provision Act 2006
The Irish Investment Funds, Companies and Miscellaneous Provisions Act 2006 included three positive measures designed to strengthen the expanding Irish finance market.

Perhaps one of the most significant developments emanating from the act is that a private company can now issue bonds to the public if the issue falls within certain offer exemptions. The act also reduces the statutory liability of guarantors for the contents of a prospectus and has reduced the circumstances in which it is necessary to obtain the consent of an expert to the inclusion in a prospectus of a report prepared by such expert.

Establishment of the ISF
One of the more important developments in the Irish financial services industry is the establishment of the Irish Securitisation Forum (ISF) in November 2005. The ISF is a representative organisation for stockbrokers and legal, accounting and taxation advisers in the securitisation area and its purpose is to promote Ireland as the best location for securitisation vehicles.

Where next?
The beauty of the Irish finance regime is that it is broad enough to deal with the new products that are evolving. We are seeing more financial institutions interested in using Irish Section 110 vehicles to access the capital markets with a view to financing the provision of front-office dealing in swaps and derivatives. This area will continue to grow and there is already a number of significant financial institutions in the process of structuring such operations in Ireland.

In addition, with the establishment of the EU Emissions Trading Scheme for trading in greenhouse gas emission allowances, it could well be argued that Irish finance vehicles may be appropriate for use in trading in these allowances. With the Irish government committed to building a “modern and up-to-date legislative framework and a tax environment focused on the realities of international finance”, the future looks bright indeed.
Conor Hurley is a partner and Alan Heuston is an associate in the tax group at Arthur Cox