Part 1 - AL-Tax

Chapter 5AbstractSecuritization is one of the most important ways in which banks and corporations raisefunds (significant savings in fundraising can be achieved as the funds raised in a securitizationare priced on the creditworthiness of the securitized assets, not the creditworthiness ofthe bank or corporation), enhance their balance sheets (by removing certain assets from theirbalance sheets and ensuring the funds raised on the security of those assets do not appear asliabilities on their balance sheets) and, in the case of banks, manage their regulatory capitalrequirements (the capital held against the securitized assets can be released and deployedmore profitably by the bank). These objectives are achieved by isolating a nominated pool ofassets in an orphan entity and having that entity issue debt securities which are serviced outof the cashflows generated by the assets, in a form of securitization known as cash or truesale securitization.5.1 IntroductionSecuritization is one of the most important ways in which banks and corporationsraise funds. Significant savings in fundraising can be achieved as the funds raisedin a securitization are priced on the creditworthiness of the securitized assets (notthe creditworthiness of the bank or corporation), enhance their balance sheets (byremoving certain assets from their balance sheets and ensuring the funds raised onthe security of those assets do not appear as liabilities on their balance sheets) and,in the case of banks, manage their regulatory capital requirements (the capital heldagainst the securitized assets can be released and deployed more profitably by thebank). These objectives are achieved by isolating a nominated pool of assets in anorphan entity and having that entity issue debt securities which are serviced outof the cashflows generated by the assets, in a form of securitization known as cashor true sale securitization. However, careful structuring of these transactions isnecessary to avoid negative international tax consequences.The efficacy of securitization transactions, which depends, in turn, upon theefficacy of the individual components of the transaction, is now necessarily a matterthat runs across borders (Schwarcz, 1998). This is due to three factors. First, manysecuritizations involve the issue of debt securities into foreign markets due, forexample, to local demand for such securities having been satiated, with the issuerbeing forced to look to foreign markets to sell the securities. This is also necessarywhere the issuer is located in an offshore jurisdiction while the likely investors arelocated in onshore jurisdictions. That leads to the second factor. Many of theissuers in securitization transactions are located in offshore jurisdictions, such asthe Cayman Islands, Channel Islands, or the British Virgin Islands, for corporate,99