CFM72010 – Corporate Finance Manual – HMRC Internal Manual



The Oxford English Dictionary (Compact Edition) defines “securitization” as “the conversion of an asset, particularly a loan, into marketable securities, generally for the purpose of raising funds”. Securitization is widely used because of the advantages it offers in terms of risk management and fundraising.

This guide concerns securitization arrangements using “Special Purpose Vehicles” (SPV).

Securitization is essentially a method of debt financing. However, it can also facilitate the management of capital requirements (for regulatory and balance sheet purposes) and risks.

It is a mechanism by which assets (loans, receivables, etc.) are used as collateral for the issuance of securities to third party investors. As part of the process, the assets are transferred to an ad hoc structure which is normally separate from the borrower and thus may obtain a higher rating from credit rating agencies than the borrower could.

The documents CFM72020 and following provide general information on securitizations and on the way in which the companies involved in the process are taxed for the accounting periods starting before January 1, 2005. The guide on the taxation of securitization vehicles for the accounting periods starting on or after January 1, 2005 is located at CFM72200.

The securitization originated in the United States. The first major securitization in the UK took place in 1987. The assets initially used were debt assets that generated an income stream, such as mortgages. More recently, a wide variety of assets have been used, ranging from credit card receivables and rental streams to future income streams and corporate income streams such as income from pub chains and stadiums. soccer.

Securitization structures are quite complex, so they tend to be used to raise substantial amounts of funding. Banks and financial institutions routinely securitize books of loans and mortgages worth over £ 1 billion (freeing up capital for other loans).

Securitization is used as a method of financing for three main reasons:

  • it is an efficient way to finance yourself at a competitive rate which is generally lower than traditional bank loans or bond issues;
  • it can help the originator meet regulatory capital requirements and thus free up working capital for other core activities;
  • and it improves the borrower’s financing options (diversification) – a securitization allows an entity to benefit from financing in the capital markets to which it would not otherwise have access because its overall credit rating is not not strong enough.

The precise structure of a securitization is determined by the relative importance of several factors: the specific business purpose of the securitization, the relevant accounting treatment, and the judgment and influence of industry regulators (who can be particularly demanding in banking and insurance sectors) and credit rating agencies. As securitizations are primarily about obtaining financing, the credit ratings of transactions are all important.

Securitization transactions are normally motivated by trade rather than taxation. However, the tax and its impact will be taken into account for credit rating purposes (and from the perspective of an originator expecting to derive benefits from the structure), and there are certain tax compliance risks associated with these transactions. Specific tax matters are dealt with in detail at CFM72100.


Comments are closed.