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SI2006/3296: regulation 8

Warehouse companies

There may also be a company in the securitisation arrangement that exists to act as an interim holder of assets which are to be securitised at a later date. Such a company is referred to as a 鈥榳arehouse company鈥�, and is essentially a pre-securitisation SPV. Typically, a warehouse company is established in order to build up a pool of assets until there is a sufficiently large pool to allow a securitisation to take place and/or in order to have a pool of assets ready for securitisation when market conditions are favourable. The company may either originate the assets itself or purchase the assets from an originator or both. The term 鈥榓cquiring鈥�, as used in the definition of a warehouse company, will be taken to include originating, where applicable, and also encompasses the related funding arrangements the company enters into in order to acquire the assets. Such a company will typically obtain funding in the bank market, rather than the capital market.

The definition of a warehouse company, therefore, is that its business (apart from any incidental activities) is to acquire (which includes originating) or hold (which includes managing) financial assets for the purpose of transferring them to an asset-holding company or a note-issuing company, or until it turns itself into an asset-holding or note-issuing company.

A 鈥榳arehouse company鈥� may become a note-issuing company or an asset-holding company. That is, it may refinance its bank or other borrowings through a securitisation by itself issuing capital market investments (as a note-issuing company), or by borrowing from a note-issuing company (as an asset-holding company). In such cases, a warehouse company may continue thereafter to acquire other assets on a 鈥榳arehouse鈥� basis, with a view to refinancing those assets as well. The key question will be whether, at any given time, taking each portfolio of assets in isolation, the company鈥檚 activities with respect to that portfolio fall within the definition of 鈥榳arehouse company鈥� or 鈥榥ote-issuing company鈥� or 鈥榓sset-holding company鈥�. Provided the company has no other activities other than ones which are 鈥榠ncidental鈥� to being one of these types of company, it will still be a 鈥榮ecuritisation company鈥� notwithstanding that it has combined activities. It will not be disqualified solely because its different categories of activities are not purely 鈥榠ncidental鈥� to one another.

Amended definition of 鈥榳arehouse company鈥�

The Taxation of Securitisation Companies (Amendment) Regulations 2018 (SI2018/143) amended the definition of a warehouse company in the regulations for periods beginning on or after 1 January 2018. A warehouse company can now transfer 鈥渁ll or substantially all鈥� of the financial assets to an asset-holding or note-issuing company. This change enables the warehouse company to retain a small proportion of the financial assets in order to meet regulatory requirements.

Previous guidance explained that in some cases, when a warehouse company has built up a portfolio of assets ready for securitisation, the warehouse company will transfer the assets back to the originator for the purpose of enabling the originator to transfer them onwards to an asset-holding company or note-issuing company. So long as the originator does in fact reacquire the assets for that purpose and transfer them onwards immediately or shortly after reacquiring them, the interposition of the originator at that stage will not prevent the warehouse company from satisfying the requirements of regulation 8.

The ability of a warehouse company to transfer the financial assets 鈥渄irectly or indirectly鈥� to an asset-holding or note-issuing company has now been included within the regulations. This amendment reflects certain types of commercial arrangements by which the portfolio is transferred out of the warehouse company to enable the securitisation transaction to take place. This indirect transfer does not have to be made using the originator. So long as the intermediate entity acquires the assets and transfers them on immediately or shortly afterwards to an asset-holding company or note-issuing company, the warehouse company will continue to satisfy the requirements of regulation 8.

鈥榃arehouse arrangements鈥�

A warehouse company will not be party to a capital market arrangement in the pre-securitisation period (and may never become party to a capital market arrangement), but it will operate in a very similar manner, under equivalent documentation (for example, it will have the same sort of priority of payments schedule - see CFM72510), and will exist solely for the purpose of facilitating full securitisations. It is appropriate therefore that it should be taxed on the basis of its 鈥榬etained profit鈥� as are other securitisation companies.

Regulation 8 defines the activities of a warehouse company as a 鈥榳arehouse arrangement鈥�, thus enabling the company to have a 鈥榬etained profit鈥� as defined under regulation 10, notwithstanding that the company is not party to a capital market arrangement (CFM72340), and to have a taxable profit for the purposes of regulation 14 (CFM72580).