IFISA money can be used as a substitute for bank debt and also to fund a portfolio of loans. The latter is the structure for the Amberside ALP and Prime Bond Renewable bond issues as both are raising capital to fund a wholly owned subsidiary of the bond issuer which has been established to carry on the trade of a money lender, making loans available to project companies that are expected to generate relatively predictable long-term cash flows.

 

We are advising a number of other clients on the set up of moneylender structures to finance portfolios of loans to project SPVs which are developing and/or running infrastructure, property developers or media asset developers (financing pre-sales and tax credits). Trade receivables financing would also be possible.

 

The skeleton structure is this:

Prime Bond Renewables has an added feature. They have an existing loan fund and so have transferred some existing loans into a special trust we set up, and as and when bond monies are raised the moneylender will buy a share in this trust thus providing immediate diversity of risk and certainty of income for bond investors with a swap rate of 8% interest and no cash drag; though in a default situation, the moneylender would be entitled to a due proportion of the loans held in the trust. As and when the moneylender finds its own deals it will sell its share in the trust back to the existing fund in order to redeploy the sale proceeds in its own deal.

 

If the bond issuer is a holding company which then makes loans of the bond capital raised to a wholly owned subsidiary so that it can trade as a moneylender this avoids the bond issuer being an AIF; based on the exemption that a holding company is not an AIF (Article 3(a) AIFMD) if it holds its subsidiaries for the long term and not for the purposes of divestment (Article 4.1(o) AIFMD).

 

One then has a choice. To raise funds above €5 million the bond issuer would need to publish a prospectus which is approved by the UKLA. Amberside and Prime Bond have both decided to raise an initial €5 million and then seek UKLA approval to raise substantially more; but we are acting for several issuers which have decided to skip this interim step and simply seek UKLA approval for a prospectus to raise up to £100 million. There is no need for the bonds to be listed (though they could be) but they must be transferable to qualify for IFISA status. Bonds might also be issued to SIPP and SASS investors.

 

The following conditions must be satisfied for bonds to be held within an IFISA account:

 

(a) the bonds must be debentures which are transferable securities issued by a company or a charity;

 

(b) the investment in the bonds must be facilitated by a person carrying on an activity of the kind specified in article 25 of the RAO through an electronic system for such purpose; – Goji white label their website so that bonds can be bought on line and also provide back office ISA administration for the bond issuer;

 

(c) that person or another, acting under an arrangement with that person or at that person’s direction, in respect of the investment, must treat the Bondholder as its client and undertake on behalf of the Bondholder to— (i) receive payments in respect of the bonds; 
(ii) make payments, when due, in respect of the bonds to the bondholders; and (iii) exercise, or facilitate the exercise of, rights in respect of the bonds; – Sapia act as the formal ISA manager on the Amberside and Prime Bond structures;

 

(d) the investment in the bonds must not be not part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax;

 

(e) the bonds must not be made available to the bondholders by reason of their or of another’s status, whether past, present or prospective, as an employee, director, partner, trustee or the holder of any office;

 

(f) the bondholders must not be connected with the issuer of the bonds, and for this purpose “connected” has the meaning given in section 170 of Income Tax Act 2007 with the omission of the reference to “in period A” in sub-section (7); – this is the EIS test for ‘connected’ where a person is ‘connected’ if he is entitled to acquire more than 30% of the ordinary share capital of the issuer;

 

(g) the bonds must not be connected with any other investment held outside an IFISA account by the bondholders or any other person, and for this purpose an investment is to be treated as connected with another if— (i) either was made with reference to the other or with a view to enabling the other to be made on particular terms; (ii) the terms on which either investment was made would have been significantly less favourable if the other investment had not been made; and

 

(h) the investment in the bonds must be made on genuine commercial terms.

 

What I find really intriguing is that the ISA Regulations import the definition of what is a ‘debenture’ from section 77 of the Regulated Activities Order (RAO) – an instrument creating or acknowledging indebtedness –  but with an important modification.

 

In the ordinary course, for the purposes of the RAO, the term “debentures” excludes bonds issued by or on behalf of the government of the UK, the Scottish Administration, the Executive Committee of the Northern Ireland Assembly; the National Assembly for Wales, the government of any country or territory outside the UK; and a local authority. For the purposes of the ISA regulations, these types of bonds are brought back into the definition.

 

Could the government have it in mind to refinance and/or redevelop public infrastructure assets using IFISA bond finance? – a latter day off the public balance sheet “PFI” financing tool?

 

You might be interested in the latest ISA stats from HMRC which show that the cash component of Adult ISAs is currently £270,233 million and that there is cash on deposit of £11,419 million within the stocks & shares component making a potential market for IFISA bonds of around £280 billion of existing cash balances.  See section 9.6 at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/702847/Full_Statistics_Release_April_2018.pdf.

 

This is a market for attracting these substantial existing cash balances.

 

 

 

Roger Blears | Senior Partner | RW Blears LLP

29 Lincoln’s Inn Fields, London WC2A 3EG

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