The history of asset securitizations of leased vehicles in Canada dates back to at least 1995. CIBC Wood Gundy and CorpFinance were the first entrants, with Coventree Capital, Clarica, and others recently entering. A Trust structure is utilized and is backed by individual and corporate investors, a.k.a. Multi–Seller Conduits (i.e. the Trust contains the assets of more than one seller). A holdback reserve of 8–9 percent of the proceeds funded back to the company over time is typical of these transactions.
Many dealerships and leasing companies across Canada have securitized their lease portfolios. There are currently two structures used: sale–sale–leaseback and concurrent lease. Each structure has different legal ramifications. Although the assets are effectively sold to the Trust, the ownership of the vehicle remains with the company.
Benefits of Securitization
Lower cost of funding — This type of funding generally receives the rating agencies' highest rating. Depending upon the structure, this may yield lower rates than traditional methods.
Increased liquidity — Securitizations can accelerate cash flows, where the proceeds from the sale of assets can be used to pay down debt, expand operations or invest in more efficient assets.
Improved financial statement ratios — The reduction of the lease chattel debt will likely result in improved debt–to–equity ratios.
Flexibility in funding alternatives — Securitization provides an alternative to traditional corporate debt facilities.
Up–front costs such as legal fees, accounting fees and other administrative fees can result from securitization. In addition, the ongoing administration costs associated with servicing, reporting, audit and administration should be carefully assessed and considered by each entity's human resource availability and capabilities.
Accounting for Securitizations
There are two methods in which to account for asset securitizations: on balance sheet or off balance sheet (sale treatment). In order to achieve the third benefit listed above, the securitization needs to be treated as a sale for accounting purposes.
In order to get the off balance sheet treatment, different accounting rules need to be met depending upon how your company accounts for its leased vehicles. There are different accounting pronouncements that are followed depending upon whether your company accounts for the leases as operating leases or financing leases. You are best to speak to your professional accountants on the implications in your particular situation.
Tax Implications of Securitization
One of the benefits promoted by the players in this market is federal and provincial capital tax relief. Although this may be true for some structures, it is not true for all. Some institutions have successfully promoted products that we believe accelerate income tax and provide no capital tax relief. Therefore it is very important to consult with your professional advisors to ensure that the structure of the securitization agreement does not have any adverse affects from an income tax perspective.
In terms of the Federal Large Corporations Tax (LCT), any amounts included in the tax base are based on Canadian Generally Accepted Accounting Principles (GAAP) financial statements. The prevailing view in the tax community, which to some extent has been accepted by the CCRA, is that if the transaction is off balance sheet for accounting purposes, it likely reduces the federal capital tax base.
The various provincial capital tax bases computed are not necessarily computed in accordance with GAAP. In the absence of detailed case law, the calculations are based on criteria established by the tax authorities. Therefore, depending upon the structure, there may be capital tax relief, although advisers are generally less comfortable opining on provincial capital tax issues.