Innovative forms of finance
Niche International Property Adviser, 1 May 2007
Unless you were a FTSE 100 company, your sources of raising debt capital, until recently, were limited largely in the form of bank loans. Now we are seeing real diversification in sources of debt capital with private placements and securitisation becoming available to the corporate market at large.
One of the questions asked of the banking industry is whether or not it can improve on its delivery of a full range of sophisticated treasury and capital markets products to a wider customer base. "I've always felt that the sector could do a better job," said Andrew Dancey, who is Royal Bank of Scotland's regional director of global banking & markets. "That's why we have been steadily addressing the question at RBS, where we now actively seek opportunities from a capital markets perspective with as broad a customer base as possible." Traditionally, RBS in Birmingham has covered largely foreign exchange and interest rate risk management. But on the back of strong growth in these two areas the bank is now expanding the scope of its business even further, pioneering alternative financial solutions. There is now an emphasis on new funding alternatives like private placements and securitisation and to increase customers' use of inflation protection solutions so that they can hedge their real economic exposure.
Dancey commented: "The long term lending market has been healthy in the UK for many years. Interestingly, as long term interest rates are considerably lower than shorter term rates currently, customers can take advantage of our well developed interest rate hedging capability to access lower longer term funding.
"In addition, the debt capital markets are very deep and institutional investors are hungry for new credit names outside of the FTSE 100 to diversify their portfolios. Not only are institutional investors looking at a wider selection of names, they are also looking at investing for longer maturities, again allowing borrowers to access cheaper long term funding.
"This market can provide very long-term funding on a fixed rate basis, which can be swapped into floating if preferred. This provides a new and powerful source of competition for customers' credit and can provide lower costs of funding and diversification of their funding sources. In addition, the capital markets have become much more flexible in buying customised and unique transactions, they are no longer just for 'plain vanilla' issues. An example is securitisation which is essentially the 'bundling' together of various revenue sources into one cash flow that becomes the basis for debt service." Dancey said that one of the fastest growing areas in the UK financial markets at the moment was RPI (retail price index) hedging, driven by government policy to link much of its contracts to the RPI index. "From the government's perspective, it is ensuring that its costs do not rise faster than inflation. For the private sector it means that one can now much more precisely lock in the economic return on a project – which means reducing the risk of the project."
The RPI indexation of government contracts is very common in the healthcare sector, one initiative being the NHS LIFT (Local Improvement Finance Trust) project, which aims to provide funding for Primary Care Trusts. RBS was the first bank to fund a LIFT project and it has been very successful in introducing RPI hedging into a number of these transactions.
"We are also seeing increasing use of inflation hedging in a wider range of property transactions as the inclusion of RPI as a cost index gains greater popularity in the private sector," said Dancey.
Hedging also proves to be a valuable tool when it comes to businesses operating within global foreign exchange markets - where the daily turnover is as high as $1.9 trillion. About 80 percent of deals have some connection to the US dollar.
Bob Munro, a senior consultant with advisers. HiFX, said: "The impact of currency prices on a business can be frustrating - and it can also be potentially very damaging. Managing funds to get the best returns is a balancing act but companies also want the security of knowing their money is safe."
That's why advisors such as HiFX have built up a corporate client list of more than 2,500 companies from 100 industry sectors, many of them in the Midlands — and over 30,000 private clients who are involved in emigration or buying properties overseas.
Fluctuating exchange rates can prove costly. "For example, if there is a movement of 19 cents and you get it wrong it could affect your bottom line by £lm," said Munro. "Last year, for example, there was a movement of 24 cents, so it was essential that companies should have a risk management strategy in place."
He added: "Foreign exchange markets can be volatile - and probably 90 percent of movement is speculation by investment funds. We try to protect our clients from that volatility, which over the last two or three years has been dominated by movement in interest rates."
Finally, as if investors didn't have enough to worry about, those with offshore accounts are being advised to "come clean" — otherwise they could face hefty fines from the taxman.
HM Revenue and Customs has delivered an offshore disclosure facility to the marketplace, labeled by the government as a tax amnesty and designed to incentivise those with undisclosed tax liabilities to "come clean." Critics say it is the government bullying offshore banks into revealing confidential account details — and others describe it as the outgoing Chancellor's swan-song.
Those with offshore accounts have been asked to provide full details by September.
Terry Ford, tax specialist at wealth management advisors Jobson James said: "This latest clampdown on tax dodgers is not a tax amnesty at all but a penalties amnesty for those who take immediate notice and pay up. Thousands of clients may choose to ignore the call to action believing that they will never be caught out. However with the government so determined to claw back this unpaid tax and maintaining strong pressure on the offshore banks - many of whom are subsidiaries of UK banks – to reveal all, the gamble is too great a risk to take.
"If customers don't declare their offshore interests and the revenue discovers this fact, the initial 10 percent penalty payable on top of tax will increase to a minimum of 30 percent and possibly up to 100 percent."
Tax investigation specialists at PKF have come across a number of instances where banks have supplied HMRC with details of accounts held by offshore companies and trusts with a connection to individuals from the UK.
Birmingham tax partner Simon Little johns believes this is no accident and points out that individuals will be liable for the same penalties if tax evasion can be proved.
Littlejohns said: "It has quickly become apparent that the banks' provision of information is much wider than most people expected; bank letters we have seen clearly show that they have supplied details of company bank accounts. Anyone who thinks their funds are still secret because they used an offshore company or trust might be in for a nasty surprise.
"HMRC has obviously thought very clearly about catching funds held in trusts and companies or they would simply have demanded information on accounts that had opted for retention tax trusts and companies or they would simply have demanded information on accounts that had opted for retention tax under the European Savings Directive (ESD) – argu8ably an option that is indicative of tax evasion.
"With company and trust affairs being generally more complex, the downside for HMRC is going to be that it is likely to end up with a substantial amount of information, much of which it will eventually prove to be worthless. However HMRC must have considered this and still believes it is worth while to go after company and trust cases.
"The only sensible option for individuals who have not fully declared their income in the past is to make a full voluntary disclosure to HMRC.”