A number of bank and fund clients have considered teaming up so that, together, they can provide unitranche funding to UK borrowers where the borrowers themselves are not party to the intercreditor arrangements. There might be a "behind the scenes" intercreditor arrangement, or it may be effected through a vehicle. Either way, the borrower is party to a single loan and is not party to the tranching and pricing arrangement which, in effect, create a senior/junior return for the bank and fund respectively.
Historically the UK tax issues around such structures have complicated those structures. However, we expect that a recent announcement by HMRC may lead to simplification of some structures and possibly their increased use.
Possible new lending structure
The idea would be to use a UK LLP or other partnership to make unitranche loans to UK borrowers. The tranching and pricing would be effected through the senior tranche being contributed as a loan to the LLP while the fund takes a partnership interest corresponding to the junior tranche.
What has changed?
Historically using an LLP as a lender to UK borrowers has rarely been attractive from a UK tax perspective. That was because partnerships cannot generally use the UK's streamlined double taxation treaty passport (DTTP) scheme. That in turn meant that the administrative requirements required to ensure no UK withholding taxes were usually onerous. Thus, an LLP was rarely a good lending vehicle.
HMRC has recently announced that the DTTP scheme is to be renewed and expanded from 6 April this year. The key proposed change is that certain partnerships will be able to utilise the DTTP scheme to lend to UK borrowers. Going forward, where the members of the partnership are all resident in either:
(i) one single foreign country and entitled to full relief under the treaty (e.g. Luxembourg); or
(ii) in the UK,
(or a combination of (i) and (ii)) then the partnership itself should be able to obtain a passport under the DTTP scheme.
Unfortunately, those entities with partners in more than one country outside the UK will still not be able to benefit, even if all members are resident in 'good' treaty jurisdictions. So, a partnership with, for example, an Irish partner and a Luxembourg partner will not be able to use the DTTP. This structure will not help there.
Other Issues
Some care will be needed around the structure to ensure it is not a "securitisation" for CRR purposes, and there are various views in the market on that. The structure is relatively untested and further work would be needed but, in suitable cases, it would be worth considering.
We have referred to "UK borrowers" as per HMRC's consultation document, but HMRC advises that the extension to the scheme goes wider than UK-resident entities and therefore the structure equally applies to any other entities which have an obligation to withhold UK income tax on interest. The classic example of a non-UK person that might have to do that would be a Jersey incorporated company or unit trust holding UK real estate.
HMRC is currently finalising the draft guidance for publication on 6 April this year. While the extended scheme will be 'live' from this date, HMRC has considerable flexibility within the law as to how it grants DTTP passports and is therefore able to make changes subsequently if there are particular issues with the operation of the scheme as extended.
Conclusion
If a fund with a Luxembourg SARL is looking to team up with a UK incorporated bank to make these sorts of unitranche loans, then there may be one new structural option as from 6 April.
