A proposed taxation change in Germany that would slap a whopping 20% tax on SPVs could lead to a huge shift in favor of synthetic securitizations as their cash equivalents would be uneconomical, according to bankers. Heinz-Udo Schaap, tax lawyer at the Bundesverband deutscher Banken, said the proposed change could snuff out the primary issuance of asset-backed securities.
However, the proposed tax would likely lead to the development of a new breed of synthetic CDOs, according to bankers and lawyers. The reason, they explained, is that corporates looking to raise funding via a cash securitization would get hammered under the proposed tax and the plain-vanilla synthetic CDO market is not a viable alternative as this would only allow them to lay off risk but not raise capital.
One way around this potential problem would be if an originator sells the reference obligation to a bank--which are exempt from paying trade tax under the existing and proposed rules--which then enters a credit-default swap on the assets, said a lawyer. A CDO structurer in Frankfurt said it is considering this structure but noted this approach would be unwieldy for an originator with a large number of small receivables.
The Bundesverband deutscher Banken's Schaap said the German parliament is likely to make a decision on the proposed tax in the next month. The association filed a proposed amendment to give SPVs the same taxable status as banks, he continued, estimating it has a less than 50% chance of being accepted. If the amendment is accepted it will effectively mean SPVs retain their tax-free status.
Others think the law change could make corporates consider alternatives to securitizations. "This would make securitizations more expensive," said Stefan Bund, director in the CDO group at Fitch Ratings in London. However, he said the main impact may be to drive corporates away from securitization and toward bank loans as a source of funding.
