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Jersey trusts are often used to hold assets off balance sheet, or to "orphan" special purpose vehicles or "SPVs".
Uses of Jersey Trusts: To hold assets "off balance sheet"
Jersey trusts are often used to hold assets off balance sheet, or to "orphan" special purpose vehicles or "SPVs". This is frequently achieved by the use of Jersey purpose trusts (often in conjunction with Jersey companies acting as the "SPV").
Example 1: sinking fund trusts
The Jersey purpose trust concept enables the dedication of monies or other assets comprising the trust fund for pre-defined business or commercial purposes without any person being entitled to claim a direct ownership interest in these assets. The use of a Jersey purpose trust also prevents any person from frustrating the application of the monies or assets to the specified purpose or purposes.
So for example a Jersey purpose trust may be used to establish a sinking fund to enable monies to be set aside and paid regularly to trustees so that an adequate fund will be available over time to meet the costs of a particular project e.g. major repairs to a building, installation or decommissioning expenses, environmental cleaning costs etc.
Example 2: company reserve or provision
Where a company or its directors wish to set aside monies or assets to create a reserve fund or a provision in respect of an anticipated funding obligation of the company a purpose trust may provide an attractive and flexible framework for this.
The Jersey purpose trust would be established using an independent trustee to take the monies or assets in question off the balance sheet of Company X. Jordans Trust Company can provide such trusteeships.
Example 3: provision of security and guarantees
A Jersey purpose trust may be established as a collateral fund arrangement under which the trust will issue a guarantee or undertake an indemnity obligation in favour of a counterparty to the person who establishes the purpose trust (the "settlor").
The settlor may fund the purpose trust fully in respect of its exposure under the guarantee or indemnity to be issued by the trust. Alternatively the settlor may only fund the trust in respect of part of its exposure on the basis that the trust fund will be invested with profits and gains rolling up inside the trust fund with the intention that over time these retained profits and gains together with the trust capital will match the exposure under the guarantee/indemnity. Alternatively, the trust may only be funded with sufficient monies to purchase insurance cover in respect of its exposure if any claim is made under the guarantee/indemnity.
The trust will operate as a limited recourse vehicle so that the guarantee or indemnity obligation can only be met and satisfied out of monies or assets in the trust fund. Until a claim is made under the guarantee or indemnity or the primary obligation which is secured by the purpose trust is otherwise discharged, the trust cannot be revoked. At the end of the trust period any monies or assets remaining in the trust can be repaid to the settlor either as a residuary beneficiary or pursuant to a resulting trust.
Example 4: divestment of debt obligations
In this example a subsidiary finance company has issued some form of debt supported by a guarantee from its parent company in favour of the holders of those debt instruments. The terms of the debt instruments may prevent early repayment and accordingly the finance subsidiary may wish to divest itself of the direct obligation to meet repayment of the debt instruments in order to improve the group's credit rating and simplify accounts presentation perhaps in preparation for entry into another financing transaction or parent group acquisition.
The finance subsidiary or some other group company will arrange sufficient funding or enable the purpose trust to be established with assets to cover interest and ultimate capital repayment obligations on the debt instruments which are in issue. With the agreement of the paying agent/trustee of the debt instruments the obligations of the finance subsidiary will be transferred to the trust or possibly a special purpose company wholly owned by the trust. The contingent liability of the parent company under the supporting guarantee may also be capable of being released at this point so as to remove it from the consolidated balance sheet liabilities of the group.