CFM82440 - Old rules: asset-linked securities pre 2005: conditions: relevant percentage change

Relevant percentage change

This guidance applies to periods of account beginning before 1 January 2005

The relevant percentage change was the full amount of any percentage change in

  • the value of chargeable assets (shares or land), or
  • in any index of the value of such assets

over the relevant period.

Calculating the relevant percentage change

A company issued a loan note for £1m in Year 1, repayable in Year 2. The amount repayable was £1m adjusted by the movement in the FTSE 100 index over the life of the loan. The FTSE rose steadily to 4,070 but crashed the day before redemption. The FTSE stood at 3,700 on issue but had fallen to 2,960 on redemption - a fall of 20% over the period. The rise in the FTSE would be ignored; only the index on the redemption date was taken into consideration when calculating the return. The holder did not benefit from the rise in the FTSE but instead suffered from the fall. The bond therefore redeemed for £0.8m and so was within S93.

Floor

The terms of the debt can provide for a ‘floor’ to ensure that there is an enforceable debt at all times. If the issue price was £100,000 and the return was linked to the percentage change in the value of a particular share, the lender could lose virtually everything if the value of that share plummets. A floor of, say, 8% would have entitled the lender/investor to at least a repayment of £8,000 and ensured that there was an enforceable debt at all times rather than a debt that would be contingent on later events. The presence of a floor of no more than 10% would not have prevented the security from falling within FA96/S93(9).

Relevant period

The relevant period was the period between the time of the original loan and its repayment. So the security had to be valued at the issue date and the redemption date. The only exception, provided by S93(8)(b), was where there were difficulties in obtaining valuations for that particular day, for example a price may only have been quoted weekly. The time difference between the issue and redemption dates and the valuation dates (at issue and redemption) had to be the same. This difference was referred to as ‘lagging’.