Off-balance sheet arrangements
The Group is involved with several types of off-balance sheet arrangements, including special purpose vehicles, lending commitments and financial guarantees.
Special purpose entities (“SPEs”)
SPEs are vehicles set up for a specific, limited purpose, usually do not carry out a business or trade and typically have no employees. They take a variety of legal forms – trusts, partnerships and companies – and fulfil many different functions. They constitute a key element of securitisation transactions in which an SPE acquires financial assets funded by the issue of securities. In the normal course of business, the Group arranges securitisations to facilitate client transactions and undertakes securitisations to sell financial assets or to obtain funding. It has established a number of SPEs to act as commercial paper conduits for customers. SPEs are also utilised in its fund management activities to structure investment funds to which the Group provides investment management services.
Residential mortgage and credit card securitisations – in the UK and Ireland, the Group has securitised portfolios of residential mortgages and credit card receivables totalling £18,589 million as at 31 December 2006. These assets have been transferred to SPEs funded by the issue of notes to third-party investors. These SPEs are consolidated under IFRS and US GAAP and the securitised assets remain on the Group’s balance sheet.
US securitisations – RBS Greenwich Capital securitises commercial and residential mortgage loans, commercial and residential mortgage related securities, US Government agency collateralised mortgage obligations, and other types of financial assets. It also acts as an underwriter and depositor in securitisation transactions involving both client and proprietary transactions. The majority of proprietary securitisations undertaken by RBS Greenwich Capital result in sales treatment under IFRS and US GAAP. Certain transactions may not result in derecognition of the assets under IFRS or US GAAP: under US GAAP, transactions involving vehicles that are not qualifying special purpose entities and where the Group is the primary beneficiary; under IFRS, those where the Group has retained substantially all the risks and rewards of the assets.
Commercial paper conduits – the Group has established a number of SPEs that act as multi-seller commercial paper conduits. These allow customers to access liquidity in the commercial paper market by selling assets to the conduit which it finances by issuing commercial paper to third parties. The Group supplies certain services and contingent liquidity support to these vehicles on an arm’s length basis as well as programme credit enhancement. These vehicles with total assets of £8,360 million at 31 December 2006 are consolidated under IFRS and US GAAP.
Finance lease receivables – in the US, the Group has financed lease receivables with non-recourse funding from third parties. The transactions are shown gross of third-party financing under IFRS but net under US GAAP.
Further disclosures about the Group’s securitisations are given in Note 12 on the accounts.
Lending commitments and other commitments
Under a loan commitment, the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term, may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities. Other commitments include documentary credits, which are commercial letters of credit providing for payment by the Group to a named beneficiary against presentation of specified documents, forward asset purchases, forward deposits placed and undrawn note issuance and revolving underwriting facilities.
Guarantees and other contingent liabilities
The Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that the Group will meet a customer’s obligations to third parties if the customer fails to do so. The maximum amount that the Group could be required to pay under a guarantee is its principal amount. The Group expects most guarantees it provides to expire unused. Other contingent liabilities include those arising from standby letters of credit that support customer debt issues and those relating to customers’ trading activities such as performance and customs bonds, warranties and indemnities.
Contingent liabilities and commitments
The table below summarises the Group’s contingent liabilities and commitments by remaining maturity.
| 2006 | Less than 1 year £m |
More than 1 year but less than 3 years £m |
More than 3 years but less than 5 years £m |
Over 5 years £m |
Total £m |
| Guarantees and assets pledged as collateral security | 5,897 | 1,655 | 2,230 | 3,231 | 13,013 |
| Other contingent liabilities | 2,524 | 814 | 882 | 2,613 | 6,833 |
| Undrawn formal standby facilities, credit lines and other commitments to lend | 148,469 | 23,361 | 35,672 | 28,084 | 235,586 |
| Other commitments | 1,183 | 892 | 160 | 167 | 2,402 |
| Total | 158,073 | 26,722 | 38,944 | 34,095 | 257,834 |
| 2005 | |||||
| Guarantees and assets pledged as collateral security | 1,584 | 3,916 | 3,760 | 2,993 | 12,253 |
| Other contingent liabilities | 3,078 | 644 | 677 | 1,995 | 6,394 |
| Undrawn formal standby facilities, credit lines and other commitments to lend | 132,126 | 15,077 | 33,466 | 22,352 | 203,021 |
| Other commitments | 2,402 | 865 | 148 | 114 | 3,529 |
| Total | 139,190 | 20,502 | 38,051 | 27,454 | 225,197 |
Contractual cash obligations
The table below summarises the Group’s contractual cash obligations by remaining maturity.
| 2006 | Less than 1 year £m |
More than 1 year but less than 3 years £m |
More than 3 years but less than 5 years £m |
Over 5 years £m |
Total £m |
| Dated loan capital | 1,236 | 931 | 4,895 | 6,710 | 13,772 |
| Operating leases | 339 | 624 | 533 | 1,877 | 3,373 |
| Unconditional obligations to purchase goods or services | 827 | 969 | 101 | 153 | 2,050 |
| Total | 2,402 | 2,524 | 5,529 | 8,740 | 19,195 |
| 2005 | |||||
| Dated loan capital | 602 | 1,065 | 2,971 | 8,363 | 13,001 |
| Operating leases | 310 | 591 | 512 | 1,700 | 3,113 |
| Unconditional obligations to purchase goods or services | 659 | 458 | 148 | 20 | 1,285 |
| Total | 1,571 | 2,114 | 3,631 | 10,083 | 17,399 |
The tables above do not include undated loan capital.
© 2007