Following the inclusion in February 2022 of the Cayman Islands on the European Union's AML list, managers and investors have been turning to Bermuda as an alternative jurisdiction in which to incorporate issuers of collateralised loan obligations where the investor base is anticipated to include those based in the EU.

A collateralised loan obligation ("CLO") is a type of securitisation whereby a portfolio of (usually leveraged) loans are pooled into a series of marketable debt securities. In the initial phase, known as warehousing, a special purpose issuer vehicle acquires the loans over a period typically lasting three to six months using a combination of bank debt and the proceeds of issuing redeemable preference shares. At closing of the CLO, the issuer issues a series of notes secured by the receivables representing the underlying loans, with the proceeds being used, among other purposes, to repay the bank debt and to redeem the preference shares. Over the life of the deal, the issuer uses the loan receivables to pay principal and interest on the notes. The key difference between a CLO and a typical securitisation structure is the active management of the collateral portfolio: the issuer engages the services of a collateral manager who selects the portfolio of loans and who can buy, sell and substitute loans in that portfolio.

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This article was originally publisehed in the Bermuda Business Review 2022 - 2023.

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