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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
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This article was originally publisehed in the Bermuda
Business Review 2022 - 2023.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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