Bermuda and Collateralized Loan Obligations ("CLOs")
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. In fact, Bermuda has emerged as one of the two major jurisdictions of choice for US CLO managers seeking to market deals to EU investors and in the first quarter of 2022 the Bermuda team has seen a number of new incorporations and existing structures in warehouse phase migrating to Bermuda.
The jurisdiction's advantages for managers and investors are numerous: tax neutrality, the stability of its legal and political system, its compliance with international standards including FATCA/CRS and the familiarity of rating agencies with Bermuda structures established through the jurisdiction's status as the global market leader in insurance-linked securities. CLO issuers are not subject to Bermuda's AML or economic substance regimes and there is no requirement to prepare financial statements if the directors and shareholders agree to waive their preparation. None of this has been lost on our clients who have migrated into the jurisdiction.
With these new entrants to the Bermuda market, Walkers has noticed a number of FAQs posited by the US market prior to pulling the trigger on domiciliation. The below gives an overview as to the "need-to-knows" for any manager looking to set up shop in Bermuda.
1) What is the speed to market when utilising Bermuda?
For standard, off balance sheet CLO structures, Walkers has agreed an expedited incorporation process with the Bermuda Monetary Authority and the Registrar of Companies. As a result, we can form (and have formed) issuer vehicles within 24 hours and frequently on a same day basis.
2) What are the main similarities and differences compared to Cayman structures?
The client experience on a Bermuda CLO deal will be very similar to a Cayman transaction. The issuer, as an exempted company, will obtain from the Minister of Finance an assurance exempting it from any tax that may be imposed through new Bermuda legislation, similar to a Cayman tax undertaking. The orphan structure is established in the same way, with a Walkers entity holding the issuer's ordinary shares on the terms of a charitable trust. Walkers continues to provide the directors, although a majority of these will be Bermuda-based rather than Cayman-based. The Bermuda closing deliverables such as the issuer resolutions, legal opinion, etc., all look and feel the same as their Cayman equivalents. The principal difference is the security registration regime in Bermuda. Unlike in Cayman, Bermuda companies do not maintain an internal register of mortgages and charges. Instead, there is the option to register the security with the Registrar of Companies. Once registered, however, the document becomes public and is accessible to anyone with a user account for the Registrar's online portal. This can be problematic in certain circumstances where documents grant security interests but contain commercially sensitive information, but Walkers has developed a solution enabling parties to benefit from registration even in these sensitive situations.
3) How does the fee structure differentiate in comparison to the Cayman Islands?
There are some differences in government fees to incorporate and maintain companies, but these are not material in the overall context of the deal, and closing disbursements are generally less. Walkers' pricing is consistent with our fee structures on Cayman deals with some small exceptions.
Walkers' global CLO team in Bermuda, the Cayman Islands, Ireland and Jersey maintain deep relationships with the leading onshore law firms, trustees and arranging banks in the EU and US. We work seamlessly with our global funds team and are involved in the establishment of risk retention investment platforms, bringing new asset management clients to the market as CLO managers and identifying private equity and HNW individuals who are exploring the CLO market as an investment opportunity. We are market-aware as well as technically excellent. Our advice is always informed by both considerations. Our lawyers, structured finance directors and administration staff work as one team and comprises experienced, well informed and financially sophisticated professionals. We have a dedicated team of CLO lawyers with international experience.
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.
