Despite the impact of the Global Pandemic, the structured finance market enjoyed strong performance in 2021, with signs that 2022 will see more of the same, supported by wider economic growth. There are positive signs across our jurisdictions, including promising ABS deals, continued strong performance in Europe, and sustained use of BVI by PRC issuers.
The structured finance specialists in our Bermuda, BVI, Cayman, Channel Islands, Hong Kong, Ireland, London and Middle East offices work every day with onshore counsel and financial institutions, and have summarised the key trends relevant to their jurisdictions of law and the regions in which they operate.
Bermuda: Flurry of Issuances Point to a Strong 2022
By Adam Bathgate
Bermuda continues to be a jurisdiction of choice for securitisation structures, particularly in the aircraft and maritime sectors. The global pandemic severely impacted these industries: border closures and stay-at-home orders were responsible for a rapid and dramatic decrease in aircraft passenger volume, and a general drop in global trade. Despite these challenges, aircraft ABS deals held firm: a combination of government relief, additional liquidity provided by lenders and accommodations under lease terms meant that airlines were generally able to keep up their lease payments, sustaining ABS structures through this period. Recently we have seen some EU clients looking more closely at Bermuda for structured finance deals in the CLO space in particular, following the inclusion of the Cayman Islands on the EU's list of "jurisdictions under increased monitoring".
BVI: Jurisdiction's Popularity Sustained in PRC Market
By Matthew Cowman
The BVI continues to be a jurisdiction of choice for issuing vehicles in DCM transactions and on-balance sheet structured notes programmes for PRC issuers and PRC financial institutions. On the general banking side, we continue to see BVI SPVs being used as borrowing entities, obligors or security providers. BVI SPVs remain popular with real estate finance transactions, but it is worth noting that we have sometimes seen sponsors using BVI limited partnership structures on some real estate finance transactions.
Cayman: Some Key Points To Consider For CLOs in 2022
By James Burch
2022 has started with the need for EU Risk Retention compliant CLOs to move to an alternative jurisdiction (Bermuda or Jersey being favoured) given the EU AML regulations adding the Cayman Islands to its high-risk list. It is hoped that this issue will only exist for a short-time and for deals without EU investors, it is business as usual, but there are a few factors to watch out for in 2022: market participants need to keep an eye on a less accommodative Fed; inflation needs to be monitored in the context of potential rate hikes; and the transition in benchmark reference rate for CLO deals from LIBOR to the new SOFR rate is relevant. Finally, ESG has a longer history in Europe than in the US, but it is becoming so mainstream that in due course it may become difficult for corporates to obtain finance unless they adhere to ESG principles.
Channel Islands: Stable Offering Appeals For CLO Deals
By Zoë Hallam
Since the start of the year, some clients have been considering Jersey and Guernsey as alternative jurisdictions to Cayman, following Cayman's inclusion on the EU's "jurisdictions under increased monitoring" list. Some new deals are likely to come to the islands, but in reality the change only affects a small fraction of the structured finance market, and is expected to be reversed within the year. That said, the use of Jersey and Guernsey SPVs in structured finance transactions remains common. While partnerships, cell companies and trusts are all options, we are still predominantly seeing incorporated companies as the vehicle of choice. The stability of the islands and their compliance with international standards continues to appeal, in particular the recently introduced legal substance requirements. Further, while they are outside of the EU for all purposes, there is recognised equivalence in certain areas, such as data protection, which is a plus when considering various jurisdictions.
Hong Kong: Liquidity Management Key Following PRC Policy Measures
By Kristen Kwok
In the offshore bond market the focus of 2022 has been liquidity management as a result of the recent PRC policy measures put in place to reduce leverage of PRC property developers, with a number of bond issuers conducting exchange or tender offers and consent solicitation exercises to amend terms and extend the maturity date of existing debt. As in other markets, we have seen a distinct trend towards ESG investments - with an increased number of ESG securitisation mandates in 2021 and more interest expected in 2022.
Ireland: European Securitisation Market Outlook - The Great Restart
By Andrew Traynor
The European CLO market had a record year in 2021 with overall issuance at €96.8 billion, a 340% increase on 2020. Assuming market conditions remain favourable and despite supply-driven inflation and current market volatility, we expect a significant number of Euro CLO transactions to reset/refi in 2022 with reported volumes expected to be €35-40 billion across refi and resets and €36 billion in new issue. For CMBS, the full impact on demand for office buildings and retail space remains unknown following the economic fallout of the pandemic and changes in working practices. The impact of post-Covid-19 forbearance and valuation challenges on legacy CMBS transactions also remains to be seen. Overall, the outlook for the CMBS market remains positive following on from the record growth in 2021. As the economy recovers and spending behaviours return to normal, we anticipate increased issuances and shift towards ESG across most products including RMBS, auto loans and prime STS labelled supply with more bank-originated product as central banks scale back their cheap funding schemes. Of course, market participants are closely watching the developing situation in Ukraine which will no doubt have an impact on investor behavior in the early part of 2022.
London: Robust Issuance Levels & Focus on ESG and Sustainability
By Mark Galazzi
London remains one of the financial capitals of the world, and with our offering of Bermuda, BVI and Cayman law expertise in this time-zone we are particularly well placed to monitor market trends and their impact in our jurisdictions. With a fairly smooth transition to synthetic LIBOR for Sterling (which is yet to be duplicated in the US), the expectation in the UK market as monetary policy starts to normalise is that there will still remain a demand for structured finance products, particularly given the continued growth of the large leveraged loan CLO and UK RMBS sectors. Whilst we are seeing an impact on some Cayman CLOs which have EU investors, we are able to pivot to a Bermuda or Jersey offering. We are also seeing innovation in some sectors, including the first synthetic securitisation of jet and superyacht portfolios by a leading lender. BVI entities remain strong in commercial property and private wealth structures, and the appreciation of prices in the property market in particular has supported strong creditor performance. With the threat of rising inflation and some volatility in the global markets there are certainly areas to watch, but the current London market trend is that there will continue to be a robust level of issuance volume with a particular focus on ESG and sustainable debt issuance.
Middle East: Continued Growth In ESG-Linked Sukuk
By Terry-Ann Arch
Rising oil prices is expected to reduce funding needs in some countries in the Middle East where Islamic finance is a key source of financing. Regulatory complexities around the implementation of certain standards by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) together with expected higher interest rates and political risk may also lower investor appetite for Sukuk issuance. However, Sukuk will remain a key financing source in core Islamic finance markets like the Middle East and continued growth in ESG-linked Sukuk is expected with a heightened demand for Sharia compliant ESG financing.
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