Bermuda CLOs: Top 3 Tips

Published date07 June 2022
Subject MatterFinance and Banking, Corporate/Commercial Law, Financial Services, Securitization & Structured Finance, Corporate and Company Law, Securities
Law FirmWalkers
AuthorMr Adam Bathgate and Nathalie West

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...

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