A secured creditor may enforce its security notwithstanding a winding-up order or an order for the appointment of provisional liquidators having been made, unless a company has negotiated a contractual standstill with that creditor.
If a company is wound up, proceedings may not be brought against it, other than with the sanction of the court. Furthermore, any disposition of the property of the company and any transfer of shares – or alteration in the status of the members of the company – made after the commencement of the winding-up shall be void, unless the court orders otherwise. While these provisions do not apply to prevent a secured creditor enforcing its security, they will generally prevent an investor or trustee enforcing a payment claim after a winding-up order has been made.
The potential impact of this rule means that it is market practice to include non-petition clauses in securitisation documents, whereby investors, trustees and other counterparties contractually undertake not to petition for the winding-up of the issuer for the lifetime of the deal. Under Bermuda law, a petition to wind up an issuer brought in breach of any non-petition provision in the deal documents may be heard by the Bermuda courts. However, subject to any applicable provision in the relevant documents to the contrary, the issuer could seek to restrain a threatened breach of such a non-petition provision by way of an application to the courts for an injunction.
A liquidator of a Bermuda company may disclaim onerous property only with the leave of the court. This allows interested parties to be heard before the court grants any such application.
Typically, an SPE would be incorporated in Bermuda as an exempted company with limited liability. To assist with insolvency remoteness requirements, the shares of the SPE are typically held on trust pursuant to a special-purpose trust or charitable trust with a Bermuda-licensed trust company as share trustee. SPEs can also be formed as Bermuda trusts (as is more typical for LATAM securitisations), partnerships and limited liability companies (LLCs). Legislation for LLCs came into force in Bermuda in 2016. Bermuda’s LLC legislation will be familiar to US portfolio managers and US legal counsel as it was modelled after Delaware law.
In a typical off-balance-sheet securitisation, the SPE will enter into an administration agreement with a Bermuda corporate services provider (the administrator), providing administrative or corporate support services to the SPE. Among the services provided, the administrator will provide independent directors and the company secretary of the SPE.
SPEs used in securitisation transactions are not usually subject to Bermuda’s economic substance regime. However, where possible, it is desirable for the board to be able to hold meetings in Bermuda and therefore, where the quorum is two directors, it is desirable for two independent Bermuda directors to be appointed. If no Bermuda resident directors are appointed, the Bermuda SPE will require a Bermuda-based secretary (or assistant secretary) or resident representative. The Bermuda corporate services provider should be able to fulfil this requirement.
In accordance with English case law, which is highly persuasive (although not technically binding) in Bermuda, only in exceptional circumstances would the Bermuda courts disregard the separate legal personality of a company in any insolvency proceedings and treat the assets and liabilities of two entities as being owned and incurred by one entity. Such circumstances include where the SPE is used for an illegal or immoral purpose, is a sham, is engaged in fraud or where public interest concerns must prevail.
Most often, the applicable sale or transfer agreement will be governed by non-Bermuda law and the Bermuda courts would generally recognise and uphold the governing law of such agreement and respect the characterisation of the transaction under such governing law.
There are no Bermuda authorities on whether the sale of an asset by a seller/originator to a purchaser/issuer may be recharacterised as a loan secured on such asset or as some other transaction, or set aside as a sham. Bermuda courts would likely follow the established English cases, which would be highly persuasive although not technically binding in Bermuda. In particular, the following criteria set out by Romer CJ in Re George Inglefield Ltd  Ch 1 for a transaction of mortgage or charge versus a transaction of sale would be persuasive in Bermuda:
Transactions should be on an arm’s-length basis with appropriate separation between the seller/originator and the purchaser/issuer, requiring:
Bermuda law true sale opinions may be provided to investors and related parties upon request. Such opinions would be limited to the effectiveness of the sale of assets as a matter of Bermuda law, and would contain the usual assumptions and qualifications, particularly where the sale or transfer agreement is not governed by Bermuda law.
As mentioned in 1.2 Special-Purpose Entities (SPEs), the assets and liabilities of the SPE can be structured as “off balance sheet” (ie, off the balance sheet of the seller/originator) whereby the shares of the Bermuda SPE are held by an independent trust company as share trustee on trust pursuant to a special purpose trust or charitable trust.
In addition, and in both off-balance-sheet and on-balance-sheet securitisations, the following steps are commonly taken to ensure that the SPE cannot be petitioned into a winding up or bankruptcy:
The Bermuda legal securitisation transaction opinion on the Bermuda SPE will typically set out the results of searches run at the Bermuda Supreme Court and Bermuda Registrar of Companies and confirm that – based on such searches – no steps have been taken in Bermuda for the appointment of a receiver or liquidator to, or for the winding up or dissolution of, the Bermuda SPE in Bermuda.
There are no stamp duties, income taxes, corporate or capital gains taxes, withholdings, levies, registration taxes, estate duties, inheritance taxes or gift taxes imposed under Bermuda law on Bermuda-exempted companies and partnerships. Bermuda provides a tax-neutral platform for securitisation transactions with no additional taxes imposed under Bermuda law if structured using a Bermuda SPE purchaser/issuer.
Bermuda-exempted companies and partnerships can obtain an undertaking from the Minister of Finance of Bermuda confirming that if any legislation is enacted in Bermuda imposing any tax computed on profits or income, or on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax will not, until 31 March 2035, apply to the SPE or to any of its operations, shares, debentures or other obligations. The undertaking does not apply to persons ordinarily resident in Bermuda or taxes payable on real property owned or leased by Bermuda entities in Bermuda.
No taxes are payable on income earned by a Bermuda SPE under Bermuda law.
No withholding or other taxes are payable on transfers by or to a Bermuda SPE under Bermuda law.
Although there are no taxes payable on securitisation transactions under Bermuda law, certain Bermuda entities are subject to both the US Foreign Account Tax Compliance Act and the OECD Common Reporting Standard, and party to many tax information exchange agreements such as the USA – Bermuda Tax Convention Act 1986 and the International Cooperation (Tax Information Exchange Agreements) Act 2005.
In keeping with its commitment to tax transparency, and following proposals raised by the EU Code of Conduct Group regarding economic substance, the Bermuda government implemented the Economic Substance Act 2018 (as amended) and the Economic Substance Regulations 2018 (as amended). The Minister of Finance of Bermuda has responsibility for the oversight of the economic substance regime in Bermuda, and the Bermuda Registrar of Companies is the competent authority for the purposes of determining whether the economic substance requirements have been met by entities that are required to comply. On securitisation transactions, Bermuda SPEs do not typically carry on an activity which would subject the SPE to Bermuda’s economic substance regulations, but this would need to be reviewed on a case-by-case basis.
The Bermuda legal opinion on a securitisation transaction will typically confirm that no taxes will arise under the transaction documents as a matter of Bermuda law.
The accounting treatment of the securitisation transaction is not usually a matter of Bermuda law or an issue for Bermuda lawyers to consider.
Bermuda lawyers are not generally required to consider or opine on the accounting treatment of securitisation transactions.
Provided the securities are not listed on the Bermuda Stock Exchange, there are no public disclosure requirements in Bermuda. A typical Bermuda SPE will not be a regulated entity and is expressly carved out of the definition of “investment fund” in the Investment Funds Act 2006 of Bermuda (the Investment Funds Act).
Conversely, Bermuda special-purpose insurers (SPIs), which are used to facilitate the transfer of insurance risks to the capital markets through the issuance of insurance-linked securities (ILS) are regulated by the Bermuda Monetary Authority (BMA).
SPIs are required to provide full disclosure of the investment guidelines governing the collateral to their cedants and their investor/debtholders, including the types, issuers and target credit ratings of permissible investments, and the following data.
Provided the securities are not listed on the Bermuda Stock Exchange, there are no public disclosure requirements in Bermuda for typical Bermuda SPEs used in securitisation transactions.
There are no Bermuda laws or regulations governing credit risk retention for Bermuda SPEs used in securitisations, although structures involving Bermuda SPEs are structured to comply with US and EU risk retention requirements. Securitisation receivables are not typically originated by a Bermuda originator, nor are they paid into a domestic Bermuda account.
Provided the securities are not listed on the Bermuda Stock Exchange, there are no laws or regulations requiring periodic reporting in Bermuda for Bermuda SPEs.
SPIs are required to abide by the following filing requirements with the BMA:
The parties to securitisation transactions involving a Bermuda SPE will invariably engage the services of one or more major international rating agencies based outside Bermuda. Such foreign rating agencies are not subject to any regulation in Bermuda.
Bermuda-licensed banks are subject to capital and liquidity regulatory requirements consistent with Basel III, with such requirements applying to securitisation transactions. However, securitisation transactions featuring Bermuda SPEs rarely involve Bermuda-licensed banks.
Bermuda SPIs are required under Bermuda’s Insurance Act 1978 to be fully collateralised. This requires the SPI to provide collateral to its insureds covering the full aggregate limits of potential claims that could arise from the applicable insurance and reinsurance contracts.
There are no specific Bermuda laws or regulations that apply to the use of derivatives in securitisations involving a Bermuda SPE.
A typical Bermuda SPE involved in a securitisation transaction is not regulated by the BMA as an investment fund under the Investment Funds Act. As such, the investor protection regulations under the Investment Funds Act do not apply to Bermuda SPE securitisation vehicles.
For SPIs, which are regulated by the BMA, only sufficiently fit and proper sophisticated participants are expected by the BMA to purchase insurance-linked securities, such as high-income or high-net-worth private investors, or eligible investment funds approved by the BMA.
There are no specific laws and regulations that apply to Bermuda-licensed banks in respect of the securitisation of their financial assets and their securitisation investments. However, banks are required to abide by the BMA’s Banks and Deposit Companies Act 1999 Code of Conduct (August 2022) and Statement of Principles (December 2012) which sets out the BMA’s guidance on the duties, requirements and standards to be complied with and the procedures and principles to be observed by Bermuda-licensed banks, including with respect to their investments.
There are no specific rules that apply to the form of SPEs or other entities used in securitisations. For details of the types of entities used, please see 1.2 Special-Purpose Entities (SPEs).
Typically, a securitisation SPE is not regulated as a matter of Bermuda law. SPEs used in securitisations are expressly carved out of the Investment Funds Act. Provided the originators and the investors are not resident in, or carrying on any trade or business in or from, Bermuda and provided that the issuer will not be making an invitation to the public in Bermuda to subscribe for any of its securities, there is no requirement under Bermuda law for the SPE or such parties to be licensed in Bermuda.
Furthermore, and as discussed in 2.4 Other Taxes, securitisation SPEs will not generally be subject to Bermuda’s economic substance regime unless carrying out certain “relevant activities”, which is rarely the case in practice.
The types and decisions regarding credit enhancements offered and granted on securitisations involving Bermuda SPEs are not typically matters of Bermuda law.
While the government of Bermuda does raise money through capital markets, it does not currently participate in the securitisation market.
Investors in securitisations involving a Bermuda SPE vary from financial institutions to high-net-worth private investors and private funds. Provided the investors are not resident in, or carrying on any trade or business in or from, Bermuda, the BMA does not restrict or regulate the type of investors (other than for investors of SPIs on ILS transactions – please see 4.8 Investor Protection).
Securitisation transaction documentation is never governed by Bermuda law, so the relevant provisions are structured to comply with the requirements of the applicable foreign law, which is most commonly New York or English law.
The requirements for a true sale under Bermuda law are discussed in 1.3 Transfer of Financial Assets, and the main means of achieving bankruptcy remoteness are set out in 1.2 Special Purpose Entities (SPEs) and 1.4 Construction of Bankruptcy-Remote Transactions.
Documentation entered into by a Bermuda issuer will include principal warranties customary in transactions in the applicable market, which is most commonly New York or England.
As a matter of Bermuda law, a charge is not required to be registered in Bermuda to be valid. However, to the extent that Bermuda law governs the priority of the charge, registration of the charge on the Register of Charges under the Companies Act (being an optional registration) ensures that the charge has priority in Bermuda over any unregistered charges and subsequently registered charges granted in respect of the same assets.
Registration also has the effect of putting third parties on constructive notice of the existence of the security, and as such trustees and investors generally require the relevant documents to be registered as soon as possible following closing.
Documentation entered into by a Bermuda issuer will include principal covenants customary in transactions in the applicable market, which is most commonly New York or England.
Documentation entered into by a Bermuda issuer will include principal servicing provisions customary in transactions in the applicable market, which is most commonly New York or England.
Documentation entered into by a Bermuda issuer will include principal default provisions customary in transactions in the applicable market, which is most commonly New York or England.
Documentation entered into by a Bermuda issuer will include principal indemnities customary in transactions in the applicable market, which is most commonly New York or England.
The issuer, which issues the notes purchased by investors, is typically an SPE that almost always takes the form of an exempted company incorporated with limited liability. The issuer holds title to the assets backing the securitisation and is responsible for honouring the payment obligations on the notes.
In most transactions, the requirement of bankruptcy remoteness is critical to the entire structure. As such, the issuer’s ordinary shares will be held on the terms of a charitable or purpose trust by an independent trust company, as explained in 1.4 Construction of Bankruptcy-Remote Transactions. The main exception to this general rule is commercial real estate (CRE) collateralised loan obligations, which generally remain “on balance sheet” with the issuer’s ordinary shares being held by an affiliate of, or an investment fund managed by, the manager or originator.
Although this term does not have any technical meaning under Bermuda law, it is generally understood that the sponsor is the party that drives the transaction. It may be the originator of the underlying assets (or one of its affiliates) or, in a collateralised loan obligation (CLO), it is likely to be the CLO manager who selects the assets that will comprise the collateral.
The identity of the sponsor is crucial to the risk retention analysis in deals that are structured to be compliant with US and/or EU requirements in this area, but this is not a Bermuda legal consideration.
The underwriter, placement agent or arranger is an investment bank whose role is to structure the deal and sell the notes to investors. Often, it will be described as the initial purchaser, since strictly speaking the arranger buys the notes before selling them on to investors. In practice, however, the investors have been lined up prior to closing and so the transfer of the notes happens within minutes.
In a CLO transaction, it is common for the arranger to provide warehouse financing for the deal when the manager is acquiring the collateral which will support the deal.
Servicers will collect payments of principal of interest on the underlying assets and administer the collateral after the transaction has closed. The role includes acting as liaison for the obligors and processing their payments, and may also include collateral liquidation and the preparation of investor reports. Servicing is a role commonly undertaken by originators, although in certain fields a specialised servicer may carry out the role.
CLO transactions do not feature servicers, with this role typically being undertaken by the trustee, as discussed further in 6.6 Trustees.
Investors in notes issued by Bermuda issuers are overwhelmingly institutional and mainly comprise banks, pension funds, insurance companies, mutual funds and hedge funds, although high net worth individuals have been known to invest as well.
Assuming that no invitation to subscribe for the securities is made to the public in Bermuda and the investor is not resident in, or carrying on any trade or business in or from, Bermuda, there are no limitations under Bermuda law applicable where a Bermuda SPE acts as a securitisation issuer – with one exception: only sufficiently fit and proper sophisticated participants are expected by the BMA to invest in insurance-linked securities issued by SPIs. Examples of such investors are high income or high net worth individuals, or eligible investment funds approved by the BMA.
The trustee is usually a large commercial bank whose role is to represent the noteholders and to provide a principal point of contact for the noteholders themselves and for other transaction parties dealing with them.
In addition, in a CLO transaction the trustee will act as portfolio administrator and run many of the practical and accounting functions of the deal, meaning that no separate servicer will be engaged for this purpose. In this capacity, the trustee will book and settle trades at the manager’s instructions, make payments and issue reports to investors.
There are no applicable Bermuda regulations, rules or legislation which apply to synthetic securitisations, so in principle it is possible for Bermuda issuers or investors to participate in such transactions. Any such transactions would not be governed by Bermuda law and so would need to comply with applicable provisions of the relevant foreign law.
Almost all securitisations using Bermuda vehicles involve assets that are originated offshore. Bermuda law does not prescribe particular types of receivables or asset classes that can be securitised. There are no provisions of Bermuda law that would restrict the acquisition of foreign receivables by an SPE.
Most securitisations involving Bermuda SPEs are concentrated in the following industry sectors:
A typical aircraft asset-backed securities (ABS) deal will be originated by an aircraft leasing company, who will act as the seller and servicer. An SPE will purchase the aircraft and the associated rights to the lease payments from the airlines to which the aircraft are leased, financing this purchase through the issue of notes and equity interests. After the deal closes, the SPE becomes the lessor of the securitised fleet and as such receives lease payments from the various airlines operating the fleet, using such payments to finance the payment of principal and coupon on the notes. The collateral will comprise a diverse mix of aircraft types, ages and geographical regions.
Container lease securitisation trasnsactions work in a similar way to aircraft ABS deals. The container-leasing company originates the deal and acts as seller and servicer. The leases are sold to an SPE (which can be either a subsidiary of the leasing company in an on-balance-sheet structure or an orphan in an off-balance-sheet structure), which then takes over the receivables owed by the shipping companies leasing the containers. The lease payments then finance the SPE’s repayment of principal and coupon on the notes.
Ocean freight has a lower carbon footprint than air freight, a point which makes container lease securitisations appealing to ESG-sensitive investors.
Insurance and Risk Management
The most common form of insurance-related securitisations are catastrophe bonds. In these transactions, an SPE is formed and licensed by the BMA as a special-purpose insurer. It then enters into a reinsurance agreement with a sponsor, with the sponsor paying premiums to the SPI for the coverage. At the same time, the SPI issues securities to investors, placing the proceeds into a collateral account held with a trustee, where they are typically invested in liquid securities such as money market funds. The SPI uses returns made from the collateral and the premiums received from the sponsor to fund the payments of principal and coupon on the notes.
If a qualifying event occurs, the SPI liquidates the collateral required to pay the sponsor under the reinsurance agreement. If no trigger event occurs over the life of the deal, the collateral is liquidated and investors are repaid.
Catastrophe bonds and other insurance-linked securities appeal to investors as they have little to no correlation with the financial markets or traditional asset classes whose performance is linked to the economic condition of a geographic region, industry sector or particular enterprise. Instead, their value is linked to non-financial risks such as natural disasters or the mortality and longevity risk associated with life insurance products.
Collateralised Loan Obligations
A CLO is a type of securitisation whereby a portfolio of (usually leveraged) loans is pooled into a series of marketable debt securities. In the initial phase, known as warehousing, an SPE 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 SPE 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.
A Jurisdiction of Choice for EU Investors in 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 (CLOs) where the investor base is anticipated to include those based in the EU.
In the months leading up to the Cayman Islands’ inclusion on the EU AML list, Walkers worked with the Bermuda Monetary Authority and the Registrar of Companies to agree an expedited and prioritised incorporation process for standard off-balance-sheet CLO structures, and the jurisdiction is well equipped to meet the turnaround times required for these transactions. Since then, Walkers has moved a number of existing deals in the warehouse stage across to Bermuda from the Cayman Islands, and in addition have incorporated multiple new issuer vehicles.
Bermuda has long been a favoured jurisdiction for securitisation deals, with market participants in the aircraft and shipping container sectors in particular choosing to incorporate issuer special-purpose vehicles in Bermuda. The island has a secure, modern and established physical and technological infrastructure, with a long history of incorporating international companies and SPVs.
This background, and Bermuda’s status as the market leader in insurance-linked securities, means that the rating agencies are familiar with the jurisdiction, characteristics and features of Bermuda deals. Crucially, Bermuda is able to offer managers and investors many of the features they have come to expect on Cayman Islands deals, as detailed here.
This latter point is a particular advantage in the commercial real estate (or CRE) CLO space, where structures tend to be on balance sheet, with the issuer’s ordinary shares being held by a fund managed by, or a holding entity affiliated with, the collateral manager, and with the issuer’s board of directors typically comprising a mix of independent directors provided by the administrator and individuals associated with the manager. In the weeks prior to this article’s publication, the authors have seen a particular uptick in the number of CRE CLOs being formed in Bermuda.
The principal difference is the security registration regime in Bermuda. Unlike in the Cayman Islands, 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; however, Walkers has developed a solution enabling parties to benefit from registration even in these sensitive situations.
The EU’s announcement understandably caused a degree of concern in the market. The authors are proud of the way Bermuda has been able to step into the breach to present managers and investors with a credible alternative, and the feedback the CLO team has received to date is that the Bermuda experience has been a seamless one. Even more encouragingly, those managers who elected to move their deals to Bermuda in the initial wave in February have shown their confidence in the jurisdiction by electing to perform subsequent deals through Bermuda issuers.
Bermuda is regarded as the “risk capital of the world”, as home to one of the largest reinsurance markets in the world and a market leader in insurance-linked securities (ILS). As the sector develops and evolves, and with growing investor awareness of the benefits and uses of ILS structures, the authors expect to see continued growth in this rapidly expanding area.
What are ILS?
ILS are an alternative asset class. The most common form of ILS are catastrophe bonds (cat bonds) but ILS also encompass various other collateralised (re)insurance instruments and risk-linked securities.
The value of these assets is linked to insurance-related risks. These risks may include natural disasters such as earthquakes and hurricanes, which cause property damage, or other insurable risks such as the mortality and longevity risk associated with life insurance products. Therefore, ILS offer a method for insurance and reinsurance risks to be transferred to investors in the capital markets.
One of the key advantages of these instruments for investors is that they have little to no correlation with traditional asset classes whose returns are often determined by economic factors such as a country’s economic performance, a company’s financial performance or geopolitical risks.
There are many reasons why Bermuda has become and remains a global leader in ILS. Some of the key advantages are its innovative regulatory framework, a deep talent pool and its proximity to both North America and Europe – two of the largest capital markets in the world.
The year 2021 was a bumper year for the Bermuda reinsurance market with yet again record levels of cat bond and ILS issuances – a record 281 issuances, representing an 11.1% increase from 253 listings in 2020, for a total of 757 listings. This increase has been driven both by existing sponsors making additional issuances and new sponsors entering the market.
In addition to this, there have been a large number of new reinsurance companies formed, with an overall increase of 10.3% in insurers registered. The number of special-purpose insurers (SPIs) registered has stayed steady, matching the 2020 numbers. These vehicles are typically used for the issuance of cat bonds and ILS.
What has also been encouraging is the increase in the number of long-term (re)insurers, which has jumped 62.5% since 2020. This indicates that the Bermuda reinsurance market is continuing to diversify away from the property catastrophe business which has traditionally dominated the landscape in Bermuda.
The increase in formations and ILS issuances and listings has also resulted in a corresponding influx of new capital into the Bermuda reinsurance market, with the Bermuda Stock Exchange (BSX) reporting 786 ILS listings with a total nominal value of USD51.9 billion as of 18 May 2022. There is a general belief that these trends will continue into 2023, driven by the ongoing profitability of the sector.