Transactional issues

SPV forms

Which forms can special purpose vehicles take in a securitisation transaction?

In the vast majority of securitisation transactions, the SPV will be incorporated as a Bermuda exempted company with limited liability whose shares will be held on trust (pursuant to a special purpose trust or charitable trust) by a Bermuda licensed trust company as share trustee, which assists with insolvency remoteness requirements. Some transactions (mostly Latin American securitisations) may involve a trust rather than a corporate SPV, in which case a Bermuda trust company would declare a trust over the transaction assets and issue debt backed by the trust property. While rare, partnerships have also been formed as SPVs to participate in securitisation transactions. Legislation was recently introduced in Bermuda to provide for limited liability companied (LLC). While LLCs have not yet been used in the context of securitisation transaction, there is scope for these vehicles to be used for a number of purposes, including as risk-retention vehicles transactions, holding companies or SPVs.

SPV formation process

What is involved in forming the different types of SPVs in your jurisdiction?

Application is made to the BMA for consent to incorporate. At the same time, the company’s proposed name is reserved by making an electronic name request to the Registrar of Companies (RoC). A name reservation must contain the words ‘limited’ (or some abbreviation of it) for a limited company.

On receipt of the BMA consent, a memorandum of association is registered with the RoC, which issues a certificate of incorporation. Once the such certificate has been issued, the new company holds its organisational meetings.

The signatories to the memorandum of association are the company’s provisional directors. Provisional directors’ powers are limited by the Companies Act, and they typically only hold one meeting where they resolve to issue shares to a proposed shareholder, call a general meeting of shareholders and approve the by-laws of the company (subject to confirmation by the shareholders).

Following the provisional directors meeting, a meeting of shareholders is held. At this meeting, the shareholders:

  • approve the company’s by-laws;
  • appoint the board of directors; and
  • appoint the company’s auditors (if any).

After the first meeting of shareholders, the first meeting of the board of directors will be convened to:

  • appoint officers;
  • establish the registered office of the company;
  • approve payment of governmental fees in connection with the incorporation;
  • apply for a tax exemption certificate;
  • authorise the opening of bank accounts; and
  • appoint accountants to maintain financial records (if required).

After the first full board meeting, a company is ready to commence its business.

Only the memorandum of association is a publicly available document. The by-laws and minutes of the organisational meetings are not publicly filed, although the company must file a list of its directors with the RoC along with certain (limited) extracts of its by-laws.

On incorporation and every year after that, a Bermuda company must pay a government fee to maintain its registration. The amount of the fee is based on the company’s authorised share capital and share premium.

Governing law

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

Yes. Choice of law clauses in contracts would be recognised, and given effect to, in any action brought before a court of competent jurisdiction in Bermuda, except for those laws:

  • that the court considers to be procedural in nature;
  • that are revenue or penal laws; and
  • the application of which would be inconsistent with public policy, as such term is interpreted under the laws of Bermuda.

English law and New York law are the most common laws seen in securitisation transactions using a Bermuda structure.

Asset acquisition and transfer

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

There are no legislative or legal restrictions arising pursuant to Bermuda law preventing an SPV from acquiring new assets or transferring its assets after issuance of its securities.

Registration

What are the registration requirements for a securitisation?

There are no registration requirements under Bermuda law. There may be filings and registrations for the issuing entity pursuant to the Foreign Account Tax Compliance Act (FATCA) and other tax information sharing legislation depending on the classification of the entity.

Obligor notification

Must obligors be informed of the securitisation? How is notification effected?

Few, if any, Bermuda domestic assets are securitised, so with no local originators, there are no notification requirements under Bermuda law.

Where there has been an assignment of a receivable arising under an agreement governed by Bermuda law, notification of such assignment must be provided to the obligors.

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

Under Bermuda common law, a general equitable duty of confidentiality applies to information coming to the knowledge of a person in circumstances where it would be unconscionable for the recipient to disclose it. Contractual waiver of confidentiality is possible.

Credit rating agencies

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

There are no rules in Bermuda regulating the relationship between credit rating agencies and issuers. Where applicable, Bermuda issuers are bound by, and, where required, need to comply with, Securities and Exchange Commission Rule 17g-5.

There are a number of factors that rating agencies consider when determining a particular rating for securitised issuances. The factors that are particularly applicable from a Bermuda perspective are true sale, bankruptcy-remoteness and taxation issues.

Directors’ and officers’ duties

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

There is no statutory prescription in Bermuda setting out all of the duties of directors of a Bermuda company. Generally, a company’s memorandum of association and by-laws will delimit and describe the powers and duties of the board and officers. These provisions, together with the Companies Act and relevant case-law, describe the scope of the directors’ powers.

As a general matter, Bermuda Company Law does not specify the general or fiduciary duties of directors. The Bermuda courts have adopted English common law principles relating to directors’ duties, which can be summarised as:

  • a duty to act in what the directors bona fide consider to be the best interests of the company;
  • a duty to exercise their powers for the purposes for which they are conferred;
  • a duty of trusteeship of the company’s assets;
  • a duty to avoid conflicts of interest and of duty;
  • a duty to disclose personal interest in contracts involving the company;
  • a duty not to make secret profits from the directors’ office; and
  • a duty to act with skill, care and diligence.

Of these, the duties of loyalty, honesty and fidelity are considered to be the core fiduciary duties.

The general principles governing a director’s conduct set out above are augmented by a range of specific duties imposed by the Bermuda Companies Act 1981 (the Companies Act). Some of these duties are imposed not on the directors in their own right, but on the company. However, since the directors are responsible for the performance of the statutory duties imposed on the company, it is they who must ensure that the company does everything that is required of it. Other duties are imposed directly on directors themselves, generally taking the form either of the restriction of a particular activity or a requirement to disclose it, or both.

In a typical off-balance sheet securitisation, the SPV will enter into an administration agreement with a corporate services provider (the administrator), a company that provides administrative or corporate support services to SPVs. Among the services provided, the administrator will provide independent directors and officers of the SPV. The directors and officers of the SPV will typically be independent of the originator but may be employees of the share trustee. Even if they are employed by the share trustee (or by the originator), directors of a Bermuda SPV will owe fiduciary duties to the SPV and will need to act in the best interests of the SPV.

Risk exposure

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

There are no such regulations under Bermuda law, although structures involving Bermuda SPVs are structured to comply with US and EU risk-retention requirements.