What legislation governs securitisation in your jurisdiction? Has your jurisdiction enacted a specific securitisation law?
Currently, there is no legislation specifically governing securitisation transactions in Bermuda, as Bermuda’s existing common law and corporate legislation provide appropriate legal structures and protections necessary for securitisations.
The largest institutional purchasers of securities issued in a Bermuda securitisation are domiciled outside Bermuda. As such, Bermuda securitisations are typically governed by non-Bermuda legislation.Applicable transactions
Does your jurisdiction define which types of transactions constitute securitisations?
No there is no such definition under Bermuda law.Market climate
How large is the market for securitisations in your jurisdiction?
Bermuda is one of the largest offshore jurisdictions for securitisation transactions. The overall issuance of securitised products has returned to pre-financial crisis levels, predominantly in the areas of existing well-established structures and asset classes.
Which body has responsibility for the regulation of securitisation?
There is no regulatory body responsible for the regulation of securitisation in Bermuda.
A typical Bermuda securitisation vehicle (a special purpose vehicle (SPV)) will not be a regulated entity.Licensing and authorisation requirements
Must originators, servicers or issuers be licensed?
Provided that the originators and servicers are not carrying on business from within Bermuda, and 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 such transaction parties to be licensed.
What will the regulator consider before granting, refusing or withdrawing authorisation?
Not applicable. See question 4.Sanctions
What sanctions can the regulator impose?
Not applicable. See question 4.Public disclosure requirements
What are the public disclosure requirements for issuance of a securitisation?
Provided the securities are not listed on the Bermuda Stock Exchange, there are no public disclosure requirements in Bermuda.
What are the ongoing public disclosure requirements following a securitisation issuance?
Provided the securities are not listed on the Bermuda Stock Exchange, there are no ongoing public disclosure requirements in Bermuda.
Outside licensing considerations, are there any restrictions on which entities can be originators?
No, there are no restrictions under Bermuda law.Receivables
What types of receivables or other assets can be securitised?
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 Bermuda provisions that would restrict the acquisition of foreign receivables by a Bermuda SPV.
The majority of Bermuda securitisations in the past decade have been concentrated in the following industry sectors:
- aircraft and aircraft engines;
- insurance and risk management; and
- shipping containers.
Are there any limitations on the classes of investors that can participate in an offering in a securitisation transaction?
No, there are no limitations under Bermuda law applicable where a Bermuda SPV is the issuer, assuming that no invitation to subscribe for securities is made to the public in Bermuda.Custodians/servicers
Who may act as custodian, account bank and portfolio administrator or servicer for the securitised assets and the securities?
Bermuda law does not prescribe who may act as custodian, account bank and portfolio administrator or servicer, and these roles are usually carried out by transaction parties operating and based outside Bermuda. The Bermuda Monetary Authority (BMA) regulates local service providers including banks.Public-sector involvement
Are there any special considerations for securitisations involving receivables with a public-sector element?
No, there are no special considerations.
Transactional issuesSPV 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.
What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?
Security over shares of the Bermuda SPV is often provided under a Bermuda law governed share charge. In addition, in most off-balance sheet securitisations, security is granted over the underlying assets by the SPV in favour of the note trustee or security trustee for the benefit of the secured parties. Such security interests will typically exclude:
- the corporate benefit fee paid to the issuer in respect of the transaction;
- the amounts (if any) remaining from the proceeds of the issuance and allotment of the issuer’s ordinary shares; and
- any accounts maintained in Bermuda maintained in respect of such funds.
How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?
As a matter of Bermuda law, a charge is not required to be registered in Bermuda to be valid. However, it may be desirable to ensure the priority in Bermuda of a charge that it be registered in the Register of Charges under the Companies Act. On registration, to the extent that Bermuda law governs the priority of a charge, the charge will have priority in Bermuda over any unregistered charges, and over any subsequently registered charges, in respect of the assets which are the subject of the charge.Enforcement
How do investors enforce their security interest?
Bermuda is internationally recognised as being a creditor-friendly jurisdiction. Much will depend on the remedies and processes as set out in the relevant security document. Other than the remedy of foreclosure, investors are permitted to enforce their contractual rights under the relevant security documents without making an application to Bermuda court or a liquidator (in the case of an insolvency).Commingling risk
Is commingling risk relating to collections an issue in your jurisdiction?
Typically, the subject receivables are not originated by a Bermuda originator and are almost never paid into a domestic Bermuda account.
What are the primary tax considerations for originators in your jurisdiction?
As mentioned previously, there are few (if any) domestic originators in Bermuda (see question 20). Nevertheless, there are no additional taxes imposed by Bermuda should a transaction be structured using, for example, a Bermuda SPV. Bermuda provides a tax-neutral platform for originators and institutions who wish to establish the issuing vehicle there.Issuers
What are the primary tax considerations for issuers in your jurisdiction? What structures are used to avoid entity-level taxation of issuers?
Currently, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by a Bermuda SPV issuer established as an exempted company, or by holders of notes issued pursuant to a securitisation.
Bermuda exempted companies obtain an undertaking from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, if any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed 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, be applicable to the SPV or to any of its operations, shares, debentures or other obligations, except insofar as such tax applies to persons ordinarily resident in Bermuda or payable by the SPV in respect of real property owned or leased by it in Bermuda.Investors
What are the primary tax considerations for investors?
Bermuda is party to many tax information exchange agreements and subject to both the US FATCA and the OECD Common Reporting Standard. Reporting entities incorporated or formed in Bermuda will, therefore, be bound to provide information regarding their investors to the Bermuda Ministry of Finance as and when required by law.
In keeping with its commitment to tax transparency, the government of Bermuda is addressing proposals raised by the EU Code of Conduct Group regarding economic substance (Economic Substance). In November 2017, the Premier of Bermuda committed to addressing the proposals relating to economic substance for entities doing business in or through Bermuda and to pass legislation to implement any appropriate changes by 31 December 2018 (the Legislative Date). This subject is one that is receiving attention in both the Overseas Territories and Crown Dependencies as we move closer to the Legislative Date. Draft legislation has been tabled in the House of Assembly but has not yet been enacted.
How are SPVs made bankruptcy-remote?
Prior to the securitisation transactions being entered into, the SPV’s objects and powers should be limited, to allow it to only enter into the specific transactions related to the securitisation. This is also necessary if the securities to be issued by the SPV are to be rated by one of the rating agencies.
It is critical to ensure that the SPV will not be petitioned into winding up (bankruptcy) and the trustee of the purpose trust will agree not to petition the SPV into bankruptcy. Further, the note holders, indenture trustee and other service providers will agree in the indenture and other transaction documents that they will not petition for the bankruptcy of the SPV. Also, the transaction documents will usually contain a provision for the extinguishment or diminishment of obligations if at any point the liabilities are greater than the assets, so that the liabilities will be extinguished or diminished to be less than the assets. This will ensure that the SPV is at all times solvent, and, therefore, cannot be petitioned into bankruptcy.True sale
What factors would a court in your jurisdiction consider in making a determination of true sale of the underlying assets to the SPV (eg, absence of recourse for credit losses, arm’s length)?
In circumstances where the sale agreement is governed by the laws of another jurisdiction, as is usually the case, the Bermuda courts would respect the characterisation of the transaction under the governing law. In order to make a determination as to whether there has been a ‘true sale’ as a matter of Bermuda law, it would be necessary to review the agreement as a whole to determine if it constitutes a sale. Bermuda courts would likely follow the established English law cases, which would be persuasive although not binding in Bermuda, and in particular the criteria set out by Romer CJ in Re George Inglefield Ltd  Ch 1 as the differences between a sale and a charge. These are:
- there is no right held by the vendor allowing it to reacquire the assets by repaying the price received on the sale;
- there is no obligation on the purchaser to account to the vendor for any profit made under realisation of the assets; and
- the purchaser has no right of recourse against the seller if a particular asset within the pool of assets realises an amount less than the price paid for it.
Any transaction should be on an arm’s-length basis with appropriate separation between the seller or originator and the purchaser or issuer.
Essentially, this requires that the job of administering the SPV is handled professionally by competent administrators who understand the commercial rational and the legal structure of the transaction, and that none of the transaction parties attempt to exert an unacceptable level of control over the SPV and its directors.Consolidation of assets and liabilities
What are the factors that a bankruptcy court would consider in deciding to consolidate the assets and liabilities of the originator and the SPV in your jurisdiction?
There is no established doctrine in Bermuda of ‘substantive consolidation’, by which we mean the principle that the assets and liabilities of two companies may be treated as though such assets and liabilities were owned and incurred by one entity on a bankruptcy, liquidation or other insolvency proceedings.
English case law, which would be persuasive in Bermuda, broadly illustrates that it is only in exceptional circumstances that the basic principle of the separate legal personality of a company is ignored and the ‘corporate veil’ is ‘lifted’, for instance, where the device of incorporation is used for some illegal or immoral purpose, is a sham, or where the company is otherwise party to some form of fraud or where public interest concerns must prevail.
Walkers works in exclusive association with Kevin Taylor trading as ‘Walkers Bermuda’, a full-service commercial law firm providing advice on all aspects of Bermuda law.
Updates and trendsRecent developments
Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on financial firms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?
As is the case with other applicable jurisdictions, the enactment of Economic Substance requirements remains too early in the legislative process to know for certain what impact (if any) such requirements shall have. We are not aware of any other legal developments in Bermuda that are likely to have a significant impact on securitisation transactions in Bermuda.