1. Loan Market Panorama
1.1 Impact of Regulatory Environment and Economic Cycles
There have not been any significant legislative or regulatory changes affecting the rights of lenders or secured creditors, or that would affect Bermuda's status as a leading creditor-friendly jurisdiction. See 1.6 Legal, Tax, Regulatory or Other Develop¬ments regarding the impact of Bermuda's economic substance regime and the Incorporated Segregated Accounts Companies Act 2019.
After emerging from the recession caused by the global financial crisis a decade ago, Bermuda's economy had shown three years of growth prior to the COVID-19 pandemic, driven principally by increases in tourism and by major projects such as the con-struction of a new terminal at the island's L.F. Wade Internation¬al Airport. With the USA being Bermuda's largest trade partner and the source of the majority of its tourist visitors, Bermuda is exposed to volatility in the US economy.
Prior to the COVID-19 pandemic, activity in the loan market was healthy and robust, with Bermuda entities frequently being used as holding companies and joint venture entities in particu¬lar. It was also (and remains) fairly common to see Bermuda special purpose vehicles used in the shipping, aviation, mining, oil and gas and property sectors.
While Bermuda is a major international financial centre and Bermuda entities are used in a variety of cross-border structures and transactions, there is no real loan market to speak of in Bermuda because such deals are in the overwhelming majority of cases originated in one of the major "onshore" jurisdictions. As such, deals featuring Bermuda entities are inevitably suscep¬tible to market trends and developments in such jurisdictions.
1.2 Impact of the COVID-19 Pandemic
Like the rest of the world, COVID-19 has had a severely detri¬mental effect on Bermuda's economy. The Bermuda government itself has had to borrow to fund previously unforeseen COVID-related expenditure, and in so doing has raised Bermuda's debt ceiling to USD2.9 billion.
The imposition of travel restrictions as a result of the pandemic has had a significant impact on tourism revenues and local busi-nesses dependent on tourism. The government took swift action to impose strict protocols protecting the community, includ¬ing a rigorous and comprehensive testing and contact tracing regime, and Bermuda has been one of the world's most success¬ful countries in per capita testing and controlling of the virus.
To ameliorate the impact of the virus on tourism, and in an attempt to capitalise on the accelerated movement towards remote working around the world, the Bermuda government has introduced a one-year residential certificate, which allows employees and students to work and study remotely from Ber¬muda for a year. Applicants must be able to support themselves while working remotely, and cannot seek work in Bermuda. The initiative has proven popular, with 190 applications having been received within a month of the scheme's launch.
In the loan markets, and consistent with trends in the wider global economy, there are examples of Bermuda borrowers hav¬ing to restructure the terms of outstanding debt and access new liquidity to meet current funding needs. In this regard, trends in Bermuda are mirroring those of the wider global economy.
1.3 The High-Yield Market
While there have been certain high-profile examples of Bermu¬da issuers accessing the high-yield market instead of the syndi-cated loan market to raise debt, such structuring decisions tend to be driven either by investor demand or by considerations in jurisdictions where such issuers operate or are tax-resident, and not by Bermuda-specific factors. To the extent Bermuda issuers elect to meet their financing needs through high-yield debt, they will invariably do so through the capital markets in one of the world's major financial centres, most frequently New York or Hong Kong.
In the reinsurance sector, Bermuda reinsurers may elect to issue subordinated debt instruments, which can constitute Tier 2 capital and as such assist with satisfying regulatory capital requirements.
1.4 Alternative Credit Providers
As explained elsewhere, Bermuda entities feature in a variety of structures across numerous market sectors. As such, it is not uncommon to see credit facilities being made available to structures featuring Bermuda companies by alternative credit providers. In such circumstances, borrowers and sponsors may elect to source debt from such providers for a variety of rea¬sons, including a willingness to lend at higher leverage mul¬tiples, greater execution speed and the ability to hold the debt throughout its term.
The Bermuda reinsurance market has proven an attractive deal source for some alternative credit providers, and there have been examples of subordinated debt issued by reinsurers either being taken up wholly by a private debt provider, or with a pri¬vate debt provider as lead investor.
1.5 Banking and Finance Techniques
Bermuda is well established as a creditor-friendly jurisdiction with a legal system based on English common law, modified by Bermuda statutes and court decisions. With current market conditions trending towards borrowers requesting additional liquidity or restructuring of their credit arrangements, lend¬ers are paying more attention to their possible remedies and enforcement options in distressed scenarios. As discussed else¬where, Bermuda's regime provides certainty and reassurance to secured creditors in this regard.
1.6 Legal, Tax, Regulatory or Other Developments Economic Substance Act 2018
The Economic Substance Act 2018 and associated regulations came into force at the end of 2018 and imposed economic sub-stance requirements on Bermuda "relevant entities" carrying on "relevant activities" as a business. Among those relevant activi¬ties are banking business and financing and leasing business. The Registrar will consider that these activities are being car¬ried on as a business if the relevant entity earns gross income in respect of such activity during the relevant financial period.
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