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 Developments 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 construction of a new terminal at the island's L.F. Wade International 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 particular. 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 susceptible 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 detrimental 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 businesses dependent on tourism. The government took swift action to impose strict protocols protecting the community, including a rigorous and comprehensive testing and contact tracing regime, and Bermuda has been one of the world's most successful 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 Bermuda 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 having 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 Bermuda issuers accessing the high-yield market instead of the syndicated 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 reasons, including a willingness to lend at higher leverage multiples, 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 private 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, lenders are paying more attention to their possible remedies and enforcement options in distressed scenarios. As discussed elsewhere, 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 substance requirements on Bermuda "relevant entities" carrying on "relevant activities" as a business. Among those relevant activities are banking business and financing and leasing business. The Registrar will consider that these activities are being carried on as a business if the relevant entity earns gross income in respect of such activity during the relevant financial period.
"Relevant entities" for this purpose are:
- companies incorporated or registered under the Companies Act, 1981 (as amended) (the "Companies Act"), including a permit company and an overseas company;
- limited liability companies registered under the Limited Liability Company Act, 2016 (as amended); and
- partnerships that are registered as exempted partnerships, exempted limited partnerships or overseas partnerships that have elected to have separate legal personality in accordance with section 4A of the Partnership Act, 1902.
A "non-resident entity" – ie, an entity that is resident for tax purposes in a jurisdiction outside Bermuda that is not included in Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes (the so-called "blacklist") – is excluded from the definition of "relevant entity" and is therefore not subject to the economic substance requirements.
A relevant entity carrying on a relevant activity is required to demonstrate to the Registrar of Companies on an annual basis that:
- it is managed and directed in Bermuda;
- core income-generating activities are undertaken in Bermuda with respect to the relevant activity;
- the relevant entity maintains adequate physical presence in Bermuda;
- there are adequate full-time employees in Bermuda with suitable qualifications; and
- there is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.
Banking business is defined as carrying on deposit-taking activity for which a licence is required under the Banks and Deposit Companies Act 1999 (see 2.1 Authorisation to Provide Financing to a Company). As the licensing requirements apply only to entities carrying on deposit-taking business in or from within Bermuda (ie, from a physical place of business in the jurisdiction), Bermuda entities carrying on such activity from a place of business overseas are not within the scope of the economic substance legislation. In practice, the substantial physical presence on the island of the licensed banks in Bermuda means they should readily be able to satisfy the economic substance requirements.
Financing and leasing business is defined as providing credit facilities of any kind for consideration to any person, but any activities falling within the activities of banking, insurance and fund management do not constitute financing and leasing for this purpose. Bermuda companies engaging in business as alternative financing providers are therefore subject to the economic substance requirements described above.
A relevant entity must notify the Registrar annually as to whether or not it is conducting a relevant activity. If it is conducting a relevant activity but is a "non-resident entity", the relevant entity will be required to provide appropriate supporting evidence.
Relevant entities conducting relevant activities that are required to satisfy the economic substance requirements must prepare and submit to the Registrar an economic substance declaration form containing prescribed information in relation to that relevant activity in respect of each relevant financial period commencing on or after 1 January 2019.
Incorporated Segregated Accounts Companies Act 2019
The Incorporated Segregated Accounts Companies Act 2019 (the ISAC Act) came into force on 15 January 2020. It introduces a new corporate vehicle, the Incorporated Segregated Accounts Company (ISAC), combining the flexibility of the traditional segregated accounts company available under the existing Segregated Accounts Companies Act 2000 with the advantages of separate legal personality enjoyed by an incorporated company.
Registered ISACs will have the capacity and rights of a natural person with separate legal personality, meaning each incorporated segregated account (ISA) will be able to enter into contracts with other ISAs within the same ISAC family or third parties as well as with the ISAC itself, providing enhanced diversification and segregation of investor assets and liabilities. ISACs will have the option to appoint a separate board for each proposed ISA. Additionally, the limited liability of ISAs provides a robust legal means of protection from creditors and may therefore appeal to more conservative, risk-averse market participants, such as pension trustees in longevity swaps or investors in ILS funds.
2.1 Authorisation to Provide Financing to a Company
Any person carrying on "deposit-taking business" (ie, the lending of money received by way of deposit to others, or financing any other activity of the person's business wholly or to any material extent out of the capital of or the interest on money received by way of deposit) in or from within Bermuda must be licensed by the Bermuda Monetary Authority to do so under the Banks and Deposit Companies Act 1999.
The effect of the "in or from within Bermuda" formulation means that only deposit-taking business carried on in the jurisdiction is subject to the licensing requirement. Accordingly, it is not necessary for any non-Bermuda bank or other financial institution providing debt funding to a Bermuda borrower to be licensed or otherwise approved by any Bermuda regulatory or government body in order to do so.
3. Structuring and Documentation Considerations
3.1 Restrictions on Foreign Lenders Granting Loans
There are no restrictions on foreign lenders granting loans from outside of Bermuda to Bermuda entities, but there are restrictions and licence requirements for a foreign lender to establish a branch in Bermuda.
3.2 Restrictions on Foreign Lenders Granting Security
There are generally no restrictions on the granting of security and guarantees to foreign lenders. Consent from the Bermuda Minister of Finance is required prior to the granting to foreign lenders of security over real property located in Bermuda where the principal debt secured exceeds USD50,000. In addition, if a foreign lender takes possession of Bermuda real property following the enforcement of its security interest, the property would need to be disposed of by the foreign lender within five years.
3.3 Restrictions and Controls on Foreign Currency Exchange
Bermuda exempted companies (the common vehicle used in Bermuda for international business and international transactions), exempted partnerships and certain permit companies designated as non-resident for exchange control purposes are not subject to restrictions or controls on foreign currency exchange.
3.4 Restrictions on the Borrower's Use of Proceeds
There are no such restrictions, other than, more generally, restrictions under Bermuda's anti-money laundering and anti-terrorist financing legislation.
3.5 Agent and Trust Concepts
Both agent and trust structures are recognised and regularly used in Bermuda.
3.6 Loan Transfer Mechanisms
There are no Bermuda-specific requirements for loan transfers between foreign lenders. If there is a change of security agent or security trustee (or lender in the case of a bilateral loan arrangement) and Bermuda law governs the security arrangements, Bermuda law assignment agreements are used to transfer the benefit of the underlying security interests to the new agent, trustee or lender. If a security agreement is registered on the register of charges at the Bermuda Registrar of Companies (the "Registrar"), a registration would be made at the Registrar to note the change in agent, trustee or lender, as applicable.
3.7 Debt Buy-Back
Debt buy-back is permitted.
3.8 Public Acquisition Finance
The Companies Act does not differentiate between public and private companies, and there are no specific rules under Bermuda law regarding "certain funds" as it pertains to acquisition financings. However, it is common for Bermuda exempted companies to be listed on foreign exchanges and, as such, they would be subject to the listing and regulatory rules of that foreign exchange and any "certain funds" requirements thereunder.
Originally published by Chambers 2020 Global Practice Guide: Banking & Finance - Bermuda: Law and Practice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.