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Wednesday, 24th April 2024 |
| Positive outlook as overhaul of Jersey's security laws will drive business |
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By: Christopher Anderson, Alex Carus, Christopher Anderson, Alex Carus
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| In the last year the Channel Islands has seen considerable development of its securitisation industry, most notably in insurance business and protected company cells. Christopher Anderson and Alex Carus explain these movements and look forward to future opportunities for the islands. |
The last 12 months have been a time of continued growth and consolidation of the securitisation industry in the Channel Islands generally. The volume of incoming projects seen has been very healthy. Much of this comes from existing sources, which demonstrates that clients and intermediaries continue to be more than happy with the service and expertise to be found in Channel Island law firms and trust companies. We have also seen work from a number of new sources. The Jersey legal market in particular has become increasingly competitive with the arrival of several ambitious new entrants on the legal side, but we are more than holding our own, and remain confident (but not complacent) for the future.
It is perhaps worth briefly highlighting why the Channel Islands have been so consistently chosen by clients and intermediaries looking to establish special purpose vehicles for securitisation structures and other structured financing transactions. It offers world-class offshore finance centres enjoying political and economic stability, while also maintaining convenient local infrastructures providing access to many established and experienced professional service providers with a high degree of expertise and efficiency in connection with the creation and administration of SPVs. The Channel Islands has a favourable tax neutral treatment of SPVs, and can boast OECD membership and FATF recognition, but outside the EU. There is widespread acknowledgment (for example, by leading investors, investment banks, supra-national bodies and rating agencies) of the Channel Island's credibility in cross-border finance transactions, as well as low establishment costs and low ongoing regulatory costs for SPVs.
In addition, the Channel Islands are located within the GMT time zone and with good communications to the UK and Europe. There are strong legal opinions - each of the Channel Islands has a strong modern framework of statutory laws and a creditor friendly system which provides flexibility and certainty in structuring transactions using SPVs and legislatures committed to development and innovation in response to commercial/prudential needs.
Each Channel Island has a network of sophisticated regulatory laws and an efficient regulatory authority committed to protecting the interest of people transacting business therein, whilst providing an environment in which business can develop to meet the demands of investors and arrangers.
Regulation of SPVs is non-intrusive and there are no foreign exchange controls.
The bulk of the transactions on which we advise are well established and familiar in the marketplace. However, there are always new asset classes emerging and new types of structure, a couple of which are worthy of mention. We are currently working for example on the first securitisation to be structured out of the United Arab Emirates. This firm's London office also helped establish a structured financing using a Jersey SPV in relation to carbon credits which are designed to encourage emissions efficiencies in line with the Kyoto Protocol.
Elsewhere, we have been involved in creating a number of Shari'a compliant Sukuk bond issues structured through Jersey SPVs targeting investors in the Middle East. These are intended to satisfy stringent Islamic law requirements, which forbid the charging of interest. The Islamic world is regarded as a huge potential market, and if the Channel Islands can demonstrate a thorough understanding and capability in this specialist area early on, it could build valuable momentum for the future as the jurisdiction of choice for Shari'a compliant structures - and we have begun to see some evidence of this already.
In Jersey, we have continued to build on the extremely successful credit card securitisations which have historically come to this jurisdiction with the establishment last year of HSBC's credit card Mastertrust Structure. This is one of Bedell Cristin/Bedell Trust's key areas of specialisation. We were also mandated in both capacities in relation to the establishment of the ?35 billion Gracechurch mortgage receivables master trust structure. We hope to continue to further grow and develop our specialisation in relation to these master trust structures in the coming years.
At the start of last year legislation came into force introducing the concept of cell companies into Jersey - the concept of a protected cell company having been pioneered by Guernsey back in 1997 and widely copied. In April last year Guernsey updated its protected cell regime to allow incorporated cell companies in a move mirroring the Jersey legislation. In both jurisdictions companies can now be incorporated as protected cell companies or incorporated cell companies each of which have a radically different legal status. A protected cell company is not a separate legal entity although it is treated as if it were a separate company under the relevant local legislation. An incorporated cell company however is a separate company under relevant local legislation and thus an entirely separate entity which may transact and enter into agreements with third parties in its own name.
The financial structures where a cell company can provide a convenient and cost- effective vehicle include:
• Multi-series securitisation programmes involving a series of debt issues by a single issuer backed by separate classes of assets
• Umbrella investment funds, where each cell can constitute a separate sub-fund with separate investment strategies and asset classes
• In the captive insurance industry, where a cell company can act as a captive insurer to cover the risks of several unrelated sponsoring entities, without exposing the capital associated with any one such entity to liability in connection with another
A cell company is particularly suitable for repeat transactions in collective investment funds and securitisation programmes. Once the basic structure has been given regulatory consent, it is generally possible to add a new cell to the existing framework swiftly and with much reduced regulatory scrutiny. The administrative benefits can be considerable.
As a world leader in the offshore insurance sector, Guernsey continues to attract some of the more specialised insurance/derivative transactions. These deals are a good example of the much discussed convergence between traditional insurance products and other types of financial instrument.
The structure involves a licensed Guernsey insurance company writing a credit default swap with a counterparty. The Guernsey insurer then fully protects its exposure under the swap through a traditional insurance policy. Crucially, the cover provided by the insurance policy precisely mirrors the exposure under the swap.
In this way the swap is transformed into an insurance risk, thus enabling traditional insurance companies to gain exposure to these financial products in the form of their everyday business - insurance contracts.
The Guernsey insurer could be a stand alone SPV but, more often, a cell of a protected cell company is used for this type of transaction. A single protected cell company may run a number of these types of transactions through different cells within its structure, relying on the statutory segregation of assets and liabilities to protect each cell from the activities of every other cell. The introduction of the incorporated cell company provides another vehicle that could be used in these transactions.
On the horizon a key piece of forthcoming legislation is the overhaul of Jersey's security interest laws, which will introduce a modern, flexible means of creating security over Jersey situating intangible assets. The existing framework has served the Island well since its introduction in 1983 but its updating will cater for the revolution the financial markets has undergone since that time and will no doubt be welcomed by Jersey lawyers, clients and intermediaries looking to developed new structures or finesse existing ones. |
Christopher Anderson is a partner with Bedell Cristin Guernsey and Alex Carus is a lawyer with Bedell Cristin Jersey.
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