Charles Collis and Kevin Butler explain how to go about a securitisation
Structured finance and securitisation transactions are a fast-expanding facility used by businesses all over the world, and provide innovative mechanisms for financings of all kinds. If there is an asset - securities, mortgages, receivables, royalties, rentals, or, indeed, just a `thing' that produces income - then it can be securitised. The typical structure involves the use of a company, often referred to as a special purpose vehicle (SPV), which raises money by the issue of its own securities, whether shares, bonds, notes, debentures or other instruments, and uses the proceeds to take title or ownership to a pool of assets, often from an `originator'. SPVs can also be used for repackaging transactions, securitising insurance risks and the structuring of complex financings for large assets such as aircraft, satellites, undersea cables and ships.
In a traditional securitisation, the originator removes the pool of assets from its balance sheet by selling them to the SPV. For both legal and tax reasons, the SPV is often located in an offshore jurisdiction such as Bermuda. In many instances, the SPV is established as an orphan company, meaning that it is not part of the originator's (or any other party to the transaction's) corporate group. This is achieved by issuing the equity in the SPV to a trustee of a Bermuda charitable or purpose trust. The SPV is structured as a bankruptcy-remote vehicle to ensure that the pool of assets is not placed at risk by an insolvency of the SPV or the originator.
Bermuda is an ideal jurisdiction for securitisation transactions because of:
Types of SPVs
SPVs are usually formed in Bermuda as exempted companies. An exempted company can be incorporated as a company limited by shares or limited by guarantee, a limited duration company (i.e. a limited liability company, as it is known in other jurisdictions) or as an unlimited liability company. The company limited by shares is the most common form of SPV, where the liability of the SPV's members is limited to the amount - if any - that remains unpaid on the shares held by them.
Formalities to be observed when choosing a name
The proposed name of the SPV can be reserved with the Registrar of Companies. The name reservation can usually be confirmed within 24 hours. An SPV must have as the last word either `Limited' or `Ltd' unless it is an unlimited liability company.
Formalities to be observed on incorporation
An application for permission to incorporate and issue shares of an SPV (together with the supporting information on the ultimate beneficial owners, including their personal declarations) is submitted to the Bermuda Monetary Authority (BMA). On receipt of such permission, the memorandum of association is registered with the Registrar of Companies which issues a certificate of incorporation.
An SPV for a securitisation transaction will often have restrictive objects, and consent of the Ministry of Finance is required. It usually takes between two and three business days for this consent to be granted. Alternatively, an SPV can be incorporated with non-restrictive objects (which usually takes one business day) and then, if necessary, the objects can be amended prior to closing.
The purpose trust (which is the form of trust usually used if an orphan SPV is required) will need to be executed prior to the SPV being incorporated and organised and can set out limitations on the trustee to ensure the SPV is bankruptcy remote. If the SPV is required quickly, a standard purpose trust can be used and if necessary can be amended prior to closing.
Legal personality, object clause, ultra vires
An SPV is a separate legal entity which has the capacity to enter into any business transaction, provided such a transaction falls within the scope of the objects of the SPV. For SPVs (other than unlimited liability companies), neither the shareholders nor the directors (other than with respect to breaching their fiduciary duties) are responsible personally to third parties for any liability of the SPV.
The ultra vires rule applies in Bermuda, meaning that an SPV cannot take any action it does not have the corporate capacity to take. The SPV will often adopt objects that allow it only to carry out its obligations pursuant to the securitisation transaction. This gives comfort to the other parties and the rating agencies that the SPV will not be allowed to carry on any other business.
An SPV is required to maintain a registered office in Bermuda, the address of which is registered with the Registrar of Companies. Its Register of Members and the Register of Directors and Officers are kept at this address.
Appointment of directors and officers
An SPV must have a minimum of two directors. Each SPV must satisfy certain Bermuda residency requirements, which are:
(a) two Bermuda resident directors; or
(b) a Bermuda resident secretary and a Bermuda resident director; or
(c) a Bermuda resident secretary and a Bermuda resident representative, each of whom must be an individual.
Corporate directors are not permitted.
Every director in exercising his power and duties is required to act honestly and in good faith with a view to the best interest of the SPV, and to exercise such care as a prudent person would exercise in comparable circumstances.
An SPV must appoint one of its directors as president or chairman and another as vice-president or deputy chairman. Further offices may be created and the people filling those offices need not be directors.
In circumstances where the SPV enters into the securitisation transaction on closing and such transaction requires little or no further action by the SPV, service providers in Bermuda may provide all the directors and officers of the SPV.
Shareholders/members and register of shareholders/members
An SPV must have at least one shareholder. For the standard securitisation orphan SPV, the shareholder will be a trustee of a Bermuda charitable or purpose trust.
The names and addresses of the shareholders must be entered on a register of members and kept by the SPV. In addition, the register must set out the number of shares held by the member, the amount paid up on the shares, the date on which the person was entered in the register as a member and the date on which the person ceased to be a member. The register of members must be kept at the registered office (or, upon filing an appropriate notice, at some other address in Bermuda) and must be available for inspection by the public.
Bearer shares are not permitted under Bermuda law, but shares may be registered in the name of a nominee.
Most SPVs used for securitisation transactions raise funds by offering debt (notes). There is no requirement in Bermuda to keep a register of noteholders.
The constitutional documents of an SPV are the memorandum of association and the bye-laws. The memorandum of association will set out the objects of the SPV. Generally, SPVs will adopt objects that restrict their ability to carry on any activity other than the securitisation transaction. The Minister of Finance in Bermuda approves the objects set out in the memorandum of association of companies. The memorandum of association is on file with the Registrar of Companies and is available for public inspection.
The bye-laws of an SPV are not filed with the Registrar of Companies in Bermuda and are not available for inspection by the public. The bye-laws will set out the rights and duties as between the SPV, the shareholders and the directors. Securitisation transactions usually provide in the bye-laws and in the purpose trust for restrictions on amending the memorandum of association or bye-laws as bankruptcy remoteness protection.
Bermuda law requires that an SPV has a minimum share capital of $12,000 (or in the case of an insurance company, $120,000) or an equivalent amount in another currency on which the minimum annual government fee is payable.
Issuance and transfer of shares and notes
The issuance or transfer of shares or notes of an SPV requires the consent of the BMA. For a securitisation transaction, consent for the issuance and free transferability of the notes is usually obtained prior to closing. There is no Bermuda stamp duty on the issuance or transfer of shares, notes or other instruments issued by an SPV.
An SPV may declare and pay a dividend, or make a distribution out of contributed surplus, provided there are reasonable grounds for believing that after any such payment:
(i) the SPV will be able to pay its debts as they become due; and
(ii) the realisable value of its assets will be greater than the aggregate of its liabilities, issued share capital and share premium account.
Prospectuses and public offers
SPVs intending to offer equity or debt to the public may be required to file a prospectus with the Registrar of Companies. Exemptions exist where the shares or notes are to be issued to less than 35 persons or in the case of a private character offer. The prospectus must contain the designated particulars including the auditor's report, and be accompanied for filing by an attorney's confirmation of the SPV's compliance or certifying that the prospectus has been filed with an appointed stock exchange or competent regulatory authority. Application will also normally be made to the BMA for permission for such shares or notes being offered to be traded without further consent of the BMA.
Where the SPV is newly incorporated and issuing a prospectus, it is sufficient to include a short statement from the auditors to the effect that the SPV has not carried on business. Thereafter, it is appropriate to include with, or attach to, the prospectus a copy of the most recent audited financial statement. The auditors' report and financial statements should relate to a period not more than six months before the date of issue of the prospectus. If the report relates to a period more than six months before the date of such issue, unaudited statements to the end of the most recent fiscal quarter must also be included.
Where an appointed stock exchange or competent regulatory authority has received or otherwise accepted the prospectus as a basis for the offering of shares to the public, such prospectus will, in general, be deemed to have satisfied the contents requirements.
The bye-laws generally provide that the directors may meet for the transaction of business and regulate their affairs as they see fit. There is no requirement that directors' meetings be convened in Bermuda.
An SPV must hold an annual general meeting once in every calendar year. There is no requirement with respect to the time between the occurrence of two annual general meetings. General meetings of an SPV may consider any matter which may properly come before the shareholders. There is no requirement that shareholders' meetings be convened in Bermuda.
Indemnification of directors and officers
The bye-laws of the SPV may provide for an indemnification by the SPV of its directors and officers from any breach of their duties save in circumstances of fraud or dishonesty.
The shareholders of an SPV must appoint auditors. However, this requirement may be waived if all the shareholders and all the directors, either in writing or at a general meeting, agree that there shall be no auditor. Auditors may not be directors of companies which they audit.
Books of accounts and records
Proper records of accounts must be maintained and, if these records are kept outside of Bermuda, there is a requirement for quarterly reporting to the directors of the SPV's financial condition. The directors are required to present before a general meeting financial statements prepared under generally accepted accounting principles of an approved jurisdiction, along with an auditors' report. Copies of the accounts are required to be made available to members of the SPV but except in the case of public companies, the members may, by unanimous consent, waive the presentation of audited financial statements.
An SPV is required to pay a fee in Bermuda at the time of its incorporation and in January of each year thereafter (if incorporation occurs after 31 August in a year, the fee is reduced by half for that year). The fee is provided for on a sliding scale. Most SPVs used in securitisation transactions issue the minimum capital to the Bermuda trustee pursuant to the purpose trust and raise the other funds by the issuance of notes resulting in the minimum government fee (currently $1,780) being paid.
SPVs are designated non-resident for Bermuda exchange control purposes and may conduct their business in any currency other than Bermuda dollars. The non-resident designation allows these entities to operate free of exchange control regulations and enables them to make payments of dividends, to distribute capital, to open and maintain foreign bank accounts and to purchase securities, etc. An SPV may open and maintain bank accounts in or out of Bermuda.
The following documents are of public record:
(i) the memorandum of association of the SPV and any amendments to it;
(ii) the certificate of incorporation;
(iii) the notice stating the registered address of the SPV;
(iv) the register of charges of the SPV;
(v) any prospectuses filed with the Registrar of Companies;
(vi) the register of shareholders (upon a payment of nominal fee) must be available for inspection at the registered office; and
(vi) the register of directors and officers (upon a payment of nominal fee) must be available for inspection at the registered office.
Register of mortgages and charges
The Registrar of Companies maintains a register of charges in respect of every SPV. Any charge over the assets of an SPV may be submitted to the Registrar for registration against that SPV.
Registration constitutes notice to the public of the interest of the chargor in or over the charged assets. Any registered charge will have priority over any subsequently registered charge and unregistered charge.
Priority is based upon the date of registration and not the date of creation of the charge. Subject to the foregoing, there is no time period within which a charge must be registered in order to be effective.
Consideration should be given at the outset as to the expected life of the SPV and whether it will need to be wound up at the end of the transaction. For instance, it may be useful to have the accounts audited annually and ensure the SPV retains enough funds at the end of the transaction to pay for liquidation and winding-up.
The rating agencies are familiar with Bermuda and are comfortable with the form of opinions we issue. By having the ability to limit the business of the SPV to only that of the securitisation transaction, a public register of charges, a stable government and a proven track record, Bermuda is a good jurisdiction as far as the rating agencies are concerned.
Obtaining tax-exempt status
At the moment, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by an SPV or its shareholders, other than shareholders ordinarily resident in Bermuda.
An SPV may apply for and is likely to receive from the Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 an assurance that, in the event of Bermuda authorities enacting any legislation imposing tax on profits or income, or on any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, it will not be applicable until March 2016. Until that date, it will not be applicable to the SPV or to any of its operations or to the shares, debentures or other obligations of the SPV except where such tax applies to persons ordinarily resident in Bermuda and holding shares, debentures or other obligations of the company or any land leased or let to the SPV.
Useful points to note about the legal system
Bermuda is a dependent territory of Great Britain. It has adopted and maintained the British system of justice, and its substantive law is based on English common law. The ultimate court of appeal is the Judicial Committee of the Privy Council in the UK.
New listing rules have been introduced for the Bermuda Stock Exchange, the objective of providing full disclosure without undue regulation. In keeping with this philosophy, the exchange sought to drop the less important but more onerous features of the listing rules of other exchanges. To be eligible for listing, a proposed equity issuer generally must be a collective investment vehicle (mutual fund, unit trust or limited partnership) or have a primary listing on an approved stock exchange or restrict its securities to `qualified investors' which are defined as individuals with a minimum investment of $100,000 or a net worth of at
By Charles Collis and Kevin Butler
Charles Collis is a partner and Kevin Butler an associate at Conyers Dill & Pearman. Conyers Dill & Pearman is an international offshore law firm, headquartered in Bermuda with operations in Anguilla, British Virgin Islands, Cayman Islands, Guernsey, London, Hong Kong and Singapore. www.cdp.bm