Hamilton, Bermuda 12 March 1999 - In a press statement released earlier today, Reid Services Limited made the following announcement:"Bermuda is the premier jurisdiction for special purpose vehicles in structured finance and insurance derivitive transactions".
Professional advisers are often required to consider which domicile to use for the establishment of a special purpose vehicle (an "SPV") for structured finance transactions, and latterly for derivatives, especially insurance derivatives. Often the choice is made purely on precedent: where was the last deal done? Indeed, there is sometimes a perception that all offshore jurisdictions are the same, so that once a jurisdiction is entered in the standard transaction documentation, matters should remain unchanged. But does this bear scrutiny?
Over the last 50 years, Bermuda has built itself a reputation for high-end transactional work. Complex, innovative structures are developed routinely for issue from Bermuda. There are many reasons to incorporate an SPV in Bermuda, to structure complex finance and derivative transactions on the Island and to revisit standard transaction documentation to see if client interests are being best served.
The principal reasons for choosing Bermuda are:-
1. Reputation
Bermuda is widely perceived as a blue chip offshore financial centre (not just in insurance). The Island has been untouched by scandal, which has plagued other offshore jurisdictions. Bermuda companies are well-known to and readily accepted by the worlds' major stock exchanges. Professionals can, therefore, be confident of securities commission reviews which do not balk at a Bermuda situs for the incorporation of an SPV. Likewise, investors are confident in Bermuda's probity and legal system as protecting their interests. This is reflected in the fact that large numbers of Bermuda companies are registered on major stock exchanges around the world.
2. Competitive Prices
Contrary to popular belief, Bermuda is no more expensive for the establishment and continuing management of an SPV than any of the other major offshore jurisdictions. Standard incorporation fees and out of pocket expenses are comparable with the Cayman Islands, Guernsey and other such jurisdictions. Indeed, by reason of Bermuda's superlative professional infrastructure, it is arguable that clients obtain substantially more for their money.
3. One Stop Insurance Market
Bermuda is the third largest reinsurance market in the world after London and New York and is much more than a "paper" jurisdiction. Enormous professional resources are readily available. For example, Ace, XL, Centre Solutions, Lehman Re, Renaissance Re, amongst others, all have fully functional offices in Bermuda. Accordingly, it is possible to effect all layers of a transaction in Bermuda on a one-stop shopping basis. This, naturally, reduces structural costs and the professional time necessary to effect them.
4. Unique Structures Possible
Bermuda is unique in being able to offer to clients the ability to petition the Bermuda Parliament for the enactment of special legislation in favour of a client company. Such private legislation is frequently instrumental in effecting innovative structures a client may propose, but which would otherwise not be permitted under either the Companies Act or at common law. Thus, recent derivative transactions have been structured by "designer" companies created for the purpose, with a private act obtained to give unique characteristics to the corporate powers of the company concerned.
5. Transformer Companies
One of the unique structures for which Bermuda is being used is the so-called "transformer" company. That is to say, a company which is a licensed insurer (usually a Class 4 insurer) which "transforms" insurance risk into capital markets instruments. The transformer companies enable underlying insurance and reinsurance obligations to be hedged or covered by the issuance of financial instruments (swaps, options, puts and calls) in the capital markets. "Transformation" is assisted by private legislation empowering the company to characterise obligations and effecting a segregation of the assets and liabilities related to a risk or a bundle of risks from the assets and liabilities of other programs within the company (see below). The private act then provides for financial instruments to be issued relating to the segregated account connected with the underlying policy or policies. The largest and best known of the recent "transformer" companies is Lehman Re, a subsidiary of Lehman Brothers. This "transformer" company was capitalised at $500 million, being 10% of Lehman Brothers assets. Another well-known transformer company, indeed the pioneer of the model, is Investors Guaranty Company Ltd., which holds a US financial patent for its transformer systems, the instruments of which have been given AAA ratings by the major agencies.
6. Segregated Accounts Legislation
Since 1990, Bermuda has been enacting private acts of Parliament to enable companies to operate segregated accounts. The Island has more experience of such companies than any other jurisdiction. While some other offshore jurisdictions have rushed to enact public legislation providing for "protected cell companies", they have found it necessary to amend their statutes within a year of enactment to deal with the complexities they throw up. Bermuda has chosen to watch and wait, with the result that the accumulated body of knowledge is now being put to use in drafting a definitive public statute which effectively segregates assets and liabilities per client account, but which protects general creditors and the public. Further, the intended Bermuda statute is structured to ensure maximum recognition in foreign jurisdictions, by employing trust and contractual concepts recognised under the Hague Convention and international private law. The new segregated accounts statute is expected to be enacted before the end of 1998 and will be effective for any type of company, not just those engaged in insurance.
The obvious benefit of segregated accounts as they relate to an SPV is the substantial economies of scale that can be achieved for successive securitisations and derivative transactions. The need for a new SPV for each transaction, therefore, falls away.
7. Regulatory Flexibility - Section 56 Directions
Bermuda's reputation rests on sound but flexible regulation. There is sufficient oversight to ensure probity and solvency; however, the Government does not mandate the business methods of Bermuda companies. Thus, policy forms and rates for insurers are at the discretion of management. Additional flexibility may be achieved even in relation to statutory matters for insurers by way of an Insurance Act 1978 Section 56 direction from the Minister of Finance. These directions allow variations from the solvency and accounting rules in appropriate cases, such as for SPV's which are fully-funded or whose risks are 100% matched by assets or reinsurance or capital instruments.
8. Insurance Amendment Act 1998
In addition to the flexibility conferred by private acts or Section 56 directions to SPV's or transformer companies, derivatives transactions can also benefit from public legislation which enables the Registrar of Companies to designate an instrument as being an investment contract and not an insurance contract or gaming or wagering. The Insurance Amendment Act 1998 provides for either the issuer or the holder of the instrument to make an application. The provisions have the effect in Bermuda of putting the instrument outside the operation of the Insurance Act, and of statutes and common law relating to betting, gaming and wagering. The benefit to the parties is that designation of an instrument as a non-insurance instrument means an investor who is not permitted or licenced to engage in insurance business in Bermuda may hold them. For an insurer issuing such a designated instrument, the Insurance Act 1978 solvency requirements do not apply.
9. Tax Assurance
Like most offshore financial centres, Bermuda does not levy income or capital taxes. By way of assurance to foreign-owned companies incorporated on the Island, a certificate is issued by the Minister of Finance confirming that no such taxes will apply to the company until at least 2016. Regular extensions of the time limit are made.
10. Privacy/Public Filings/ Prospectus Requirements
Whilst Bermuda is by no means secretive, the Island does maintain confidentiality concerning the identity of sponsors of commercial transactions. Further, there is usually no requirement to file with any public authority private transaction documents, no matter how large the transaction. The main exception, not unexpectedly, is for public offerings. However, even there, Bermuda operates a flexible regime which allows disclosure only at the level required by any appointed stock exchange on which the securities are to be listed. If there is to be no listing, the statutory disclosure items in Bermuda are of a routine and unexceptional nature.
11. Speed
As a complement to flexibility, the special partnership between industry and the Bermuda Government means that commercial objectives can be achieved very quickly. In urgent cases, incorporations can be effected in two days, notwithstanding the substantial background check conducted on the parties. Where appropriate, special Ministerial dispensations can be obtained on a same day basis. The insurance licensing process takes approximately 10 working days from receipt of completed application materials.
12. Professional Expertise
Fifty years of serving the financial community has produced a core of excellent professionals working and living in Bermuda. Major investment managers, commodities traders, insurance underwriters and brokers, lawyers and accountants operate in Bermuda and are fully competent to handle the most complex structured finance and insurance derivative transactions. Response times and depth of knowledge are equal to the expectations of City firms.
13. Ongoing Management
Once an SPV is incorporated, it will have a corporate existence of its own, particularly if it holds a licence as an insurer or as a mutual funds company. Bermuda has the expertise to provide the continuing management of such companies at rates equivalent to any other jurisdiction, but with the added advantage of close proximity to the United States and a superlative physical environment (beaches and world class hotels) for Board and management meetings.
14. Cutting Edge Telecommunications
Initial instructions and subsequent management for an SPV are rendered seamless by the excellent communications which Bermuda enjoys. The Island is fully wired into the Web, and has first-rate satellite and fixed link communications. Whether responding to London, New York, Hong Kong or California, documentation flows easily and quickly through the system.
Reid Services Limited is a wholly-owned subsidiary of the Bermuda law firm of Appleby Spurling & Kempe.
For further information on Bermuda as a domicile for SPV's in structured finance or insurance derivative transactions, please contact Mike Jones, Head of the Securities & Financial Services Team (mjones@ask.bm), Warren Cabral, Head of the Insurance Team (wcabral@ask.bm), Shaun Morris, Head of the Shipping & Aviation Team (smorris@ask.bm), or Peter Bubenzer, Head of the Company Department (pbubenzer@ask.bm), or by telephone (+441 295 2244) or facsimile (+441 292 8666). You may also visit our website at www.ask.bm.