Blacklisting of Cayman Islands will force Euro CLOs to move

Michelle D’souza

Reporter

The Cayman Islands could soon be lost at sea for CLO managers looking to establish European and EU-compliant deals, after panellists at Creditflux’s CLO Symposium indicated that regulations ruling out use of the jurisdiction are likely to be implemented.

As previously reported, the Financial Action Task Force added the Caymans to its increased monitoring list in February. The EU then placed the Caymans onto an equivalent list and signposted that the territory may well be blacklisted. Market participants anticipate 1 October as the key date.

Should the Caymans go on the list, EU investors subject to EU Securitisation Regulations will no longer be able to take positions in deals registered in the Caymans. The regulation will not affect US CLOs — only EU-compliant deals and those with EU investors.

“We actually heard today, from what I consider to be a reliable source in the EU, that this is going to happen,” said John Goldfinch, partner at Milbank, on a panel at the symposium. “It’s not going to happen on the first of October, but it now looks more likely than not, in fact, very likely, that the Cayman Islands will go onto the blacklist.”

“It’s very likely the Cayman Islands will go onto the blacklist”

John Goldfinch, Partner | Milbank

On a virtual panel hosted by law firm Walkers, panellists explained that the regulation is drafted as forward-facing, with language focusing on CLOs being established.

EU investors of existing CLOs should be unaffected, so there will be no need for EU investors to divest of holdings. But the regulation could have an impact on refis and resets of those CLOs, to the extent it is determined EU investors who receive refi/reset notes are taking on a new position. As such, repricing provisions may need to be looked at and managers may wish to move jurisdiction.

Lawyers are also adding risk factors in CLO offering documentation. These address the potential impact, distinguishing between EU and UK Securitisation Regulations (UK investors should not be affected by this).

Provisions are also being placed in indentures — in the event the Caymans is added to the list, a manager can move the deal to another jurisdiction at its discretion.

For now, there has been no movement of CLOs out of the islands. Deals are being incorporated and warehouses are opening as usual. But Bermuda and the British Virgin Islands are being tipped as alternative hubs.

Share this article:

Browse more Creditflux newsletters

Global credit funds & CLO's

October 2021 | Issue 239

Published in London & New York.

${prev-page}

${next-page}