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Historically, the jurisdictions of choice for this US$1.2 trillion market have been the Cayman Islands and Ireland. 

Guernsey offers similar tax, legal and regulatory advantages and should be an attractive alternative, especially since (i) the Cayman Islands were designated by the EU in 2022 as a high-risk country making it harder to market Cayman CLOs to EU investors, (ii) Guernsey offers the same tax neutrality and a light-touch regulatory regime with less "red tape" than its Irish equivalents.

What are CLOs? 

Collateralised loan obligations are structured finance securities collateralised usually – but not always – by broadly syndicated, leveraged bank loans.  In plain English: an original lender (usually a bank) will package up and sell a pool of existing loans to a special purpose vehicle (SPV); the SPV pays for such loans by issuing debt securities (i.e. the CLOs) to investors. The CLOs entitle the investors to a stream of income linked to the repayments of the underlying portfolio of loans. The loans and CLOs are split into tranches and ranked in order of priority – so, the senior noteholder receive distributions ahead of the junior noteholders. Investors like CLOs because they offer an exposure to a diversified pool of loans which can help to reduce the risk of default associated with any individual loan or borrower. CLOs also have credit risk such that the underlying portfolio might not generate sufficient cash flow to pay investors on a full and timely basis, with the junior noteholders carrying more of that risk; however, the varying yields on offer for each tranche of CLO reflect such risk.  

Variants to CLOs include ABS (asset-backed securities where the underlying portfolio might be interests in collective investment schemes instead of loans) and RMBS (residential-backed mortgage securities made (in)famous in the global financial crisis of 2008 and the movie "The Big Short").  All variants share a common theme - the pooling of assets into a marketable security – such process being known as "securitisation".

Why Guernsey? 

CLOs established in Guernsey benefit from all of the usual benefits associated with Guernsey: tax neutrality, economic substance, compliance with international standards and robust anti-money laundering regimes.  Guernsey is also a common law jurisdiction making it creditor friendly with a significant community of finance lawyers, listing sponsors and corporate service providers familiar with securitisation and structured debt issuance.  Guernsey is well known to rating agencies. 

In relation to tax, Guernsey SPVs are taxed at 0% and there is no withholding tax in Guernsey.  Guernsey currently does not levy taxes upon capital, inheritances, capital gains, gifts, sales or turnover. No stamp duty would be chargeable in Guernsey on the issue or transfer of CLOs.

On the regulatory side of things, Guernsey CLOs are not regulated as collective investment schemes and the audit requirement can be waived (unlike Irish CLOs).  There are no Guernsey restrictions to whom CLOs can be marketed.

By way of value-add, Guernsey can – and already does – host other parts of the CLO eco-system including licensed CLO managers and regulated "risk retention funds", being collective investment schemes which raise the minimum 5% "skin in the game" requirement imposed on CLO managers under EU/UK regulation. It makes sense to bring all parts of the CLO eco-system under a common jurisdiction and group of service providers, which in our view is something which differentiates Guernsey from other jurisdictions. 

An original version of this article was first published by En Voyage, October 2022. 

 

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