Jersey is well known as a leading jurisdiction for structured finance and capital markets transactions, a reflection of its highly-skilled and experienced advisors and service providers. Jersey has a longstanding track record of economic and political stability, alongside tax neutrality, economic substance and robust anti-money laundering (“AML”) regimes.
While the market has been steady and consistent throughout the COVID years and beyond, 2022 was notable for its influx of US CLO deals.
The origin of the shift into Jersey was the inclusion of the Cayman Islands (along with eight other jurisdictions) on the EU’s AML List in February 2022. The immediate practical impact was that existing US CLO issuers incorporated in the Cayman Islands, that had not yet held their final closing and that were aiming to include investors based in the EU, needed to migrate to a different jurisdiction. In addition, any future US CLOs wanting exposure to the European markets, needed to incorporate elsewhere.
The majority of managers chose to migrate their CLOs to either Jersey or Bermuda.
While the current expectation is that the Cayman Islands will be removed from the EU AML List as soon as possible in the first half of 2023, Jersey remains a jurisdiction of choice for US CLOs, offering a similar product appropriate for the investor base. While there are differences between the various jurisdictions, not least with the time zones, it is well-documented by market participants that the relevant stakeholders in these deals have not encountered significant hurdles in the switch to Jersey.
March and April of 2022 proved to be very busy for all relevant service providers, with a huge number of migrations of existing issuers into Jersey, and the origination of a significant number of new deals.
Subsequently, the US CLO market has seen a bit of a slowdown, given the current macro environment and tougher conditions for pricing CLOs, including in particular, access to AAA investors and rising interest rates. This cooling of the market has of course been mirrored in Jersey. Though, notwithstanding the year kicking off at the pace that it did, there has remained a continual flow of work into Jersey.
Overall, around 60 CLO issuers have migrated into Jersey and over 100 new special purpose vehicles (SPVs) have been incorporated in Jersey in 2022 to date.
In addition, and contrasting the speed of deals racing to close in H1 2022, there has been a slowdown in the pace of deal timelines. We are also seeing an extension to warehouse periods and transactions generally taking longer to close.
Looking at the big picture, and like so many markets, this is very much a case of ‘watch this space’, with inflation and interest rates continuing to make an impact. Anecdotal reports suggest that the CLO slow down could last through at least the first half of 2023.
In Jersey, we are not expecting to match the volume of work seen in early 2022 and the expectation is that the Cayman Islands will deservedly be removed from the EU AML List, but in the meantime, CLOs continue to launch and close here, and Jersey remains very much open for business and keen to assist.