Legal Business

Caribbean offshore report: End of the storm?

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The Caribbean’s offshore financial centres have faced their fair share of challenges in recent years thanks to the increased international scrutiny of the tax haven environments, the impact of falling oil prices and the business interruption caused by the seemingly endless cycle of hurricanes, which sees the region bear the brunt of the ever-pervasive impact of climate change. Add to that a global pandemic, and there’s certainly the potential for a substantial economic disaster.

While the Covid-19 infection numbers for the Caribbean as a whole have remained low thanks to quick action by the local governments to close borders, enact temporary lockdowns and implement testing and contact tracing methods, the primary impact of the coronavirus pandemic on the Caribbean is undoubtedly on tourism. For Bermuda, the British Virgin Islands (BVI) and the Cayman Islands (Cayman), the tourism industry contributes 28%, 52% and 70% of the average GDP respectively and figures suggest that, at worst, 2020 could see a 71% reduction in the number of international visitors.

With the main victims of the downturn being hotels, airlines and other service industry businesses, the region has shifted its efforts to focus on local residents and ‘staycations’, while several jurisdictions have also offered temporary residency permits to attract more freelance and mobile businesspeople to their shores; Bermuda is a notable example, which is advertising its Work from Bermuda Certificate, which allows workers and students to work remotely from Bermuda for a year.

Caribbean territories have also utilised business continuity plans originally created to assist businesses with the aftermath of hurricanes to put themselves a step ahead when it comes to weathering the economic storm that Covid-19 has brought. But with the devastation of the tourism industry (including its effect on the peak Christmas holiday period) and the impact still being felt from Hurricanes Irma and Dorian in previous years, it is no surprise that it has been a rough year for the region.

That being said, as is often the case in times of substantial crisis, the law firms in the Caribbean’s offshore markets are doing surprisingly well and have proven their resilience. Harneys’ chair and corporate specialist Peter Tarn states the impact of the pandemic on business activity has been ‘extraordinarily limited in reality’. As he recalls: ‘Of course March was moderately scary but month on month through the year we have seen great performances from the businesses and by mid-September it had become apparent that the world had far from ended.’

‘It is often the years when there are significant challenges, market disruptions or important global changes that we see some of the greatest demand for top-notch legal advisers.’
Jonathan Green, Maples Group

Maples Group’s global managing partner Jonathan Green adds: ‘It is often the years when there are significant challenges, market disruptions or important global changes that we see some of the greatest demand for top-notch legal advisers – lawyers that can really add value for their clients.’ He continues: ‘If our experience is anything to go by, then the legal market is generally managing the impact extraordinarily well.’

Firms in the Caribbean were also already ahead of the game in terms of remote working as Christian Luthi, chair of Conyers, explains: ‘From a practical perspective, legal and financial services were already largely provided remotely so were little affected. In our jurisdictions of operation, the regulatory authorities and the courts rapidly transitioned to remote working/remote hearings, ensuring that business was able to continue more or less as normal.’

Ingrid Pierce, global managing partner of Walkers, agrees: ‘While the effects of the pandemic have given rise to certain challenges, it has reaffirmed the resilience of our business. Our infrastructure enabled us to continue to engage with clients in many of the same ways as before.’

Another factor playing to the strengths of many Caribbean firms is their broad global footprint, with many expanding in recent years, including Carey Olsen’s Hong Kong office, which opened in 2016 and Harneys’ office in Shanghai, which was established in 2017.

With different parts of the world impacted to varying degrees at differing times, the Caribbean offshore firms with bases in locations such as Shanghai, Singapore and Hong Kong alongside their UK and European offices have been able to benefit from a broader international office network, as Tarn notes: ‘Like any firm with a wide geographical footprint it has been interesting – and helpful – having different locations at different stages of the virus impact and government reaction through the year, and slightly bizarre to have Shanghai back to ordinary operating procedures at times when, say, London is fully remote.’

As is the case globally, one area that is being given notable thought, however, is the question of office space, given the now widespread acceptance of virtual meetings and working from home. Tarn says, ‘it’s reached cliché proportions, but of course we are thinking long and hard about the purpose of physical offices’, while Luthi adds: ‘Although most of our offices are once again open, a more flexible approach to working practices is here to stay.’

‘While the effects of the pandemic have given rise to certain challenges, it has reaffirmed the resilience of our business.’
Ingrid Pierce, Walkers

While the means and methods of advising the firms’ global client rosters remain fairly resilient, the type of work coming through the doors has seen some substantial changes and shifts. Unsurprisingly, restructuring work has increased across the board, and is now a mainstay practice for most firms. For Harneys, recent top-drawer work included advising the Virgin Group on the offshore elements of Virgin Atlantic’s £1.2bn private-only solvent recapitalisation of its airline and holiday business, working with Herbert Smith Freehills and Allen & Overy as onshore counsel in London, while Conyers advised Caribbean telecoms giant Digicel on its $7bn debt restructuring.

Finance departments have also been noticeably active, with refinancing transactions and debt capital markets work keeping local lawyers busy. In this arena, Conyers’ Bermuda office assisted cruise ship company Carnival with its private offering of $6bn in two tranches of notes in the early months of the pandemic and also handled Avalon Holdings’ two private offerings totalling $2.4bn, while the firm’s Cayman office advised on the Cayman elements of Stonegate Pub Company’s $1.57bn bond issuance program, the largest in the UK since Virgin Media issued £1.1bn of senior secured notes in 2013. The firm’s BVI team also assisted Despegar, a leading online travel company in Latin America, with a series of financing transactions to supplement its liquidity levels.

For Maples Group, its financing department has been active advising both Delta Air Lines and United Airlines on their $9bn and $6.8bn financing plans respectively, and also acted as Cayman counsel for Ninebot on the first-ever listing of Chinese depositary receipts on the Shanghai Stock Exchange science and technology innovation board.

The use of special purpose acquisition companies (SPACs) – shell companies created to raise capital via an initial public offering – is becoming increasingly common, and Pierce says recent months have seen ‘a surge’ in work for the firm in advising on the formation of such structures. ‘Established fund managers have been tapping the public markets for capital, with Oaktree, Apollo and SoftBank, among others, successfully bringing SPACs to the market,’ she notes. Walkers has also been active in advising on asset loyalty programmes, a novel way in which airlines are aiming to ride out the pandemic by raising capital using Cayman-domiciled loyalty programmes as security against debt.

Litigation has also shifted focus, with pure commercial litigation taking something of a back seat to be replaced by insolvency and shareholders disputes. Christian Hay, managing partner of Collas Crill’s Guernsey office notes: ‘Our Cayman team is all about contentious insolvency, and that is where all the work is in Cayman at the moment due to the collapse of substantial investment funds that have lots of claims flying out of them. In the BVI it’s all about shareholder disputes as companies get into trouble and the principals behind them start falling out with each other.’

‘Like any firm with a wide geographical footprint it has been interesting – and helpful – having different locations at different stages of the virus impact and government reaction through the year.’
Peter Tarn, Harneys

Alongside changes in types of work, regions of interest have also changed for a market traditionally reliant on mandates originating from Europe and the US, two regions affected far more intensely by the pandemic than the rest of the world. According to Jason Romer, group managing partner in Collas Crill’s Jersey office: ‘We’ve seen a lot of really interesting BVI deals coming out of Russia and the Far East. Potentially, those markets have started to pick up more than the traditional European and US markets.’

With changes rife, some aspects of the legal market have remained fairly consistent and as active as they were prior to the global lockdown. Regulatory issues have dominated discussions in the Caribbean in recent years with a wide variety of policies introduced to try to change the mindset surrounding the ‘tax haven’ status of some of the region’s jurisdictions. This culminated in 2019 with the introduction of the economic substance rules, a series of requirements for companies (primarily in the banking and financial services sectors) stating the company must have adequate expenditure, physical premises and employees in the jurisdictions it claims to do business.

This trend continued in 2020 with the Cayman Islands Monetary Authority (CIMA) implementing the Private Funds Law, which increases the number and types of closed-ended Cayman-based investment vehicles required to register with the CIMA. Maples Group has been particularly active here – Green states ‘in terms of regulatory work, we assisted clients in registering many thousands of private equity funds with the CIMA. This was an enormous undertaking on an extremely compressed timetable. When one considers that it was also achieved under pandemic operating conditions it is all the more impressive’.

‘We’ve seen a lot of really interesting BVI deals coming out of Russia and the Far East. Potentially, those markets have started to pick up more than the traditional European and US markets.’
Jason Romer, Collas Crill

For some though, the continued regulatory scrutiny is not necessarily always welcome. Luthi comments: ‘Increased regulatory scrutiny of offshore jurisdictions has been ongoing for several years, regardless of the direction of the global economy. However, it is likely that the financial difficulties brought about by the pandemic will only increase efforts by onshore tax authorities to de-legitimise offshore jurisdictions.’

Phillip Kite, global head of dispute resolution, insolvency and restructuring at Harneys and managing partner of the firm’s London office, concurs: ‘Whenever there is any seismic negative global event it seems the offshore world gets blamed for it at some stage in the process but it is important to note that jurisdictions like the BVI and Cayman are regulated very heavily, more so than onshore jurisdictions.’

A new hope

This diversified offering is ultimately the key to law firm survival, Luthi argues: ‘Firms that have a diversified practice are better positioned to survive the impact of the pandemic than those with a boutique offering.’ Pierce adds: ‘Law firms that were able to adapt to an agile approach to working during the early stages of the pandemic and actively supported their employees while making necessary budget cuts to adjust to a more virtual work have a good chance of survival. Firms that are less able to diversify may find it tough to keep their doors open.’

Likewise, firms without sound IT and operations infrastructure are likely to face more difficulties, but Green argues that this diversification is nothing new for Caribbean firms: ‘Operating in the Caribbean, with its annual hurricane season, for over 50 years has meant that Maples Group has always had to maintain a level of IT infrastructure and business continuity preparedness that would likely impress even the most stalwart geek’.

‘Our Cayman team is all about contentious insolvency, and that is where all the work is in Cayman at the moment due to the collapse of substantial investment funds that have lots of claims flying out of them.’
Christian Hay, Collas Crill

So, what for the future? There’s no doubt that there will be notable repercussions from the pandemic that will leave a lasting impact. Whether it be the businesses that weren’t able to survive or the additive effects of the pandemic on the recovery efforts from previous years’ hurricanes, the island nations certainly have their challenges to face. ‘The coronavirus pandemic will have socio-economic effects for many years to come,’ states Luthi. ‘We will likely see continued economic turbulence for the next 12 months as the pandemic plays out, and we expect continued high demand for legal services as a result. It will likely be four-to-five years before we can anticipate a return to “normality” – assuming no other black swan event comes along meanwhile.’

However, while 2020 has thrown up myriad problems, there is a returning sense of hope. As Green states: ‘The coronavirus has challenged us to work in novel ways and, in its way, has also presented us with opportunities.’ For Pierce: ‘There are signs of light at the end of the tunnel and increasing commitments from government, industry and citizens to work together to better the circumstances.’ Pierce also argues that even the pandemic has a silver lining: ‘The pandemic has undoubtedly spurred a greater sense of community as we continue to find ways of maintaining connectivity. It has also led to unprecedented levels of innovation, with many firms completely reimagining the way to stay front of mind with clients and conduct business going forward.’

‘Whenever there is any seismic negative global event the offshore world gets blamed for it at some stage but it is important to note that jurisdictions like the BVI and Cayman are regulated very heavily, more so than onshore jurisdictions.’ Phillip Kite, Harneys