(Bloomberg) — European regulators are creating trouble for managers of U.S. collateralized loan obligations that typically sell some of their bonds to investors in the region. In the coming weeks, the European Union is likely to add the Cayman Islands to its list of jurisdictions that have “strategic deficiencies” in areas including anti-money laundering and counter-terrorist financing regimes, according to a January note from law firm Clifford Chance. That effectively blacklists them for European investors, the note said. The problem: most U.S. CLOs are issued using entities domiciled in the Cayman Islands. If the Cayman Islands are blacklisted, any U.S. CLOs that are routinely offered to EU investors in addition to the typical American audience — nearly one-third of U.S. deals, by some estimates — will need to find an alternative home to for issuing. Otherwise, managers will have to limit their deals to U.S. investors. The leading alternative jurisdictions to set up CLO special purpose vehicles are the island of Jersey, a self-governing dependency of the U.K. off the coast of France, or Bermuda. Deals are already in the works using these new locations as offshore SPVs, and will be issued soon, according to CLO lawyers. “In the coming weeks, we’ll see the first deals priced with Jersey or Bermuda-based SPVs” from managers that want to sell their deals into Europe, Nick Robinson, a partner at Allen & Overy who is focused on CLO deals, said in an interview. “A number of deals are in the launch stage. Of course, deals not marketed to Europe can stay in the Cayman Islands.” The Ministry of Financial Services & Commerce of the Cayman Islands said in a press statement in January that it was working with the EU to be removed from the list of jurisdictions viewed as being a high risk from the standpoint of money laundering activity. On Jan. 7, the European Commission adopted a draft regulation adding the Cayman Islands to its list of countries with strategic deficiencies in their AML regimes, according to the law firm Cadwalader. Article 4 of the EU Securitisation Regulation provides that securitization special purpose entities may not be established in any country on that list. “The application of Article 4 of the EU Securitisation Regulation to EU investors is unclear, but the general consensus is that EU investors should not invest in Cayman-domiciled securitization vehicles while the Cayman Islands are on the list,” Cadwalader attorneys wrote in a Jan. 27 article. In addition to new deals, refinanced CLOs that are to be sold to European investors also need to be re-domiciled, lawyers say, and the jurisdiction needs to be changed before the refinancing closes, which can lead to a time crunch. “To the extent that those CLOs sold to EU investors are refinanced, they’ll need to be moved, which increases costs and time,” said Robert Villani, structured credit partner at Clifford Chance. The British Virgin Islands, another perceived tax haven that is creditor friendly, was briefly considered as an alternative jurisdiction for CLOs, Robinson said, but was dismissed because there had been AML investigations in that country as well. One other option that has been used, especially for a few middle-market CLO deals, is to register the SPV domestically as a Delaware LLC, Robinson said, although that means the transactions would need to have somewhat simpler structures. CLOs have been one of the hottest sectors in the credit markets for several reasons, including the fact the securities are floating-rate and may protect against rising yields during a rate-hiking cycle. Investors have also become more comfortable because the product had stellar performance through the pandemic downturn. The outsized demand brought new sales of U.S. CLOs to a post-financial crisis record in 2021, with numbers close to $184 billion, according to data compiled by Bloomberg. NN: Using offshore tax havens are asking for trouble. That is why we use Jersey trusts out of England. I am told the offshore trading bussiness is slowly moving. These places are not inherently bad. The problem is they are small places and cartels doing bad things can easily overwhelm them.