The Cayman Islands is one of the leading jurisdictions in which to establish special purpose vehicles (SPVs) used for securitisation and other structured-finance transactions. A structured-finance transaction involves the transfer of underlying assets to the SPV. The SPV funds that acquisition by issuing securities, typically debt securities called 'Notes'. The ongoing revenue from the assets repay principal and interest to the holders of Notes (Noteholders) over the life of the deal.
Form of Entities
Structured-finance transactions can be completed through a variety of legal entities: companies, segregated portfolio companies, partnerships and trusts, although the vast majority are in the form of companies. Local legislation relating to these entities generally operates with the promotion of Cayman's finance industry and ease of doing international business in mind. Local government bodies such as the Registrar of Companies operate online registration systems, which means SPVs can be established in less than 24 hours.
Cayman legislators take a proactive approach to facilitate structured-finance transactions and encourage the use of a Cayman SPV. In recent years, statutory provisions have been introduced to make the SPV structure more robust and enshrine typical characteristics of the SPV.
An excellent example of this relates to one of the key principles underlying structured-finance transactions, namely the bankruptcy remoteness of the SPV. Parties to the transaction and Noteholders agree contractually not to petition for the winding up of the SPV until the Notes are repaid. The s.95(2) Companies Law 2009 Revision introduced an express statutory enforcement of this normal contractual agreement and provides that the Cayman Islands court shall dismiss a winding-up petition if the "petitioner is contractually bound not to present a petition against the company". This important provision removed any doubt regarding the enforceability of non-petition provisions overriding general creditor statutory rights, and was welcomed by the global structured-finance community. Another example is the Companies Law 2010 Revision, which introduced new rules relating to the ability of entities (including foreign entities) to merge with Cayman companies. Prior to 2010, the process was more complex and time consuming. Since 2010, the merger provisions have been used in many structured-finance transactions to effect the merger into a Cayman SPV of an onshore vehicle that initially held the underlying assets for the deal. Upon merger, the assets of the merging entity become the assets of the Cayman SPV as surviving company, by operation of law, eliminating the need to transfer each underlying asset into the name of the SPV required by normal sale and purchase.
There are no forms of relevant direct taxation in Cayman for SPVs. Stamp duty may be relevant and is typically nominal. Cayman is also a Model 1 IGA country for the purposes of the US Foreign Account Tax Compliance Act (FATCA). Model 1 IGA simplifies some of the reporting and compliance burdens that financial institutions (FIs) in non-Model 1 countries face. Local legislation is expected to be passed early 2014 to bring the provisions of the Model 1 IGA into force. This simplified FATCA tax-reporting regime on an FI should attract those seeking to do business using Cayman SPVs over Model 2 or non- IGA countries.
Rating Agency Acceptance
Rating agencies have long recognised Cayman as a predominant jurisdiction for rated- debt capital-market transactions. S&P have their own criteria applicable to Cayman SPVs. The rating agencies are familiar with the different legal entity types, the bankruptcy remote structures and local law opinions relating to the SPV and the transaction. Sophisticated Professionals Law firms, fiduciary service providers and accounting firms in Cayman have been serving the global structured-finance industry since the market inception. There is great depth of experience available. The major financial institutions across the US, Asia and Europe that arrange and underwrite structured- finance deals, asset managers, originators and the onshore law firms are familiar with the international law firms operating within Cayman.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.