Cayman Islands: Securitisation In The Cayman Islands

Last Updated: 27 March 2003

Article by Peter Cockhill and Michael Johns

The Cayman Islands

The use of offshore special purpose vehicles for structured finance transactions has long been established. The Cayman Islands enjoys a dominant role in this field and is recognised by leading institutions and arrangers as the leading offshore financial centre in the world. The financial services industry in the Cayman Islands is well developed with a concentration of experienced offshore professionals and service providers that is second to none, a stable political and economic environment and a legal system based on English common law. The following article summarises the principal characteristics of securitisation in the Cayman Islands and looks at some of the legal and business attractions of the jurisdiction.

What is Securitisation?

Broadly speaking, securitisation is a process by which illiquid assets, in the nature of cash flows, receivables and connected contract rights, are pooled and converted into marketable securities representing claims against the illiquid pool of assets. The marketable securities are then sold to third-party investors so that the income producing assets are effectively refinanced by newly raised debt in transferable form on a non or limited recourse basis. This debt is then serviced by the cash flow from the assets.

Securitisation transactions (which are a form of structured finance) come in many forms and structures. Securitisations may involve repackaging (i.e., where the security offered to investors has different characteristics to the underlying assets), credit enhancement or even (through the use of derivatives) credit risk transfer without the transfer of underlying assets (known as "Synthetic CLOs" – Collateralised Loan Obligations). Synthetic CLOs aside, there are a number of basic elements which are generally common to all securitisation transactions.

The original owner of the assets (the "Originator") sells the assets to be securitised to a special purpose vehicle ("SPV") usually established by an investment bank or other financial institution for the purpose of acquiring those assets. The SPV will be an "orphan" vehicle owned by a share trustee, usually a Cayman Islands trust company, which will hold the shares on trust for charitable purposes or for the purpose of the transaction itself under a STAR trust (see further below), the effect of which is that the SPV will not appear on the balance sheet of any party to the transaction.

The SPV raises funds to pay for the assets by the issue of securities (either debt instruments or equity or a combination of the two) which, for the purpose of this article, are referred to as "Notes". It is important that the asset pool acquired generates a stable and predictable cash flow because it is that cash flow that will service interest payment obligations under the Notes. The eventual redemption or sale proceeds of the underlying assets will be used by the SPV to repay the principal on the Notes upon maturity.

The SPV creates fixed and floating charges over the purchased assets and the accounts into which the receivables those assets generate is credited, and all of the SPV’s other property, undertaking and assets, to secure its obligation to repay the holders of the Notes. This security is granted in favour of a security trustee for the benefit of the investors/noteholders and the providers of any enhancement (usually a swap counterparty). As the SPV is a specifically formed shell company with no other assets, forms of enhancement are often provided to protect the SPV from various risks to which it might otherwise be exposed. Hedging (interest and exchange rate) will usually be required to deal with any potential mismatch between the cashflows generated by the underlying assets and the interest due from the SPV on the Notes.

The Originator will most often continue to service the assets and collect payments from debtors under those assets and deal with the day to day administration and enforcement of the securitised assets, pursuant to an administration agreement.

What are the benefits of securitisation?

(i) Improving balance sheets – the securitisation of an Originator’s assets removes those assets from the Originator’s balance sheet and the proceeds from the sale of the securitised assets are shown as cash, thereby improving capital adequacy ratios for financial institutions and reporting ratios, such as debt-to-equity ratios and return-on-assets ratios.

(ii) Low Cost – securitisation can be a cheaper and more flexible source of long-term financing than conventional bank lending, particularly for companies below investment grade. Securitisation is a capital market tool that enables cash flows to be isolated from the credit risk of the Originator. Once isolated, the cash flows used to back the Notes issued in the capital markets often have a higher rating than securities issued by the Originator.

(iii) Liquidity – by selling a portfolio of assets, an Originator is able to realise cash for those assets, providing it with additional liquidity. This liquidity can be used by the Originator to generate new business and/or reduce its existing borrowings.

(iv) Credit Risk – an Originator may wish to reduce his exposure to certain sectors, and by remaining servicer of the securitised assets, the Originator is able to maintain its existing relationships with its customers without having to bear their full credit risk.

(v) Investors – the ability to participate in securities issued by the SPV may give onshore investors who may be prohibited by their domestic laws and regulations from investing in certain types of assets the opportunity to do so.

The SPV

(i) Set up

The SPV in a typical structured finance transaction is incorporated as a Cayman Islands exempted company under The Companies Law (2002 Revision). The incorporation process is very straightforward and the SPV can be set up within twenty-four hours. Government fees are payable upon registration of the Company, and at the beginning of each year thereafter, and are based on the authorised share capital of the Company. Most SPV’s are set up with an authorised share capital of US$50,000 or less to qualify for the minimum registration fee of US$574 (the maximum fee is US$1,722). The share capital of the SPV may be denominated in any currency and there are no minimum requirements in respect of issued or paid up capital. The SPV need only have one shareholder and one director, neither of whom need be resident in the Cayman Islands. The SPV must have a registered office in the Cayman Islands and it is necessary that a register of directors and officers (a copy of which must be filed with the Registrar of Companies in the Cayman Islands) and a register of mortgages and charges be held at the registered office. A register of shareholders must be maintained, but is not publicly available information and does not need to be held at the registered office.

In the case of a typical off-balance sheet SPV, the shares of the SPV are owned by a Cayman Islands trust company which will hold the shares on trust for charitable purposes and who will provide directors to the SPV. Alternatively, under Cayman Islands law, it is possible to establish a trust specifically for the purpose of ensuring the transaction is bankruptcy remote (a "STAR trust") under The Special Trust (Alternative Regime) Law 1997.

The SPV must be run as an independent entity to avoid the risk of a court piercing the corporate veil and treating it as an agent of the Originator. Furthermore, the directors of the SPV, as with English companies, must act in good faith and in the best interests of the SPV. This is achieved by the SPV charging a fee for entering into the transaction (corporate benefit issues are the same as in England) and by using a Cayman Islands trust company to provide independent directors.

(ii) Continuing Requirements

The continuing requirements for a Cayman Islands exempted company are minimal. An exempted company must file an annual return, together with the appropriate annual filing fee (described above) with the Registrar of Companies. The annual return simply confirms that the requirements of the Companies Law as far as they relate to exempted companies have been complied with and that the SPV has conducted its operations mainly outside the Cayman Islands.

(iii) Publicly Available Information

The only information which may be obtained by a member of the public from the Registrar of Companies in relation to an exempted company is the type of company it is (i.e. exempted) and the location of its registered office. The exempted company’s register of mortgages and charges may be inspected by any shareholder or creditor of the company.

(iv) Accounts

The SPV is required by the Companies Law to keep books of account which give a true and correct view of its affairs. However, the SPV is not required to have its accounts audited nor do any accounts need to be filed with any Cayman Islands authority.

(v) Tax

The enormous value of modern securitisation transactions make careful tax planning imperative.

The Cayman Islands is a tax-neutral jurisdiction and therefore does not impose any direct taxes on the SPV or the Noteholders or indirect taxes by way of withholdings on payments made by the SPV. This is supported by an undertaking given by the Cayman Islands Government that the exempted company will not be subject to any tax imposed by any new law enacted in the Cayman Islands for a period of at least twenty years from the date of the undertaking.

Stamp duty is only payable on instruments if such instruments are executed in or physically brought into the Cayman Islands. Stamp duty is charged at a nominal rate provided that the property over which the security is granted is not situated in the Cayman Islands (which is usually the case for all property secured except for the shares of the SPV). It is usual therefore that documents are executed by way of power of attorney outside the Cayman Islands.

Cayman Islands Service Providers

The financial services industry in the Cayman Islands has developed over many years and institutions and arrangers doing business in the Cayman Islands benefit from top quality professional service providers with extensive experience of structured finance transactions. Service providers are often used to provide the share trustee of the charitable or STAR trust and directors to the SPV and may also provide transfer agent and accounting agent services. Fully licensed subsidiaries of major international financial institutions, such as BNP Paribas, CIBC, Deutsche Bank and HSBC, are very experienced in structured finance transactions and the market for service providers is very competitive.

The service provider will typically enter into an administration agreement with the SPV pursuant to which it agrees to provide corporate services to the SPV. The fees of such administrators are competitive with other offshore jurisdictions. With the broad range of service providers available it is easy to ensure that the SPV is controlled and managed offshore by experienced personnel supported by first-rate legal advisers and all the major accounting firms.

The trust deed pursuant to which the share trustee agrees to hold the shares in the SPV will invariably prohibit the trustee from exercising its rights as a shareholder to wind-up the SPV during the life of the transaction. The service provider will also be concerned to ensure that the transaction is structured on a limited recourse basis so that the liability of the SPV is limited to the security provided and that in the event of a shortfall after that security has been realised, any further sums due from the SPV to any party shall be extinguished. The roles and concerns of each party are well rehearsed and understood so that finalising legal documentation can be done quickly and economically.

Outlook

The Cayman Islands continues to be the offshore domicile of choice for structuring off balance sheet finance transactions and the outlook for securitisations and debt repackagings in the jurisdiction remains bright. The publication in July 2002 by Standard & Poor’s of the application of its criteria to Cayman Islands SPVs and the listing of several specialist debt securities programmes issued by such SPVs on the Cayman Islands Stock Exchange bears testimony to the jurisdiction’s enduring appeal.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions