Cayman Islands: The Use Of Segregated Portfolio Companies As An Alternative For Structured Finance Issuers

Last Updated: 9 October 2003
Article by Alasdair Robertson

In asset-backed multi-issue structured finance vehicles, for example vehicles issuing under repackaging programmes, one of the core structuring features is to ensure that each series of notes issued to investors is properly "ring-fenced". Amendments to the Companies Law in the Cayman Islands late last year has created a statutory alternative to contractual "ring fencing" through the use of segregated portfolio companies.

The purpose of this article is to explain, in summary: the current methods of ring-fencing; what a segregated portfolio company or "SPC" is; the benefits of the SPC legislation; some of the potential key issues that may arise; other potential applications for SPCs; and certain points in the SPC legislation to bear in mind with respect to capital markets transactions.

Current Methods of Ring Fencing Multi-issue, Structured Finance Vehicles

In essence, ring fencing should ensure that the cash flows from the underlying assets for one specific series of notes flow to the investors of that series in accordance with the terms of the notes and are unavailable to meet the liabilities on any other series of notes of the same issuer. This "cross contamination" risk has been addressed in the past through contractual methods contained in the issue documentation for the relevant issue of notes.

The documentation for most multi-issue transactions is typically governed by English or New York law and the courts of the Cayman Islands will generally recognise the choice of law and the creation of the security interest under such law.

Under English law, the ring fencing is currently achieved using a combination of two elements. The first is for the underlying assets to be charged in favour of the trustee of the notes for the benefit of the noteholders of that series (i.e. the notes of each series are secured by the underlying assets). The second element is to utilise limited recourse and non-petition provisions to limit the ability of each of the noteholders to claim against underlying assets not attributable to their series. Once the underlying assets for the relevant series have been exhausted, such provisions provide that any remaining liability under such notes will be extinguished and the holder will have no further claim against the issuer or its assets.

Although not as common as the English law governed repackaging programmes, we are aware that as a matter of New York law, the key requirements from the rating agencies involve such transactions using limited or, in U.S. terms, non-recourse wording, and non-petition wording as well as subordination agreements which would constitute an enforceable subordination agreement under Section 510 of the Bankruptcy Code.

Segregated Portfolio Companies

The segregated portfolio legislation contains a potential alternative to the above structures by providing for ring fencing by way of statute. The legislation, which is set out in Part XIV of the Companies Law (2003 Revision) (the "Companies Law"), permits within a single company or issuer (the "SPC"), the segregation of assets and liabilities amongst various "portfolios" in a way which binds third parties as a matter of Cayman Islands law.

The core provisions are set out in Section 240 and 241 of the Companies Law and provide that the assets of each portfolio shall only be available and used to meet liabilities owed to the creditors of that portfolio and that any creditor of a particular portfolio shall only be entitled to have recourse to the assets of that portfolio, and if not prohibited by the SPC's articles of association, the general assets (but not the assets of the other portfolios) of the SPC. With regards to the availability of the general assets, please see further below.

Accordingly, an SPC achieves through statute, as a matter of Cayman Islands law, the objective of the current ring fencing techniques used in the international capital markets with each "portfolio" having as assets, the underlying assets and as liabilities, the obligation to pay the principal and interest of the notes (subject to limited recourse) for that series. In other words you can think of each current series and its corresponding underlying assets as a portfolio. As with current structures, the equity share capital would be held by a licenced trust company, such as Maples Finance Limited, on trust for charitable and other philanthropic purposes.


The obvious benefit of using an SPC is the fact that the ring fencing is embedded in statute rather than contract and accordingly has the benefit of statutory recognition in the place of incorporation of the issuer. However, the other important benefit of the segregated portfolio regime is that as a statutory regime, it would also bind non-consensual third parties as well as consensual third parties under Cayman Islands law. This therefore extends the ring-fencing concept to parties who would otherwise not be covered by the current contractual ring fencing, which would only bind contractual parties.

Potential Key Issues

Although the segregated portfolio legislation, as a matter of Cayman Islands law offers a viable alternative on its own, one critical point to be acknowledged is that invariably the underlying assets are located in other jurisdictions, primarily New York or London. One issue which needs to be addressed, therefore, is the recognition of the segregated portfolio legislation in the jurisdiction in which the underlying assets are located.

To the extent that such jurisdiction may not recognise the segregation provided for by the Cayman Islands legislation, or where insolvency proceedings could be commenced against the SPC in a jurisdiction which would ignore the segregated portfolio legislation, then the use of the SPC legislation on its own may not in itself meet the objective of ring fencing the series or portfolio.

This can be addressed in two ways: firstly, where possible legal opinions in the relevant jurisdictions should be obtained confirming the point; and secondly, using the SPC legislation in addition to contractual ring fencing, rather than as an alternative in itself. Even if a legal opinion is obtained, in light of potential cost of jurisdictional 'reviews' and acknowledging the cross-border nature of structured finance, our recommendation would be to use an SPC as a "bolt on" or in addition to the existing contractual ring fencing.

In doing so, participants would benefit from the current market acceptance of the current structure and the neutralization of the potential issue regarding recognition of the segregated portfolio legislation in the jurisdiction on which the underlying assets are located while at the same time participants would gain the benefits mentioned above, including the ability to bind non-consensual parties as a matter of Cayman Islands law.

Other Applications

The SPC Legislation was initially introduced into the Cayman Islands in 1998, but was limited only to regulated insurance companies. After several years of insurance companies successfully utilising the legislation to create segregated portfolios for separate pools of risk (59 SPCs formed with 240 segregated portfolios), the Cayman Islands government in 2002 extended the SPC legislation to any type of exempted company with the intention that SPCs could be used more generally within the mutual fund industry (where it has particular application with respect to umbrella funds) and also in capital market transactions. After representations from various industry bodies in Cayman and with the leading assistance of Maples and Calder, the Cayman Islands government then amended the SPC legislation to remove a provision which permitted a moratorium on security being enforced in the event that a receivership order was made in respect of a portfolio, such provision obviously made SPCs unattractive for capital markets issuers and hedge funds where security was often granted. At the same time the Cayman Islands government also amended certain other provisions with the overall intention to make SPCs more attractive to the international capital markets and also the mutual funds industry, where already at least 58 SPC's have been used for mutual fund transactions1.

Other Points to Note in the context of using SPCs for Capital Markets Transactions

As permitted by Section 241 of the Companies Law, unless the articles of association so prohibit, a creditor can have recourse to both the assets of the segregated portfolio and also the general assets of the SPC. This concept is generally known as "flow over". On the basis that the general assets will only be used to pay the general expenses of the SPC, it may make sense to prohibit recourse to the general assets in the articles of association in order to prevent any flow over into the general assets for the creditors of each of the segregated portfolios. This should ensure that the SPC is always adequately funded to meet its general expenses, such as annual return fees. Such a provision would also limit the ability of a creditor to wind up the SPC as opposed to the portfolio.

Another point to note is that the SPC legislation specifically contemplates that a receivership order can be obtained in respect of any segregated portfolio. Obviously, it would make sense to extend the wording of the non-petition covenant to prohibit any known creditor from applying for any such receivership order.

A further issue is that it must be clear in each contract or agreement to be entered into by each segregated portfolio, that such contract or agreement is entered into by or on behalf of the directors for, and on behalf of, the segregated portfolio and where the contract is in writing, the contract or agreement must indicate that such execution is in the name of, or by, or for the account of, such segregated portfolio. It would therefore be advisable for a specific covenant to be given in the transaction documents that the directors will comply with this requirement so that that the relevant contracts or agreements are binding on or enure to the benefit of that portfolio.

With respect to administration and fees, there should not be any material change to the current structures used. As noted above, there would need to be arrangements put in place to ensure that the general ongoing expenses of the SPC are funded out of general assets. This can obviously be done by having either a large reserve in general assets or alternatively have each of the segregated portfolios' cash flow transfer pro rata amounts to the general assets to meet such expenses.

Although we would anticipate in the context of structured finance transactions for a new entity to be formed and to apply for registration as a segregated portfolio company on incorporation, it is possible for existing exempted companies to apply to convert to a segregated portfolio company. The legislation contains specific provisions to ensure that existing assets and liabilities are properly allocated upon conversion.


Following the recent amendments to the SPC legislation, there is definite potential application for the use of SPCs in the international capital markets for asset backed multi-issue transactions. However, as indicated above, we believe the most natural step forward would be to utilise the SPC legislation by way of an addition or bolt on to the current tried and tested methods used to ring-fence multi-issue vehicles.

1 Information provided by the Cayman Islands Monetary Authority.

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.

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

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

Alasdair Robertson
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”

Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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