The use of offshore special purpose vehicles ("SPVs") in securitisation transactions is a long- established practice. The Cayman Islands continue to enjoy a dominant role in this field, which they have attained by offering the following key legal, political and professional elements that arrangers, originators and investors seek out:
(1) a cutting-edge legislation (the result of close co-operation between the public sector and government), a creditor-friendly legal system based on English common law, recognition of foreign law-governed security interests and the absence of direct or indirect taxation;
(2) a stable political and economic environment, the result (in part) of the Cayman Islands’ status as a British Overseas Territory, which has supported the AAA rating of Cayman Islands SPVs by international rating agencies; and
(3) the availability and selection of top-flight professionals and service providers, trained in the leading North American and European financial centres, to provide initial and on-going support to Cayman Islands SPVs.
The combination of these factors have made the Cayman Islands the location of choice for structuring all types of cross-border securitisations.
Overview of a Securitisation Structure
Securitisation structures are many and varied but certain elements are common to all. In its most simple form a securitization structure involves the sale of income-generating assets by an originator to an SPV established, usually by an investment bank or other financial institution, specifically for that purpose. The SPV finances the acquisition of the assets by the issue of debt securities ("Notes") or equity securities or both. The cash flow derived from those assets services payment obligations under Notes and distributions on equity securities. The eventual redemption or sale proceeds of the underlying assets will be used by the SPV to repay the principal on Notes upon maturity and to redeem equity securities.
The SPV creates fixed and floating charges over the purchased assets, the accounts into which the receivables deriving from those assets are paid, and all of the SPV’s other property, undertaking and assets, to secure its obligations in respect of the Notes. This security is granted in favour of a security trustee for the benefit of the holders of Notes, any guarantor and the providers of any other credit enhancement (usually a swap counterparty). The transaction is invariably structured on a limited recourse basis so that the liability of the SPV is limited to the secured assets and their proceeds of realisation.
Formation of the SPV
The SPV in a typical structured finance transaction is incorporated under the Companies Law (2003 Revision) as an exempted company limited by shares, and the remainder of this article refers to an SPV in that form. The incorporation process is very straightforward. No governmental authorisations or licences are required for the formation of the SPV which can, if necessary, be set up within twenty-four hours. Government fees, based on the authorised share capital of the SPV, are payable upon incorporation, and at the beginning of each calendar year thereafter. Most SPVs 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 constitution of the SPV is contained in two documents, the Memorandum of Association and the Articles of Association.
The Memorandum of Association contains the name of the SPV, the location of the registered office, details of the authorised share capital and details of the objects and powers of the SPV. These objects and powers may be listed, in full and limited to those listed or expressed to be unrestricted and give the SPV full power and authority to carry out any object not prohibited by law. Typically, the corporate powers and objects will be restricted, particularly where the securities issued by the SPV are to be rated.
The Articles of Association govern the administration of the SPV. They contain details of the rights attaching to shares and the manner in which those rights can be exercised, provisions governing the issue, transfer and redemption or repurchase of shares, the appointment and removal of Directors, the powers and duties of the Directors, the proceedings of the Directors, declaration and payments of dividends and rights on dissolution.
The SPV need only have one shareholder, who need not be resident in the Cayman Islands. In the case of a typical off-balance sheet SPV, the shares of the SPV are held subject to charitable trusts by a Cayman Islands trust company which will also provide directors and administrative services to the SPV. As an alternative to the charitable trust, it is possible to establish a purpose trust, under The Special Trust (Alternative Regime) Law 1997, to hold the shares of the SPV.
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 of the transaction. Furthermore, the directors of the SPV owe fiduciary duties and duties of skill and care to the SPV, and must act in good faith and in its best interests. It is therefore important that the corporate formalities of the transaction are properly documented with full board minutes setting out the terms of the transaction, the potential liabilities of the SPV, the manner in which they will be satisfied or discharged and the benefit accruing to the SPV (usually in the form of a transaction fee).
The SPV is required to maintain a registered office in the Cayman Islands, provision of which is normally part of the administrative services provided by the trust company, and to maintain registers of directors and officers, shareholders and of mortgages and charges granted by the SPV over its assets. The only public registration requirements relating to mortgages and other security interests in the Cayman Islands relate to certain personal chattels, ships and aircraft registered in the Cayman Islands and real estate located in the Cayman Islands.
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. The SPV must notify the Registrar of Companies of any changes to its constitutional documents, its registered office or its directors and officers.
Publicly Available Information
The only information which is publicly available from the Registrar of Companies in relation to an exempted company is the type of company (i.e. exempted), the location of its registered office and whether the company is active, is in liquidation or has been dissolved.
The SPV not required to have its accounts audited nor do any accounts need to be filed with any Cayman Islands authority. However, it is required by the Companies Law to keep books of account which give a true and correct view of its affairs. The accounts need not be kept in the Cayman Islands.
Tax and Exchange Controls
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 on Notes or equity securities issued 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 law enacted in the Cayman Islands for a period of at least twenty years from the date of the undertaking. This undertaking may be renewed, if necessary, usually for a period of a further ten years. There are no foreign exchange controls in the Cayman Islands.
Offering of Securities
There are no requirements that a prospectus be filed with any public body in the Cayman Islands in connection with any offer of securities, unless those securities are to be listed on the Cayman Islands Stock Exchange. An SPV which is an exempted company may not, unless it is listed on the Cayman Islands Stock Exchange, make any invitation to the public in the Cayman Islands to subscribe for its securities. For these purposes, the public in the Cayman Islands does not include another exempted company or an ordinary non-resident company incorporated in the Cayman Islands.
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.