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.
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.
This article first appeared in the magazine titled
"Cayman. The Future of Finance.", published by
Cayman Finance in April 2014.
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.
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