1. Project Finance Panorama
1.1 Recent Trends and Development
Maples and Calder, the Maples Group's law firm, has witnessed a general shift in the international project finance market from financing via standalone bank loans to financing through a combination of debt securities and bank loans, together with a significant increase in the use of Cayman Islands vehicles to finance Latin American project finance transactions. For example, in 2019 alone, the firmacted for numerous Cayman Islands companies structured as "off balance sheet" note-issuing vehicles in the transportation sector. These include:
- Rutas 2 and 7 Finance Limited, incorporated to issue USD458 million in zero-coupon bonds, the proceeds of which are being used to finance the construction of a new toll road funded in part by a public private partnership in Paraguay
- Bioceanico Sovereign Certificate Limited, incorporated to issue USD732 million 5.375% notes due in 2034, the proceeds of which are being used to finance the design and construction of a new road between Loma Plata and Carmelo Peralta in Paraguay.
- Lima Metro Line 2 Finance II Limited, incorporated to issue USD563 million 5.0% notes due in 2036, the proceeds of which are being used to finance the east-west subway line in Lima, Peru.
- Line One Peru Metro Expansion Company Limited, incorporated to issue USD273 million 4.737% notes due in 2033, the proceeds of which are being used partially to repay a loan facility entered into in 2017 to finance the expansion, adaptation and improvement of the subway "Line 1" in Lima, Peru.
The success of these transactions has been widely seen as a positive development for project finance generally in the Latin America region, where most countries have historically had very limited access to traditional commercial lending sources and have instead had to rely on state-owned lenders for support. This success is in no small part due to the:
- continued strength of international capital markets;
- increased investment participation in the project finance space by a wide variety of public and private institutions; and
- improvements made by various governments over the last few years to their public private partnership (PPP) or concessions legislation. These types of transactions are usually funded by "structured finance repackaged securities". These are described in further detail in 1.4 Structuring the Deal below but are essentially bonds backed by government-issued payment certificates.
While many countries in the Latin American region have had recent success in financing public private partnerships in the last few years, unfortunately not all of them have achieved this success. Argentina, for example, introduced new public private partnership legislation in 2017 aimed at encouraging foreign direct investment to finance much needed improvements to its transportation infrastructure, one result of which was the planned expenditure on six upgrading projects to finance the construction of various toll roads. It is understood that the intention was to finance these projects using the types of "structured finance repackaged securities" described above. However, due to the current economic and political climate in Argentina, and the fact that such repackaged securities would ultimately rely on the credit-worthiness of the Argentinian Government, these projects have been postponed indefinitely.
1.2 Sponsors and Lenders
As the Cayman Islands is typically used as a tax-neutral jurisdiction that is an efficient and neutral platform for sponsors and investors alike, a broad variety of participants in the international project finance space can be found, from domestic construction companies and foreign international infrastructure companies on the sponsor side, to government-owned development banks, institutional lending banks, and private equity and hedge funds, on the lender side
1.3 Public-Private Partnership Transactions
Historically, soft-law guidelines from administrative authorities in the Cayman Islands were the main source of PPP regulation for local PPP projects. However, the introduction of a public procurement legal framework in 2018 has resulted in the Cayman Islands having one of the youngest PPP law and regulation models in the world. This framework has been used as the basis for assessing and regulating the current expansion of, for instance, the Owen Roberts International Airport located on Grand Cayman, Cayman Islands, as well as a proposed cruise ship pier/terminal and a new waste management and treatment facility. As may be expected, the framework does not apply to international project finance transactions structured through Cayman Islands vehicles.
1.4 Structuring the Deal
The Cayman Islands as a Jurisdiction of Choice
The Cayman Islands continues to be one of the leading tax-neutral jurisdictions through which to structure international project finance transactions where a tax-neutral jurisdiction is required for the relevant debt securities and bank loans. There are four broad categories of benefits which contribute to the appeal of Cayman structures for international transactions, as follows:
Sophistication as a jurisdiction
The Cayman Islands is a British Overseas Territory. The United Kingdom is responsible for the external affairs of Cayman and its defence and internal security but, otherwise, the Cayman Islands is self-governing with a democratically elected legislature. The Cayman Islands makes its own laws and has independent legal and judicial systems.
Well-recognised legal concepts (including limited liability and separate corporate personality) underpin the Cayman corporate vehicle, as well as the principles governing lending and granting security over assets. Decades of experience and extensive due diligence have demonstrated to investors, banks, development agencies, counterparties, regulators and international authorities that these foundations are solid and reliable. Furthermore, international lenders and rating agencies have rigorously reviewed and stress-tested Cayman Islands laws governing lending and granting of margin and security over assets.
There are dedicated "fast track" commercial courts in the Cayman Islands, including a Financial Services Division of the Grand Court that recognises the need for special procedures and skills in dealing with the more complex civil cases that arise out of the financial sector in the Cayman Islands. Courts in the Cayman Islands are very active, efficient and well-respected. In addition, the ultimate court of appeal is the Privy Council in London so there is a good deal of certainty in relation to the judicial process. This is a strong source of comfort for investors and counterparties, who may want the reassurance that if rights have to be enforced before a court, it will be before a familiar and trusted system.
Commitment to transparency
The Cayman Islands Government and its main regulator, the Cayman Islands Monetary Authority, have worked continuously with governments and international authorities over many years to ensure that the Cayman Islands is trusted as a well-regulated, co-operative and transparent jurisdiction. For example, the Cayman Islands was an early adopter of: (i) comprehensive and strict anti-money laundering laws and Know Your Customer (or KYC) rules and regulations, which are at least equivalent to those of established OECD member states; and (ii) the Foreign Account Tax Compliance Act and the OECD's Common Reporting Standard, so that tax information on investors is now exchanged with over 100 other countries. As a result, the Cayman Islands is rated by the OECD as largely compliant regarding transparency and information exchange - the same rating as given to the United Kingdom, Germany and the United States.
The Cayman Islands is an ideal tax-neutral domicile for international project finance transactions as it creates a level taxation playing field for investors by not adding a further layer of taxation and it has no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax.
Simplicity of entity formation and flexibility of their administration
The formalities regarding the incorporation of companies are simple and straightforward, so they can be incorporated on a same-day basis and at relatively low cost. Maintenance requirements are likewise limited: for instance, there is no requirement to have resident directors, to convene annual general meetings or to prepare and file accounts. This reduces cost and the burden of administration.
Types of Cayman Islands Vehicles
While there are a range of Cayman Islands vehicles to choose from in these transactions (including, but not limited to, exempted limited partnerships, limited liabilities companies and trusts), Cayman Islands exempted companies remain the most popular form of vehicles used to structure "issuers" of debt securities and "borrowers" of bank loans. The Cayman Islands exempted non-resident company (or exempted company) is a body corporate limited by shares and is similar in form to "private companies limited by shares" and "corporations" in jurisdictions such as England and Wales and the United States, respectively.
The laws of the Cayman Islands underpinning companies provide a framework that can be adapted to give effect to a wide range of commercially agreed requirements, including bespoke objects for which exempted companies can be incorporated and highly individual corporate governance arrangements. This enables the constitution of companies to be tailored to many different situations.
Typical Funding Techniques
The vast majority of PPP contracts are funded in one of three ways:
- structured finance repackaged securities, in which the underlying assets are infrastructure-related certificates issued by the state upon the completion of agreed milestones;
- project finance transactions, which rely on the cash flows generated by the project assets for repayment;
- repackaged securities in line with the above, where the debt is government guaranteed.
In recent years, the securities used to finance the Latin American project finance transactions referred to above tended to be of the "structured finance repackaged" type described at the first bullet above. These securities are invariably issued by orphan note-issuing vehicles. Part of the proceeds of the issue of the securities is used by the issuer to purchase the assets (ie, the infrastructure-related certificates issued by the relevant government). The single most important structural feature of these issuers is to make them "bankruptcy-remote". In practice, this means ensuring that, in the event that the originator or seller of the assets goes into bankruptcy, (i) a liquidator of that originator or seller cannot attach them, ie, that the issuer is independent and that there is a "true sale" of the assets to it; and (ii) the issuer does not go into insolvency in the Cayman Islands or elsewhere. There are a number of essential features, often interrelated, that are employed to achieve that objective. These include: (i) having the equity interests in the issuer being held under a declaration of trust (which serves to take the issuer "off the balance sheet" of related transaction parties); and (ii) ensuring that all obligations of the issuer are secured and the recourse of creditors is limited to the secured assets as set out in the principal transaction documents (ie, that all obligations to transaction creditors are secured by the purchased assets and that recourse is limited to those assets accordingly).
The success of such orphan note-issuing vehicles and their attractiveness to international project finance sponsors is not surprising, given the broad categories of benefits which contribute to the appeal of Cayman Islands structures described above.
2. Guarantees and Security
2.1 Assets Available as Collateral to Lenders
The main assets available as collateral to lenders in international project finance transactions which rely on the cash flows generated by their assets are:
- the shares in the project company;
- the project assets;
- the project site;
- the project company's bank accounts;
- the key project contracts; and
- the project insurances.
In the case of structured finance repackaged securities, the main asset is the infrastructure-related certificates issued by government and, where available, government guarantees. In each case, the formalities and perfection of the relevant security interests will depend on the nature of the underlying assets that are subject to the security interest and the lex situs of collateral. Separately, security documents do not need to be filed, registered or recorded in the Cayman Islands in order to be perfected (as there is no public or central registry to record them). Certain entities are required to maintain registers of mortgages and charges which should be updated whenever they provide security over their assets; however, failure to update such registers does not impact the validity or priority of the security. Central security registers do exist for certain types of assets (including Cayman Islands real estate, intellectual property rights, ships, etc), which registers should be updated in order to secure priority (as opposed to perfection).
2.2 Charges or Interest over All Present and Future Assets of a Company
Fixed and floating charges are both possible under Cayman Islands law: fixed charges are usually taken over specific assets, while floating charges tend to cover those assets not covered by the fixed charge (which assets tend to be shifting by nature). Until crystallised into a fixed one, a floating charge is intended to allow the charger to continue to use the secured assets in question.
2.3 Registering Collateral Security Interests
A company must make an entry in its register of mortgages and charges in respect of any security interest created by it in order to comply with the Companies Law (2018 Revision). A limited liability company (or LLC) must also make an entry on its register of mortgages and charges in a similar manner. In each case, failure to make the entry does not affect the validity of the security, however, it would be in the interest of any secured party to ensure that this is done so that any potential creditors who inspect the register are put on notice. The registered office provider to a company or LLC will usually arrange for this promptly and, because of how easy they are to do, these updates are typically very efficient from a costs' perspective. Other than this, it is not necessary that any transaction documents creating a security interest by a company be filed, recorded or enrolled with any governmental, regulatory or judicial authority in the Cayman Islands in order to ensure the validity of the security interest. However, charges over certain assets granted by Cayman Islands companies, such as Cayman Islands real estate, intellectual property rights, ships and aircraft, do need to be registered at other specialist registries related to the asset in question.
2.4 Granting a Valid Security Interest
All-asset debentures are both common and permissible in the Cayman Islands, and do not require that each item of collateral be individually identified in the debenture itself. The laws of the Cayman Islands also permit liens and pledges although, these are rarely used in practice (in the case of pledges, this is most likely because physical delivery of the underlying asset is required). Mortgages (both legal and equitable) and charges (both fixed and floating) are generally used instead.
2.5 Restrictions on the Grant of Security or Guarantees
There are no statutory restrictions on the form of security that can be granted by a Cayman Islands company, nor do any such restrictions exist in respect of the amount of any guarantees that can be granted. All the property of a Cayman Islands company should therefore be available to secure any international project finance transactions. In approving the grant of any security or the provision of any guarantee, among the various fiduciary duties that are imposed on them, the directors of the company should act in good faith and should be satisfied that its provision is in the best interests of the company as a whole.
2.6 Absence of Other Liens
With limited exceptions (for Cayman Islands real estate, intellectual property rights, ships etc), no public security register exists in the Cayman Islands that can be searched to determine whether or not a Cayman Islands company has granted any security interests. However, as previously noted, a company must make an entry in its register of mortgages and charges in respect of any security interest created by it in order to comply with the Companies Law (2018 Revision) and a limited liability company (or LLC) must also make an entry on its register of mortgages and charges in a similar manner.
2.7 Releasing Forms of Security
In the context of international project finance transactions, where the assets are not located in the Cayman Islands and where the laws of the Cayman Islands are not used as the governing law of the relevant security agreements, no Cayman Islands steps need to be taken to release the security. However, it is customary to enter into a deed of release or equivalent document to confirm or evidence the release. Any entries on the register of mortgages and charges of a company or an LLC should be updated to reflect the release of the security, although failure to do so does not impact the validity of the release.
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