In the Aviation Finance & Leasing Review 2023/24 for the
Cayman Islands, our aviation experts highlight important issues,
key developments, and the very latest trends within the global
aviation finance industry; and provide a clear understanding of the
opportunities within the Global aviation industry and also within
individual domestic markets.
This year's chapter was authored by Cayman Islands partner Sarah Humpleby, along with associate, Hannah Hawkins.
The Cayman Islands is well known for more than just white sandy beaches. This article provides an overview of why the Cayman Islands is the offshore jurisdiction of choice for so many and gives a flavour of the ways in which incorporating it into a transaction can be effective.
Innovation in the industry
IATA's mid-year assessment of the aviation industry has noted the positive trajectory of the rebound of air travel and airline profitability despite ongoing pockets of economic uncertainty. Having faced significant headwinds over the last several years, the aviation industry has proved itself to be both resilient and innovative in its endurance. There has been a clear expansion in the range of transactions and structures in which Cayman Islands entities are deployed and that flexibility is attractive to participants at all levels from investors to operators.
6 answers to 'Why Cayman?'
The Cayman Islands' strength in financial services is borne out of its ability to provide institutionally focussed services to a global network of clients and this has seen it mature into one of the largest international financial centres in the world. The global financial industry can rely on the Cayman Islands' well developed and predictable company and partnership laws and put its trust in effective, cost-efficient and tax-neutral transaction structuring. We will focus on the key advantages here.
- Sophisticated Legal System and Political Stability: The Cayman Islands is a self-governing British Overseas Territory with an independent legal and judicial system grounded in English common law with well-developed local legislation. This predictability and stability is attractive when combined with a widely known and accepted corporate governance framework.
- Tax Neutrality: The Cayman Islands has no direct taxation and a structure involving a Cayman Islands entity has the advantage of minimising potential tax leakage. It is free from any form of income, capital gains or corporation tax and no Cayman Islands' withholding tax is imposed on an entity's cash flows. Certain Cayman Islands entities with exempted status may also apply for a government undertaking confirming that such entity will not be subject to any taxation in the Cayman Islands for a period of 20 to 50 years (depending on the type of entity). The tax transparency of Cayman Islands exempted companies and partnerships can enable efficient raising of capital.
- Flexibility: The business in which a Cayman Islands entity can be involved is generally unrestricted provided it falls within what is permitted by law. Combined with the ability to incorporate a new entity within as little as 24 hours, the flexibility allows parties to move quickly and efficiently. The Cayman Islands remains a relatively inexpensive jurisdiction in comparison to its competitors with government fees being assessed on a scale linked to the authorised share capital of the SPV. There are no exchange control restrictions allowing money and securities in any currency to be freely transferred to and from the Cayman Islands.
- Creditor Friendly: The Cayman Islands' insolvency regime is recognised as creditor friendly. Contractual rights including subordination, netting and set-off are recognised by express statutory provisions. The effective use of bankruptcy remoteness structures is a key aspect of asset and structured financing in the Cayman Islands and recognised as robust by rating agencies and financiers.
- Regulation: There is a well-established regulatory framework encompassing international standards around anti-money laundering and counter terrorism, data protection, economic substance and the Common Reporting Standard (to name a few). Regulatory and financial transparency are core values embodied by the Cayman Islands Monetary Authority which is an independent regulator charged with consistent application of regulatory requirements for financial institutions.
- International Connectivity: It is well known that Ireland is a key global hub for the aviation industry not least due to its enviable treaty network. There is a well-established route for Cayman Islands entities to be established as Irish tax resident and that can be a powerful structuring tool in a variety of transactions.1
What's in a name?
One of the most commonly chosen entities for structured and asset finance deals is the exempted company incorporated with limited liability (an 'SPV'). Exempted Companies have their registered offices in the Cayman Islands and carry on business outside of the Cayman Islands. SPVs are distinct from segregated portfolio companies ('SPCs') and limited liability companies ('LLCs') in the jurisdiction. At an investor level, an exempted limited partnership is likely to be the entity of choice and the Cayman Islands is the premier jurisdiction for investment funds with an estimated 80% of all new offshore funds domiciled in the country. The biggest challenge to incorporation or formation of a new entity may well be settling on the naming convention!
Off-balance sheet financing
In an aviation context, an SPV is typically incorporated to act as a borrower and owner/lessor of an aircraft and its shares will be held on trust by a professional trust company such as Walkers Professional Services. This effectively separates the legal and beneficial ownership of the SPV and creates the 'orphan' structure taking the SPV off the balance sheet of the relevant parties and isolating the underlying assets from the corporate credit(s) in the deal. The trust will generally be a charitable or purpose trust maintained for the life of the deal.
The other key feature for an orphan SPV deal is that all documentation is entered into on a limited recourse and non-petition ('LRNP') basis. This ring-fences the assets and preserves bankruptcy remoteness by limiting the chance of claims against the SPV.
Aviation itself is a multi-billion dollar industry, from commercial passengers to freighters, private aircraft, the vast network of regulators and technical service providers, the manufacturers and the infrastructure required to support it all. It is no surprise then that there are so many ways to transact. We have already touched on some of the kinds of transactions we see but below is a (non exhaustive) list of where the Cayman Islands can feature in deals.
Funds and investment – as we have mentioned, the Cayman Islands is the jurisdiction of choice for the formation of investment funds. In recent years we have seen new investors with capital to deploy becoming new entrants into the aviation sector.
Alternative lending, joint ventures, new leasing platforms – once the investment is identified, those funds need to be put to use and we have seen Cayman incorporated entities being used in the establishment of alternative lending platforms, joint ventures with established industry players and the founding of new leasing platforms. The flexibility of Cayman entities is particularly attractive to alternative lenders who can deploy capital quickly and fulfil a need where traditional lenders have retreated.
Debt financing – traditional debt financing for new and used aircraft also favours the use of bankruptcy remote SPVs. From pre-delivery payment financing, to delivery financing at the point of delivery from the manufacturers (including export credit guarantee and insurance backed products), to warehouse financing of portfolios, all lend themselves to an SPV borrower. As production lines continue to ramp up, we also expect to see carbon neutral and de-carbonisation projects increasingly highlighted across the industry. Improvement in fuel efficiency, innovations in aircraft technology and a growing focus on what ESG means for aviation financing will be put into practice in debt documentation and elsewhere as pre-delivery payments fall due and new aircraft are delivered.
Capital markets – Cayman incorporated Irish tax resident issuers is a tried and tested structure in aircraft asset backed securitisations ('ABS'). Where we also see the use of Cayman entities in capital markets and rated deals are in connection with note of bond issuances (secured or unsecured) and in non-US enhanced equipment trust certificate ('EETC') transactions. At the time of writing access to the ABS market is heavily restricted due to, among other things, interest rate volatility and the disconnect between lease rates and cost of funds. Those who need to find access to financing or refinancing have had to look elsewhere and there has been a surge in term loan transactions to fill that gap and those deals are commonly structured with an SPV borrower.
Loyalty fi nancing2 – the highly structured transactions entered into by several major US airlines following the deep impact of the global pandemic is an excellent example of the innovative approach the industry takes to self-preservation. The valuation of frequent flier programmes has long been a closely guarded secret but the first of-its-kind United Mileage Plus financing changed that. The bankruptcy remoteness protections afforded to the financiers and investors by using Cayman Islands SPVs were integral to the highly structured nature of these transactions.
Listing services – many of the transactions already described are likely to have a requirement for notes to be listed. The Cayman Islands Stock Exchange ('CSX') was the first offshore stock exchange to be granted approved organisation status by the London Stock Exchange. In addition, the UK HMRC also recognises the CSX under section 1005 of the Income Tax Act (ITA) 2007 regards the CSX as a 'recognised stock exchange'. The CSX is a specialised exchange which prides itself on being user-friendly and offering an efficient and competitively priced listing service.
Aircraft registration – a summary of the involvement of the Cayman Islands in aviation is not complete without a word on the Cayman Islands Civil Aviation Authority ('CAACI'). The aircraft registry maintained by the CAACI is an internationally respected registry with strategic values and a desire to strengthen the reputation of the jurisdiction as a safe, effective and innovative registry of choice.3 It is predominantly a private aircraft register but can also handle commercial aircraft (including those of the national flag carrier, Cayman Airways). It has an Article 83bis Agreement in accordance with the International Civil Aviation Organisation ('ICAO') with the Kingdom of Saudi Arabia and in more recent times, a transitional register for commercial aircraft. The transitional registration programme developed significantly throughout 2020 with an increase in demand from the commercial aviation community for reliable registry services resulting from the effects of the global pandemic.4 It should also be noted that the Cayman Islands benefits from the Convention on International Interest in Mobile Equipment (the 'Cape Town Convention') following the United Kingdom's ratification. It affords entities structuring their asset financing transactions with a Cayman Islands SPV the added protection, certainty and uniformity that the Cape Town Convention and its Protocols afford.
Management and professional services
Regardless of the type of transaction, a Cayman Islands SPV still requires directors. Cayman Islands fiduciary service providers such as Walkers Professional Services can be engaged to provide administration and management services for SPVs and other kinds of Cayman entities including the provision of directors and officers, and importantly ensuring provision is made to assist the SPV meets its regulatory obligations. Ongoing monitoring and testing can be implemented to maintain required compliance procedures and ensure that the relevant entities remain in good standing with the appropriate authorities including the Registrar of Companies CIMA and the Department for International Tax Cooperation.
Looking to the future
The additional macro-economic headwinds in early 2023 against a backdrop of multiple black swan events in recent years have not dampened optimism. For those who have been around long enough, there is faith in the industry cycle; firm demand for air travel which will continue and the good times will return. What we have learned is that the fundamentals remain strong in respect of both the industry itself, and the reasons why the Cayman Islands is an effective jurisdiction to support it. When the unexpected occurs, there is courage in innovation and Cayman has the tools to reinforce that progress.
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.