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Capital Markets and Structured Finance

The Cayman Islands have long been the destination of choice for many of the world’s most prestigious financial institutions who seek a high quality of service and advice from service providers based in a mature offshore jurisdiction. Cayman is a preferred offshore jurisdiction for structured finance and capital markets transactions. This is a result of the many advantages of structuring such transactions under Cayman Islands law as described below.

 

Taxation

 

There is no corporation or other direct taxation imposed by the Cayman tax authorities on SPVs incorporated in the Cayman Islands. Payments made by a Cayman Islands SPV, whether of principal or interest, are not subject to withholding tax. Furthermore, stamp duty is only levied if the instrument being executed is executed in, or following execution is physically brought into, the Cayman Islands.

 

Ease of Formation

 

It is relatively very easy, quick and inexpensive to register and maintain a Cayman Islands SPV, as further described below.

 

Legal and Regulatory Framework

 

Minor legislative amendments, following the OECD and FATF initiatives, have cemented the efficient regulatory regime in the Cayman Islands, a regulatory regime which does not impose unnecessarily onerous restrictions while still providing an effective regulatory framework for all forms of capital markets and structured finance transactions.

 

The Cayman Islands legal system is largely based on English common law although the Cayman authorities have created a specific legal environment to facilitate structured finance transactions.

 

Insolvency Law

 

Cayman Islands legislation provides greater flexibility and clarity, when compared to corresponding provisions in English statutes, in many areas which are of importance in capital markets transactions. For example, under Cayman Islands law, a company can provide financing for the acquisition of its shares by a third party, if it can be demonstrated that the transaction is for the material benefit of the company. Also, under Cayman Islands law, shares can be redeemed by a company from a credit balance on its share premium account as well as out of profit.

 

Cayman Islands insolvency law is one of the most creditor-friendly regimes in the world and therefore enjoys the confidence of the major rating agencies. Benefits for creditors include (1) the express recognition of netting and set-off arrangements and contractual subordination (assuming in each case that they are contractually effective under the governing law of the contract), (2) the ability of secured creditors to enforce their security in the liquidation of an SPV, (3) the absence under Cayman Islands law of the concept of “substance over form”, ensuring that heavily subordinated debt and participating debt will not be treated as equity, and (4) the absence of a corporate rehabilitation system mirroring U.S. Chapter 11 or English “administration” proceedings that would allow a debtor to effectively suspend the rights of creditors.

 

Trust Law

 

Particularly relevant to structured finance transactions is the well established and modern trust law of the Cayman Islands. Under Cayman Islands trust law, a Cayman Islands SPV can be structured as an “orphan company” whose shares are held on trust for either a charitable purpose or for a special purpose (i.e., for the benefit of the transaction). This allows the originator in a structured finance transaction to transfer assets off its balance sheet to the SPV which, if structured properly, will be insulated from the bankruptcy of other parties to the transaction. The use of the charitable purpose trust is well recognised in global financial markets and the special purpose trust is formed under the more recent Cayman Islands STAR Trust law.

 

Professional Expertise

 

The depth of professional expertise in the Cayman Islands in relation to capital markets and structured finance transactions is perhaps unmatched by any other offshore jurisdiction. There are a number of highly qualified and experienced administrators and trustees who provide trust, management, director and other corporate services to Cayman SPVs. All of the major accounting firms are also located in the Cayman Islands to provide auditing and accounting services to SPVs.

 

Other Advantages

 

The Cayman Islands has its own stock exchange which is recognised as an “approved organisation” by the London Stock Exchange. The listing rules of the Cayman Islands Stock Exchange are specifically designed to facilitate the listing of debt securities issued by SPVs.

 

Due to the bankruptcy remote status of the SPV (described above) and the ability, under Cayman Islands law, to meet other specific requirements, Cayman Islands SPVs are routinely approved by rating agencies and many debt issues by Cayman SPVs have received high ratings from the rating agencies.

 

Under Cayman Islands law, there are usually no restrictions on the activities a Cayman Islands SPV can undertake in the framework of a structured finance transaction.

 

Areas of Experience

 

The services that our Capital Markets/Structured Finance Group offers include the provision of advice in relation to the following types of transactions, as well as the provision of general advice on securities regulation and licensing in the Cayman Islands:

 

  • Collateralised Debt Obligation (CDO) Transactions
  • Net Interest Mortgage Securities (NIM) Transactions
  • Repackaging Transactions
  • Securitisation Transactions
  • Medium Term Note Programmes
  • Commercial Paper Programmes
  • Eurobond Offerings
  • Asset Financings
  • Derivatives
  • Preference Share Issues
  • Rights Issues

 

Our Capital Markets/Structured Finance Group is able to provide the same high levels of service and advice to our clients that they would expect to receive from any major international law firm.

 

Our lawyers have a good understanding of the structures commonly used in such transactions. They are committed to providing quality advice, managing transactions professionally, reviewing and producing transaction documents efficiently and generally being responsive and available to service our clients’ needs.

 

Other relevant areas of expertise within the firm include advising on the insolvency and winding-up of Cayman Islands SPVs, and generally on the financial regulatory regime of the Cayman Islands, particularly on the impact of the recent initiatives of the Organisation of Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF).  This expertise has been developed in part by several appointments to committees and other advisory boards set up by the Cayman Islands Government.

 

Formation of a Cayman Islands SPV

 

In the context of capital markets/structured finance transactions, the Cayman Islands SPV usually takes the form of an Exempt Company.

 

A Cayman Islands SPV can be formed and registered very quickly, within 24 hours if desired. There is no need to obtain any prior approvals from the Cayman Islands regulators in order to register the SPV.

 

It is relatively inexpensive to register and maintain an Exempt Company. The Cayman Islands Government levies registration fees and annual fees based on the authorized share capital of the SPV. Most companies will qualify for the lowest fee band. Legal fees, local service provider fees, and registered office fees are also competitive.

 

In order to form an Exempt Company, there must be at least one shareholder and one director, each of which may be a corporation and neither of which must be resident in the Cayman Islands (although they can be).

 

Once the Exempt Company is registered, a tax undertaking is obtained from the Cayman Islands Government which confirms that, in the unlikely event the Government subsequently enacts a law imposing tax on profits, income or gains or importing estate duty or inheritance tax, such tax will not be payable by the Exempt Company or the holders of its securities for a period of 20 years (which may, if necessary, be extended for a further period of 10 years).

 

The Exempt Company must maintain a registered office in the Cayman Islands, however, directors’ and shareholders’ meetings may be held outside the Cayman Islands. The Company’s register of shareholders is not open to public inspection.

 

Our affiliated fiduciary services company, Circumference FS (Cayman) Ltd. carries out all company incorporations and can also provide registered office, company secretarial and trustee services if required.


related services


Trusts

We provide advice on all trusts and fiduciary matters with specialisation in establishing private, commercial, charitable and non-charitable purpose trust structures, including setting up private trust companies; ongoing advice to trustees, settlors, beneficiaries, protectors and other fiduciaries; effecting required changes over the life of trusts; and advice and litigation in contentious trust matters.

Corporate and Investment Funds

We provide advice on all matters of relevance to corporate clients with specialization in hedge funds, private equity funds, international investment vehicles, mergers and reorganizations, joint ventures, partnerships and commercial trust arrangements.