Using Cayman Islands SPVs


written by:
Kevin Butler, Partner, Conyers Dill & Pearman

Cayman has been the preferred jurisdiction for the incorporation of structured finance and securitisation vehicles for over 20 years, which provide innovative mechanisms for various financings.

A typical securitisation transaction involves a debt issue made by a Cayman Islands Special Purpose Vehicle (SPV) which will then apply the proceeds from such issue to acquire an underlying pool of assets (receivables, mortgages, royalties, rentals, or any other asset which provides an income stream from the originator).

The issuance by the SPV of the debt (notes or bonds) or equity in order to finance the purchase of the asset are often rated and sometimes listed. Cayman Islands SPVs in such securitisation transactions are well accepted by the rating agencies.

Although some securitisation transactions involve an SPV being owned by the originator, most often the SPV is an orphan company, whereby all the voting shares will be issued to a trustee (which is usually from an offshore trustee associated with the law firm incorporating the SPV) pursuant to either a charitable or purpose trust. The SPV then issues securities such as notes to raise the funds necessary to purchase the asset pool from the originator.

The pool of assets is then ‘ring fenced’ by the grant of a security interest in favour of the indenture trustee. The income flow from the asset pool is used to pay the transaction costs and interest to the noteholders.

When establishing the structure for the SPV, it is important to ensure that the SPV is bankruptcy remote. Although the SPV may be established with very broad objects and powers while the transactions are being negotiated, prior to the transactions being entered into the objects and powers of the SPV should be limited to allow the SPV to only enter into the specific transactions related to the securitisation. Also, the SPV will be restricted contractually from entering into any other transaction, with rating agencies requiring that the SPV is unable to carry on any business other than the specified securitisation transaction.

The trustee, pursuant to the purpose or charitable trust, must not be permitted to sell the shares, amalgamate the SPV, continue the SPV into another jurisdiction or make any other structural changes to the SPV.

It is important to ensure that the SPV will not be petitioned into winding up (bankruptcy). The trustee of the purpose or charitable trust will agree not to petition the SPV into bankruptcy. The noteholders, indenture trustee and other service providers (such as a collateral manager) will agree in the indenture and other transaction documents that they will not petition the SPV into bankruptcy.

Cayman legal counsel will provide an opinion as to the power and authority of the SPV to enter into the securitisation transaction and related documents. In addition, counsel may be requested to provide a true sale/non-consolidation opinion.

With its political and economic stability, effective judicial system, tax neutrality, absence of exchange control and currency restrictions, availability of professional service providers and effective but light regulation, Cayman continues to be the pre-eminent offshore jurisdiction for structured finance and securitisation transactions.


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