An Overview of Capital Markets Transactions in the Cayman Islands

An Overview of Capital Markets Transactions in the Cayman Islands

Introduction

The Cayman Islands has been the dominant offshore jurisdiction for capital markets transactions since the 1980's due to its political and economic stability, an effective judicial system, a nil direct tax system, the absence of exchange control or currency restrictions, the availability of highly skilled professional and support services and the presence of light but effective regulation which did not negatively impact on capital markets transactions.

Development of Capital Markets in the Cayman Islands and the Market Today

From the first bond issues by a Cayman Islands issuer in the late 1970's, the volume of capital markets transactions grew significantly throughout the 1980's as international corporations and financial institutions increasingly funded their activities through Cayman bond issuing vehicles. Acceptance of Cayman issuing vehicles in the euro bond, MTN and CP markets lead, in the mid 1980's, to the emergence of the repackaging market in which the Cayman Islands dominated, and continues to dominate. This market saw a huge increase in business from 1987 with hundreds of billions of dollars of repackaged debt being issued by Cayman issuers, much originally backed by ex-warrant bonds issued by Japanese corporates but subsequently the underlying assets came from a wide variety of credit risks ranging from sovereign issuers to emerging market debt. This lead to the Cayman Islands being the first choice jurisdiction for a vast array of structured finance transactions which dominate the capital markets practices in the Cayman Islands today.

From the late 1980's there was a move away from the stand-alone repackaging issue to issuing under repackaging programmes where one issuer is used to repackage numerous tranches of debt, structured on adequate security and limited recourse provisions to compartmentalise the risk. In the event of a default by the finance vehicle, the noteholders or counterparty will only be entitled to look to the security for that issue and after this has been realised and the proceeds distributed, any balance remaining in respect of that transaction will be extinguished, all other transactions by that vehicle unaffected by the default. Cayman Islands law will uphold such contractual "ring-fencing" provisions provided that they are effective as a matter of the governing law of the contract. The repackaging programme has become a valuable tool in the market as its lower cost margins has permitted arrangers to service clients with smaller issues of repackaged securities. In addition it has lent itself to, and has contributed significantly to the growth of, the synthetic repackaging market with credit-linked note issues being the most frequent type of issue in the market today. By further amendment to the Companies Law at the end of 2002, the Cayman Islands introduced a significant change in the legal structure of companies to permit the segregation of assets and liabilities amongst various "portfolios" within a single company such that a liability in respect of a particular segregated portfolio entitles a creditor of that segregated portfolio to have recourse only to the segregated portfolio assets attributable to such segregated portfolio, and not to the assets of other segregated portfolios. The Segregated Portfolio Company, while not dispensing with the need for properly structured security and limited recourse arrangements, is expected to be a useful vehicle, particularly for multi issue transaction as, amongst other benefits, it will bind...

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