Securitisation In The Cayman Islands

Article by Peter Cockhill and Michael Johns

The Cayman Islands

The use of offshore special purpose vehicles for structured finance transactions has long been established. The Cayman Islands enjoys a dominant role in this field and is recognised by leading institutions and arrangers as the leading offshore financial centre in the world. The financial services industry in the Cayman Islands is well developed with a concentration of experienced offshore professionals and service providers that is second to none, a stable political and economic environment and a legal system based on English common law. The following article summarises the principal characteristics of securitisation in the Cayman Islands and looks at some of the legal and business attractions of the jurisdiction.

What is Securitisation?

Broadly speaking, securitisation is a process by which illiquid assets, in the nature of cash flows, receivables and connected contract rights, are pooled and converted into marketable securities representing claims against the illiquid pool of assets. The marketable securities are then sold to third-party investors so that the income producing assets are effectively refinanced by newly raised debt in transferable form on a non or limited recourse basis. This debt is then serviced by the cash flow from the assets.

Securitisation transactions (which are a form of structured finance) come in many forms and structures. Securitisations may involve repackaging (i.e., where the security offered to investors has different characteristics to the underlying assets), credit enhancement or even (through the use of derivatives) credit risk transfer without the transfer of underlying assets (known as "Synthetic CLOs" - Collateralised Loan Obligations). Synthetic CLOs aside, there are a number of basic elements which are generally common to all securitisation transactions.

The original owner of the assets (the "Originator") sells the assets to be securitised to a special purpose vehicle ("SPV") usually established by an investment bank or other financial institution for the purpose of acquiring those assets. The SPV will be an "orphan" vehicle owned by a share trustee, usually a Cayman Islands trust company, which will hold the shares on trust for charitable purposes or for the purpose of the transaction itself under a STAR trust (see further below), the effect of which is that the SPV will not appear on the balance sheet of any party to the transaction.

The SPV raises funds to pay for the assets by the issue of securities (either debt instruments or equity or a combination of the two) which, for the purpose of this article, are referred to as "Notes". It is important that the asset pool acquired generates a stable and...