The Acquisition And Leveraged Finance Review

I OVERVIEW

The majority of merger and acquisition activity (and the financing thereof ) involving exempted companies or exempted limited partnerships2 in the Cayman Islands is originated in either England or the United States. The Cayman Islands is recognised as a leading offshore jurisdiction through which much of such merger and acquisition activity is structured.

The Cayman Islands is a tax-neutral jurisdiction, offering a robust and straightforward legal and regulatory system based on English common law. Much like England, the legal system in the Cayman Islands is well regarded as creditor-friendly (with the absence of debtor-friendly insolvency regimes such as Chapter XI in the United States) which is clearly attractive to lenders and helps to increase liquidity in leveraged finance structures involving Cayman Islands holding companies.

There are few restrictions in the Cayman Islands on the type of recognised debt products that may be used to finance the acquisition of entities incorporated in the Cayman Islands (which, for ease, shall be referred to in this chapter as 'Cayman companies'). Accordingly, all of the 'usual' leveraged finance debt products are available in the Cayman Islands. These include: secured bank term facilities (including senior secured, mezzanine and second-lien term loans); notes/bonds and bridge facilities (including high yield, senior secured, second lien and privately placed); and working capital and revolving credit facilities.

The type of debt product used in leveraged acquisitions involving Cayman companies is driven by the commercial needs of the specific deal (rather than jurisdictional issues arising in the Cayman Islands). 'Mid-market' acquisitions are typically financed with secured-term bank lending (typically senior and mezzanine term debt for acquisitions originating in Europe and first and second-lien term debt for acquisitions originating in the United States). In higher-value acquisitions, it is common for high-yield and/ or senior secured notes to be issued. In both cases, it is common for revolving facilities to be made available to the target group (primarily for working capital purposes) under secured bank lending arrangements (and where the acquisition is structured using senior secured notes, it is typical for such revolving facilities to rank 'super senior' to such senior secured notes).

Irrespective of the combination of debt products used, such debt is typically guaranteed by each material subsidiary and the direct parent of the borrower. The finance documents (other than jurisdiction specific security documents) are typically governed by English or New York law (depending on the originating jurisdiction).

The mergers and acquisitions market in the Cayman Islands is buoyant. The total deal value for corporate activity in offshore jurisdictions in the first quarter of 2015 was US$68.3 billion, with the Cayman Islands accounting for approximately a quarter of such activity.3 During 2014, 9,055 exempted companies4 and 1,808 exempted limited partnerships5 were formed in the Cayman Islands and, as at 8 July 2015, there were a total of 94,090 companies6 and 16,821 exempted limited partnerships7 registered in the Cayman Islands.

II REGULATORY AND TAX MATTERS

i Licensing

The banking sector (among others) is regulated in the Cayman Islands by the Cayman Islands Monetary Authority (CIMA). Financial institutions are required to be licenced by the CIMA if they are carrying out 'banking business' - which is defined as 'the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or other similar account money which is repayable by cheque or order and may be invested by way of advances to customers or otherwise'.8

It is not necessary for a foreign financial institution that is simply lending to a Cayman company to be licensed, qualified or otherwise entitled to carry on business in the Cayman Islands. In addition, a financial institution lending to a Cayman company will not be deemed to be resident, domiciled or carrying on business in the Cayman Islands by reason only of the execution, performance or enforcement of the relevant finance documents (including any Cayman law governed security documents) by such financial institution.

Lenders that are carrying out 'banking business' are required to be appropriately licensed by the CIMA, but such requirements are beyond the scope of this chapter.

ii Sanctions, anti-corruption and anti-money laundering

Local sanctions, anti-corruption, anti-money laundering and anti-terrorism financing legislation and regulations have been adopted in the Cayman Islands in line with other major offshore financial centres and onshore jurisdictions. Such laws in the Cayman Islands require financial institutions to apply a risk-based approach to money laundering and to implement risk management policies (including customer due diligence and suspicious activity reporting).

As EU and international laws relating to sanctions are also adopted in the Cayman Islands and such legislation is regularly revised, it is important to ensure that the relevant legislation is reviewed on an ongoing basis.

iii Tax

General

There are no income, corporation, capital gains or other taxes presently in effect in the Cayman Islands which generally affect Cayman companies. A Cayman company can apply for (and expect to receive from the Governor-in-Cabinet of the Cayman Islands), pursuant to the Tax Concessions Law of the Cayman Islands, an undertaking that in the event of any change to the foregoing, such Cayman company, for a period of 20years from the date of the grant of the undertaking, will not be subject to tax in the Cayman Islands on its income or its capital gains arising in the Cayman Islands (or elsewhere) and that dividends of such company will be payable without deductions of Cayman Islands tax. It is typical for Cayman companies to obtain such an undertaking upon incorporation (but it may be obtained at any time thereafter).

Stamp duty and documentation

There is no stamp, registration or similar tax or duty to be paid on or in relation to any finance documents provided that they are executed and remain outside the Cayman Islands. If it becomes necessary to bring any of the finance documents into the Cayman Islands (for enforcement or otherwise) nominal stamp duty will be payable. In the case of any finance document creating security over moveable property situated in the Cayman Islands or over shares in a Cayman company, stamp duty will be payable on an ad valorem basis to a maximum of CI$500.

Withholding tax and the Cayman Islands Stock Exchange

As above, there is no income, corporation, capital gains or other taxes presently in effect in the Cayman Islands and, accordingly, no withholding tax is applied in the Cayman Islands on payments to or from Cayman companies.

There is, however, a steady stream of Cayman and non-Cayman companies making 'technical listings' of debt securities (typically intercompany loan notes) on the Cayman Islands Stock Exchange (CSX). A principal reason for doing so is to benefit from the well-publicised quoted Eurobond exemption. The CSX has been designated a 'recognised stock exchange' by HM Revenue & Customs in the United Kingdom, meaning that an issuer which is tax-resident in the UK can make payments of interest on such listed debt securities gross, without any deduction for tax. As at December 2014, quoted Eurobond securities with an aggregate face value of US$72 billion had been listed on the CSX (which constitutes about 40 per cent of the total aggregate value of debt securities listed on the CSX).9

III SECURITY AND GUARANTEES

i Guarantees

The provision of a guarantee by a Cayman company of the debts and other obligations of companies within the same group is a common feature of leveraged financings involving Cayman companies. The guarantee is typically documented under the same governing laws as the underlying finance documents to which it relates and is generally included within the facility agreement (or occasionally the intercreditor agreement). Guarantees are often granted by the direct parent of the borrower of the acquisition debt (which is typically a newly formed vehicle established for the purpose of making the acquisition of the target company) and are ordinarily granted by all subsidiaries (or, increasingly commonly, just the material subsidiaries) of the borrower by way of accession to the main finance documents within an agreed time frame post-acquisition.

There are no legislative or other restrictions on the ability of a Cayman company to provide financial assistance (i.e., the ability of a Cayman company to guarantee or secure borrowings incurred to finance or refinance the direct or indirect acquisition of the shares of such Cayman company or any of its holding companies or sister companies). There are also no restrictions imposed by Cayman Islands law on the amount of any guarantee that a Cayman company may provide, although, as set out below, the directors of a Cayman company have a duty to consider the corporate benefit to that company in entering into any such transaction.

ii Security

Cayman Islands law does not place any restrictions on the categories of assets that can be subject to security and, accordingly, any or all of the...