Cayman Islands

Author: | Published: 10 Oct 2001
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The Cayman Islands, together with all the world's financial centres, have undergone rapid recent changes to accommodate the demands of an increasingly integrated global economy. Offshore financial centres have been the focus of the attention of several supranational agencies, particularly the OECD and the Financial Action Task Force (FATF). The changes were promoted by the G8 countries to counter money laundering, for greater transparency to enhance onshore tax enforcement and to improve regulation in all financial centres to limit global financial risks. Certain aspects of the initiatives such as the harmonization of tax rates and the right to the exchange of tax information have now been de-emphasized or withdrawn following the lack of support from the US, the reluctance of certain OECD members themselves to exchange financial data and the existence of preferential tax regimes within OECD member states. As a result of the accord reached by the Cayman Islands in June 2001 with the OECD on transparency in relation to criminal and civil tax evasion, and the determination by FATF in June 2001 to remove the Cayman Islands from its list of "non co-operative" jurisdictions, and to withdraw any advisories in relation to money laundering activities insofar as they relate to the Cayman Islands, the position of the Cayman Islands as a well regulated and leading financial centre has been further consolidated and enhanced. The OECD has accepted the nil tax regime of the Cayman Islands and that the exchange of tax information is properly limited to tax evasion and illegal tax avoidance rendered within a treaty structure with appropriate safeguards.

The emergence of the Cayman Islands as the pre-eminent jurisdiction for structured financial transactions can be traced back to the development of the Cayman Islands as a dominant jurisdiction for capital market transactions during the 1980s. The Cayman Islands became the favoured centre for such transactions through the political and economic stability of the Islands, its effective judicial system, its tax system, the absence of exchange control or currency restrictions, the availability of professional and support services and the presence of light but effective regulation which did not negatively impact on capital markets transactions. These attributes, including no taxes on income or capital gains, no withholding taxes, a flexible incorporation and licensing regime and flexible use of trusts, partnerships and special corporate vehicles will continue; but most importantly, the Cayman Islands has built a highly regarded pool of experienced professionals and support service providers for structured finance transactions.

The first bond issue using a Cayman Islands incorporated issuer was structured in the late 1970s. The volume of capital markets transactions grew significantly throughout the 1980s as the Cayman Islands was used by multinationals and financial institutions as the offshore jurisdiction of choice for the establishment of finance subsidiaries to issue Eurobonds to fund their activities. The debt issued reflected market conditions and practice. The early days saw plain vanilla issues but techniques gradually became more sophisticated, with debt programmes emerging firstly in the form of commercial paper programmes and subsequently medium term note programmes.

The mid-1980s saw the development of the repackaging market in which the Cayman Islands dominated, and continues to dominate, as the preferred jurisdiction for the issue of repackaged debt. The repackaging market saw a huge increase of business from 1987 onwards with hundreds of billions of dollars of repackaged debt being issued. Much of the repackaged debt was originally secured on ex-warrant bonds issued by Japanese corporations. Subsequently, the underlying assets came from a wide variety of credit risks ranging from sovereign issues to junk bonds. The development of medium term note programmes in the late 1980s saw many Cayman Islands finance vehicles moving away from traditional Eurobond issues to establishing and issuing notes under EMTN programmes, and this was rapidly followed by the development of repackaging programmes with one issuer being used to repackage numerous tranches of debt, structured on adequate security and limited recourse provisions to compartmentalize the risks.

The CBO market developed in the 1990s where, unlike the repackaging where the underlying credit risk tended to be a single credit risk, multiple or variable credit risks were collateralized through a Cayman Islands vehicle. The CBO/CDO/CLO markets continue to grow with increasing use of synthetic CBO structures. There has also been a trend for CBO transactions to include an offering of preferred shares, and an increased use of credit derivatives.

Investment bankers have brought together the techniques derived from capital markets transactions, particularly repackagings, for a wide range of structured finance transactions.

Since the mid-1980s the Cayman Islands has been the leading jurisdiction for the incorporation of AAA-rated specialist finance companies which aim to achieve a credit spread on assets over their costs of funds, fully hedging any exposure to interest rate and currency exchange risks and being funded by issuing commercial paper and medium term notes both in the Euro markets and in the US markets. There is over $100 billion of assets under management on behalf of such Cayman Islands finance companies, and it is expected that there will be further growth in this area.

Securitization transactions also developed where the underlying asset was an income stream of receivables generated from a varieties of sources, whether royalty contracts, payments under steel, aluminum and petroleum contracts, automobile lease receivables, credit card receivables and home mortgage payments. Structured finance transactions have been conceived for financing ships, rolling stock, pipelines, power projects and other infrastructure projects. The financing requirements for the world's airline fleets have developed to such an extent that some 500 civil aircraft were financed through the Cayman Islands during the last 12 months, with many of the aircraft funded by structured finance transactions.

The Cayman Islands continues to be the leading jurisdiction for the issue of catastrophe bonds, as insurance companies transfer certain risks and investors accept insurance linked products, reflecting its strong pedigree in capital markets transactions coupled with the insurance expertise within the Cayman Islands arising from its position as the second largest jurisdiction for captive insurance companies.

The growth of structured finance transactions was originally initiated domestically but the trend continues in the international arena with increasingly sophisticated techniques being adopted and developed by a broad range of multinational financial institutions, often replacing traditional bank finance. To the extent that markets are becoming unified and increased capital and regulatory standards are being imposed domestically, the trend of establishing structured finance transactions offshore is expected to accelerate.


Maples and Calder
PO Box 309, Ugland House
South Church Street
Grand Cayman, Cayman Islands
Tel: +1 345 949 8066
Fax: +1 345 949 8080
Internet: www.maplesandcalder.com