Cayman Islands SPVs
A special purpose vehicle (SPV) is an entity created to engage in a specific transactions, including asset acquisitions or securitizations. Corporations, trusts, partnerships, and limited liability companies or other entities can be used. The Cayman legal structure allows companies to raise capital off of their balance sheets and SPV activities may be insulated from claims of creditors.Legal and regulatory framework is flexible and red tape is minimal. No governmental authorizations necessary. Incorporation generally takes less than 2 business days. Government fees seldom exceed $2,400, depending on the amount of capital involved, and total costs are often under $5,000 -- $6,000.
Cayman-based SPVs are "exempted companies” not permitted to conduct business in the Caymans. It is given a 20 year tax holiday plus a likely 10-year extension if needed. An exempted company does not have to pay any form of income tax or capital gains tax.
A Cayman Islands SPV especially makes sense if the sponsor operates in a high-tax country such as the US. A properly structured SPV can reduce or even eliminate taxes owed the sponsor's home country
A Cayman SPV can protect assets from litigation and other legal exposure, significantly limiting risk if the project fails.
The sponsor may not have to reflect the debt of the SPV on its own balance sheet, helping with its credit rating.
To set up a Cayman Island SPV as an exempted company, it must have a registered office in the Cayman Islands; have a Board of Directors, which may meet anywhere in the world (but typically has its meetings in the Cayman Islands); keep a register of directors and a register of shareholders (which remain private); pay an annual filing fee; and file a form stating that it is in compliance with the law, such as not conducting business in the Caymans.
A Cayman Islands SPV need have only one shareholder and only one director, which itself may be a legal entity. Frequently, the SPV's manager, under the terms of a management agreement, chooses the director. Parties to the transaction may feel more comfortable with a local presence of a Cayman-based director, but a sole director does not have to be a Cayman resident. Alternate directors or proxies may attend board meetings. (Regardless of a director's residence, rating agencies will expect a person of substance, if that is important). The register of members may be kept at any location
Typically, the SPV is owned by a Cayman trust while the sponsor is the beneficiary of the trust. The trust is required in order to reinforce the SPV's "orphan" status so that assets do not appear on the books of the sponsor.
When an SPV transaction involves real estate, it usually falls into one of two categories:
Acquisition. The SPV acquires the property, often with the proceeds of a non-recourse loan. If a trust is being used, the trust beneficiary may provide additional equity capital. The property can be leased to an operator under the terms of an operating lease with lease proceeds covering debt service.
Securitization. If a company originates mortgages it can convert these debt obligations into marketable securities and sell them to investors. An SPV might purchase assets or loan contract and issue equity or debt securities to cover the purchase price. The trustee will hold the shares of the SPV for the benefit of the owners of the debt securities. A "true sale opinion" might state that the originator has, in fact, relinquished ownership of the assets. Assets often produce more income than is necessary to pay interest on the securities.
An exit strategy can be executed when the SPV sells the assets to redeem the outstanding securities and then re-pays investors and lenders. Swaps or other hedging devices may reduce the risks of interest-rate or currency fluctuations.
Assets with undesirable characteristics can be put into a SPV which, in turn, issues notes and/or certificates to investors under Rule 144A of the Federal Securities Act.Conduits may be appropriate for different assets classes, such as a structured investment vehicle (SIV).
Banks and other financial institutions often hold loans that are deemed high-quality based on the collateral or the borrower's credit-worthiness. Ownership of such loans can be undesirable because regulatory requirements may cause the firms holding these assets to back them with a high proportion of capital. To avoid this, banks can establish an SIV in the Cayman Islands to purchase the assets, removing them from the bank's books and reducing the bank's requirement of additional capital.
The SIV can sell securities to investors and for reasons including excess collateralization, shorter maturities, and repayment guarantees the interest payable on the securities issued by the SIV can be less than the interest paid by the borrower, leaving a spread between interest income and cost of funds
With collateralized loan obligations (CLOs), the assets are not sold. The lender, instead, employs some form of derivative such as credit-linked notes or credit default swaps. The notes or swap agreements are sold to the SPV, which issues securities backed by the income from these derivatives. A CLO may thus serve to securitize the income and the risk of the loan but not the assets. The sponsor typically retains some degree of control over the original assets.
With collateralized debt obligations (CDOs), the sponsor still has access to the assets and their income, at least in certain circumstances. CDOs often are used to repackage asset-backed securities, mortgage-backed securities, and other securitized products
Sponsors need an advisor who offers the accounting and administrative services necessary to maintain the SPV's independence from the sponsor. Sponsors also need an advisor who can help it establish and maintain banking services.
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