1. Special Purpose Vehicles Get Special
Treatment in Cayman Islands
By: James P. Lawler
In today’s global economy, corporate managers must make the most of available opportunities, wherever they are in
For asset-financing transactions, which frequently have a myriad of tax, legal, and financial issues associated with
them, creating a special purpose vehicle (SPV) is frequently the ideal approach. Establishing this SPV in the Cayman
Islands, meanwhile, may enhance the associated benefits.
As the name suggests, an SPV is an entity created to engage in a specific transaction, most commonly for asset
acquisition, leasing, and securitization. Various structures may be used, including corporations, trusts, partnerships,
and limited liability companies. Often, the documents creating the SPV contain language that clearly limits
permissible activities. For example, the individuals managing the SPV might be prohibited from engaging in any
unauthorized transactions, such as taking on additional debt or disposing of assets.
An SPV may be formed in many jurisdictions, but the Caribbean’s Cayman Islands are gaining favor. The legal talent
available in the Cayman Islands, a British Overseas Territory, ranks among the best in the world, including many
attorneys who were educated and have practiced in the United Kingdom. For sophisticated asset financing
transactions, conducting business in the Caymans is akin to doing business in New York or London.
The political and economic stability of the Cayman Islands is certainly appealing to corporations wishing to sponsor
SPVs. The Cayman legal structure allows companies to raise capital off of their balance sheets, often at lower costs,
and SPV activities may be insulated from claims of potential creditors.
While other jurisdictions also offer the opportunity to create SPVs, these rival venues may be more closed to
outsiders, with fewer world-class law firms. Plus, banking and trust structures may not be as easy to arrange as they
are in the Caymans.
There are many other advantages to operating in the Caymans. Fees are generally modest, and the legal and
regulatory framework is extremely flexible.
Red tape is also minimal: No governmental authorizations or licenses are necessary in order to establish an SPV in the
Cayman Islands. Incorporation generally takes less than 24 hours once the process is underway, and costs are modest.
To set up an SPV, government fees range between US $574 and US $2,400, depending on the amount of capital
involved, and total costs generally range between US $2,000 and US $3,000.
In essence, companies from all over the world find that it is a friendly and advantageous place to do business.
2. A Less Taxing Environment
Under current Cayman law, most SPVs are established as “exempted companies.” An exempted company is not
permitted to conduct business within the Cayman Islands, and, in return, it is entitled to a complete tax holiday for 20
years, with a possibility of a 10-year extension. In any event, there are no direct taxes in the Cayman Islands, so an
exempted company will not have to pay any form of income tax, capital gains tax, or corporation tax. Similarly, no
taxes will be withheld from any cash flows.
Establishing an SPV in a tax-neutral jurisdiction such as the Cayman Islands is especially helpful if the ultimate
sponsor operates in a high-tax country such as the U.S. or U.K. A properly structured SPV may reduce or even
eliminate taxes owed to the sponsor’s home country.
In addition to tax relief, an SPV can protect assets from potential legal exposure. In some circumstances, the
sponsoring company may maintain upside potential if a venture is successful but may significantly limit its risk or
liability if the project fails. If an SPV is properly structured, the sponsor may not have to reflect the debt of the SPV
on its own balance sheet, thus improving its credit rating.
For corporate sponsors interested in the advantages described above, the Cayman Islands offer a favorable regulatory
climate. Among the few requirements, an SPV set up as an exempted company must:
• have a registered office in the Cayman Islands;
• have a Board of Directors, which may meet anywhere in the world but generally restricts its meetings to the
• keep a Register of Directors and a Register of Shareholders, which remain private;
• pay an annual filing fee;
• file a simple form stating that it is in compliance with the law, including the provision on not conducting
business in the Caymans.
To make these requirements even easier to meet, a Cayman Islands SPV need have only one shareholder and only one
director, which may be a corporation. Frequently, the SPV's manager, under the terms of an administration or
management agreement, will choose a suitable director. Even though the parties to the transaction may feel more
comfortable with the additional local presence of a Cayman-based director, the sole director does not have to be a
resident of the Islands. The law allows for alternate directors or proxies to sit at board meetings. Regardless of the
director's home base, rating agencies will expect that he or she be a person of substance.
The Register of Members may be kept at the SPV’s registered office or at any other location. The annual filing cost
falls in the same range as the incorporation fees mentioned earlier, based on the same criteria.
In a typical arrangement, the SPV is owned by a Cayman trust, and a charity or the ultimate sponsor is the beneficiary
of the trust. A charitable trust or a property structured purpose trust structure is required in order to reinforce the
SPV’s “orphan” status so that its assets do not appear on the books of the corporations involved.
Fundamentals of Asset Financing
When an SPV transaction involves asset financing, it usually falls into one of two categories:
1. Acquisition. In an aircraft financing, for example, the SPV would acquire the plane from the manufacturer.
In order to purchase the airplane, the SPV would use the proceeds of a non-recourse loan (one backed only by the
plane). If the SPV structure involves a trust, the trust beneficiary may provide equity capital as well. Following the
purchase, the airplane would be leased to an operator, under an operating lease, and the lease proceeds would be used
to cover the debt service.
3. 2. Securitization. Companies that originate loans such as mortgages or credit card balances may often convert
these debt obligations to marketable securities, which are sold to investors. An SPV might purchase the assets (the
loan contracts) from the originator and in turn issue debt securities to raise funds to cover the purchase price.
Through the trust structure, 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.
For both types of transactions, cash flow generated by the underlying asset can enable the SPV to make the required
principal and interest payments. Indeed, most SPV transactions are over-collateralized, so that the assets involved are
projected to produce more income than necessary to pay interest on the securities that have been issued.
When the transaction winds up, the SPV will sell its assets to redeem the outstanding securities, re-paying investors
and lenders. In the meantime, hedging agreements such as swaps may be used to reduce the risks of interest-rate or
Drilling deeper into the two categories mentioned above, SPV transactions may be designed to meet specific
objectives. Examples include:
Asset repackaging. An asset that may have some undesirable characteristics can be transferred into the SPV.
The SPV, in turn, will issue notes and/or certificates to investors, probably under Rule 144A as an
institutional private placement.
Conduits. Many different asset classes may be appropriate for inclusion in a conduit. For example, lenders
may use a form of conduit known as a structured investment vehicle (SIV).
Banks and other financial institutions often hold loans that are considered to be high quality, based on the collateral
and/or the borrower’s creditworthiness. Ironically, ownership of such loans may be unappealing because regulatory
requirements cause the firms holding these assets to back them with a high proportion of capital. Naturally, banks
want to avoid this obligation yet still profit from the high-quality loans they have made.
To attain these goals, banks can establish an SIV in the Cayman Islands, which will purchase the high-quality assets.
This removes those assets from the bank’s books and reduces the bank’s need to hold additional capital.
Subsequently, the SIV can sell securities to investors, backed by the high-quality assets it is holding. For various
reasons—including excess collateralization, shorter maturities, and repayment guarantees—the interest payable on the
securities issued by the SIV may be lower than the interest paid by the ultimate borrowers. Thus, the originator of the
loans can make money from interest-rate arbitrage: the spread between its interest income and its cost of funds.
Collateralized loan obligations (CLOs). In these deals, the lender does not sell the assets to an SPV. Instead, the
lender creates derivatives in the form of credit-linked notes or credit default swaps. The notes or swap agreements are
sold to the SPV, which issues securities that are backed by the income from these derivatives. In this manner, a CLO
may serve to securitize the income and the risk of the underlying loans but not the actual assets. This structure allows
the sponsor to retain some degree of control over the original assets.
Collateralized debt obligations (CDOs). Again, these arrangements provide the sponsor with access to the assets and
their income, in certain circumstances. Often, CDOs are used to repackage asset-backed securities, mortgage-backed
securities, and other structured products.