The Cayman Islands is well known for more than just white sandy beaches. This article provides an overview of why the Cayman Islands is the offshore jurisdiction of choice for so many and shows the ways in which incorporating it into a transaction can be effective.
Innovation in the industry
Despite a number of challenges in the market, IATA recently noted that total global passenger demand for May 2024, measured in revenue passenger kilometers (RPKs), was up 10.7 per cent compared to May 2023 and total capacity, measured in available seat kilometers (ASK), was up 8.5 per cent year-on-year. Having faced significant headwinds over the last several years, the aviation industry has proved itself to be both resilient and innovative in its endurance. Underpinning this performance has been a combination of multiple factors including an expansion in the range of financing transactions and structures in which Cayman Islands entities are deployed. That flexibility is attractive to participants at all levels from investors to operators.
6 answers to ‘Why Cayman?’
The Cayman Islands’ strength in financial services is borne out of its ability to provide institutionally focused services to a global network of clients and this has seen it mature into one of the largest international financial centres in the world. The global financial industry can rely on the Cayman Islands’ well developed and predictable company and partnership laws and put its trust in effective, cost-efficient and tax-neutral transaction structuring. We will focus on the key advantages here.
- Sophisticated Legal System and Political Stability: The Cayman Islands is a self-governing British Overseas Territory with an independent legal and judicial system grounded in English common law with well-developed local legislation. This predictability and stability is attractive when combined with a widely known and accepted corporate governance framework.
- Tax Neutrality: The Cayman Islands has no direct taxation and a structure involving a Cayman Islands entity has the advantage of minimising potential tax leakage. It is free from any form of income, capital gains or corporation tax and no Cayman Islands’ withholding tax is imposed on an entity’s cash flows. Certain Cayman Islands entities with exempted status may also apply for a government undertaking confirming that such entity will not be subject to any taxation in the Cayman Islands for a period of 20 to 50 years (depending on the type of entity). The tax transparency of Cayman Islands exempted companies and partnerships can enable efficient raising of capital.
- Flexibility: The business in which a Cayman Islands entity can be involved is generally unrestricted provided it falls within what is permitted by law. Combined with the ability to incorporate a new entity within as little as 24 hours, the flexibility allows parties to move quickly and efficiently. The Cayman Islands remains a relatively inexpensive jurisdiction in comparison to its competitors with government fees being assessed on a scale linked to the authorised share capital of the SPV. There are no exchange control restrictions allowing money and securities in any currency to be freely transferred to and from the Cayman Islands.
- Creditor Friendly: The Cayman Islands’ insolvency regime is recognised as creditor friendly. Contractual rights including subordination, netting and set-off are recognised by express statutory provisions. The effective use of bankruptcy remoteness structures is a key aspect of asset and structured financing in the Cayman Islands and recognised as robust by rating agencies and financiers.
- Regulation: There is a well-established regulatory framework encompassing international standards around anti-money laundering and counter terrorism, data protection, economic substance and the Common Reporting Standard (to name a few). Regulatory and financial transparency are core values embodied by the Cayman Islands Monetary Authority which is an independent regulator charged with consistent application of regulatory requirements for financial institutions.
- International Connectivity: It is well known that Ireland is a key global hub for the aviation industry not least due to its enviable treaty network. There is a well-established route for Cayman Islands entities to be established as Irish tax resident and that can be a powerful structuring tool in a variety of transactions.
Entity Types
One of the most commonly chosen entities for asset and structured finance deals is the exempted company incorporated with limited liability (an ‘SPV’). Exempted Companies have their registered offices in the Cayman Islands and carry on business outside of the Cayman Islands. SPVs are distinct from segregated portfolio companies (‘SPCs’) and limited liability companies (‘LLCs’) in the jurisdiction. At an investor level, an exempted limited partnership is likely to be the entity of choice and the Cayman Islands is the premier jurisdiction for investment funds with an estimated 80% of all new offshore funds domiciled in the country. Incorporation can be as quick as 24 hours.
Off-balance sheet financing
In an aviation context, an SPV is typically incorporated to act as a borrower and owner/lessor of an aircraft and its shares will be held on trust by a professional trust company such as Campbells Corporate Services Limited or its controlled subsidiary. This effectively separates the legal and beneficial ownership of the SPV and creates the ‘orphan’ structure taking the SPV off the balance sheet of the relevant parties and isolating the underlying assets from the corporate credit(s) in the deal. The trust will generally be a charitable or purpose trust maintained for the life of the deal. The other key feature for an orphan SPV deal is that all documentation is entered into on a limited recourse and non-petition basis. This ring-fences the assets and preserves bankruptcy remoteness by limiting the chance of claims against the SPV.
Transactional Diversity
Aviation itself is a multi-billion dollar industry, from commercial passengers to freighters, private aircraft, the vast network of regulators and technical service providers, the manufacturers and the infrastructure required to support it all. It is no surprise then that there are so many ways to transact. We have already touched on some of the kinds of transactions we see but below is a (non-exhaustive) list of where the Cayman Islands can feature in deals.
Funds and investment – as we have mentioned, the Cayman Islands is the jurisdiction of choice for the formation of investment funds. In recent years we have seen new investors with capital to deploy becoming new entrants into the aviation sector.
Alternative lending, joint ventures, new leasing platforms – once the investment is identified, those funds need to be put to use and we have seen Cayman incorporated entities being used in the establishment of alternative lending platforms, joint ventures with established industry players and the founding\of new leasing platforms. The flexibility of Cayman entities is particularly attractive to alternative lenders who can deploy capital quickly and fulfill a need where traditional lenders have retreated.
Debt financing – traditional debt financing for new and used aircraft also favours the use of bankruptcy remote SPVs. From pre-delivery payment financing, to delivery financing at the point of delivery from the manufacturers (including export credit guarantee and insurance backed products), to warehouse financing of portfolios, all lend themselves to an SPV borrower. As production lines continue to ramp up, we also expect to see carbon-neutral and de-carbonisation projects increasingly highlighted across the industry. Improvement in fuel efficiency, innovations in aircraft technology and a growing focus on what ESG means for aviation financing will be put into practice in debt documentation and elsewhere as pre-delivery payments fall due and new aircraft are delivered.
Capital markets – a Cayman incorporated but Irish tax resident issuer is a tried and tested structure in aircraft asset backed securitisations (‘ABS’). Where we also see the use of Cayman entities in capital markets and rated deals are in connection with note of bond issuances (secured or unsecured) and in non-US enhanced equipment trust certificate (‘EETC’) transactions. At the time of writing access to the ABS market is heavily restricted due to, among other things, interest rate volatility and the disconnect between lease rates and cost of funds. With this said, there have recently been two major aircraft ABS transactions in 2024 with one of these being structured through a Cayman issuer.
Loyalty financing – these highly structured hybrid capital market/securitisation type transactions entered into by several major US airlines following the deep impact of the global pandemic is an excellent example of the innovative approach the industry takes to self-preservation. The valuation of frequent flyer programmes has long been a closely guarded secret (and protected asset) but the first of-its-kind United Mileage Plus financing changed that. The bankruptcy remoteness protections afforded to the financiers and investors by using Cayman Islands SPVs were integral to the highly structured nature of these transactions. We have seen continued interest in this transaction structure.
Listing services – many of the transactions already described are likely to have a requirement for notes to be listed. The Cayman Islands Stock Exchange (‘CSX’) was the first offshore stock exchange to be granted approved organisation status by the London Stock Exchange. In addition, the UK HMRC also recognises the CSX under section 1005 of the Income Tax Act (ITA) 2007 regards the CSX as a ‘recognised stock exchange’. The CSX is a specialised exchange which prides itself on being user friendly and offering an efficient and competitively priced
listing service. A CSX listing is commonly utilised by entities (whether Cayman incorporated or otherwise) for the purpose of the “Quoted Eurobond Exemption” on withholding tax. Notes issued pursuant to structured finance transactions are sometimes listed with the CSX but also intra-group debt is commonly CSX listed.
Aircraft registration – a summary of the involvement of the Cayman Islands in aviation is not complete without a word on the Cayman Islands Civil Aviation Authority (’CAACI’). The aircraft registry maintained by the CAACI is an internationally respected registry with strategic values and a desire to strengthen the reputation of the jurisdiction as a safe, effective and innovative registry of choice. It is predominantly a private aircraft register but can also handle commercial aircraft (including those of the national flag carrier, Cayman Airways). It has an Article 83b Agreement in accordance with the International Civil Aviation Organisation (‘ICAO’) with the Kingdom of Saudi Arabia and, in more recent times, a transitional register for commercial aircraft. The transitional registration programme developed significantly throughout 2020 with an increase in demand from the commercial aviation community for reliable registry services resulting from the effects of the global pandemic. It should also be noted that the Cayman Islands benefits from the Convention on International Interest in Mobile Equipment (the ‘Cape Town Convention’) following the United Kingdom’s ratification. It affords entities structuring their asset financing transactions with a Cayman Islands SPV the added protection, certainty and uniformity that the Cape Town Convention and its Protocols afford.
Management and professional services
Regardless of the type of transaction, a Cayman Islands SPV still requires directors. Cayman Islands fiduciary service providers such as Campbells Corporate Services Limited can be engaged to provide administration and management services for SPVs and other kinds of Cayman entities including the provision of directors and officers, and importantly ensuring provision is made to assist the SPV meets its regulatory obligations. Ongoing monitoring and testing can be implemented to maintain required compliance procedures and ensure that the relevant entities remain in good standing with the appropriate authorities including the Registrar of Companies CIMA and the Department for International Tax Cooperation.
Looking to the future
The present macro-economic headwinds resulting from a number of factors including the continuing conflict within Ukraine has not dampened optimism. Further, with interest rates beginning to plateau and indications of potential rate cuts have been positive. There is an inherent industry cycle within the asset and structured finance space but with ABS transactions back underway continued softening of the market in the short term seems possible. The fundamentals remain strong in respect of both the industry itself, and the reasons why the Cayman Islands is an effective jurisdiction to support it.
Campbells
The Cayman Islands is a leading offshore financial centre and Campbells LLP and Campbells Corporate Services Limited are right at its heart. The Campbells team provides innovative solutions, unmatched flexibility and the strength to deliver results on all types of asset and structured finance transactions. For further information or advice, please reach out to the authors or your usual Campbells contact.
This article was first published in International Aviation Financing Leasing Review 2024-25.
