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Financing Structures embedded within Family Offices
In the last edition, some of our Private Capital & Trusts colleagues examined why the Cayman Islands is rapidly becoming the most attractive location for UHNW individuals and families looking to establish both satellite or stand-alone single family offices.
Cayman Islands and Financing Transactions
The Cayman Islands is indisputably the heavyweight financial services champion offshore, one of the top five largest financial centres globally. From a financing perspective, the jurisdiction hosts complex structured finance transactions, asset financing for aircraft and shipping assets as well as substantial fund financing activity, unsurprising given that 85% of the world's investment funds are domiciled in Cayman.
Such transactions all employ Cayman Islands entities as borrowers/issuers, entities which are well understood and respected globally by finance parties of various kinds. Evidence of Cayman's pre-eminence comes from the fact that Standard & Poor's, the rating agency, developed specific ratings criteria for Cayman Islands vehicles over 20 years ago – something that is only justifiable for a major market participant.
Benefits of a Creditor-Friendly Jurisdiction
Many features of Cayman Islands law makes financing transactions especially "frictionless", which assists with reducing borrowing costs for clients. For example, under Cayman Islands law, a borrowing entity does not need to demonstrate that there is "corporate benefit" when borrowing, nor are there prohibitions or 'white washing' requirements where a transaction amounts to providing financial assistance. Further, security granted to lenders in the Cayman Islands require minimal local perfection formalities (except for certain asset classes) and enforcement is not subject to any moratorium periods, as is common in many other jurisdictions. Lenders are able to enforce their security freely in an event of default, without any administrator risk or 'lock-up' period delays. Similarly, restructuring/reorganisation risk in the context of an insolvency does not trump the rights of a secured creditor, where secured creditors must consent to any amendment to their rights.
These features played a significant role in enabling approximately $30 billion of emergency financing to be delivered to severely challenged airlines threatened by the Covid-19 pandemic in 2020. It would have been difficult for prudent lenders to lend into a US group in these circumstances without some creditor-friendly structuring through Cayman. These creditor-friendly financing structures were able, thereby, to unlock the value in various airlines' loyalty programmes.
Financing Family Offices
For a family office, the Cayman Islands provides access to one of the world's largest sources of debt capital.
When establishing or advising family offices or UHNW families, we invariably recommend an umbrella structure which segregates assets of various classes within separate entities, allowing effective ring-fencing while also enabling lenders to "cherry pick" assets which they consider suitable collateral to support borrowings.
We regularly see margin lending (often used by hedge funds and other vehicles) as well as financing for aircraft and superyacht purchases through structures familiar to institutional lenders. Cayman Islands law, interestingly, permits security to be granted over a vessel under construction, which means that clients are not forced to tie up their own capital while they await vessel completion; important when the lead time in constructing large luxury yachts can extend to several years.
We have also, in an UHNW client context, been able to deploy structured finance technology, using Cayman special purpose vehicles to repackage illiquid assets into tradeable instruments, thereby allowing clients to monetise those assets pending the awaited liquidity event. Cayman's longevity as a key finance jurisdiction provides virtually endless templates for financing transactions which have satisfied the institutional markets and which can easily be utilised within a family office structure.
The Opportunity for Private Banks
The institutional finance market has been very comfortable with funding structures in Cayman for decades. Family office and UHNW clients that have come to the Cayman Islands more recently (for a variety of reasons) have discovered that Cayman Islands structures provide an ease of access to debt funding, whether for liquidity or leverage purposes and whether in a bilateral or capital markets format.
Some private banks are well aware of this and understand the business opportunities this may create for them. Other private banks, which are not so familiar with Cayman entities and structures, would be well-advised to upskill swiftly, otherwise they risk missing out on developing some of the most interesting new client relationships that can be won today.
Biography of the Authors
Philip Paschalides: Philip is a partner in the multi-disciplinary Private Capital & Trusts team, where he represents private clients and family offices acting on complex cross-border financing transactions and handles the establishment of family offices, as well as the migration to Cayman of UHNW individuals and their business interests. Philip specialises in debt capital market issuances and structured financings. Over the years, he has acted on a number of "pathfinder" transactions, developing technology which has since become market standard; some of this was employed by Walkers recently during the COVID-19 pandemic in the airline loyalty financing transactions referred to above.
Shivagar Siva: Shivagar is an associate in the Private Capital & Trusts team. Shivagar assists ultra-high net worth clients on complex financing transactions, together with advising such clients on the structuring and establishment of their family offices in the Cayman Islands. He advises on a broad range of corporate financing transactions and has a particular expertise in debt capital markets, securitisation and structured financings.
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