Loans & Secured Financing In The Cayman Islands 2023.

This 2023 overview of the loan and secured financing sector in the Cayman Islands provides insights into general issues (bank loans versus debt securities; common forms of bank loan facility; bridge facilities; role of agents, trustees and lenders; governing laws); regulation (capital, liquidity and disclosure requirements; use of loan proceeds; cross-border lending; interest rate and currency restrictions); security interests and guarantees; the impact of fraudulent conveyance and similar doctrines on the structure of bank loan financings; intercreditor matters; loan terms and structures; and recent trends.

GENERAL FRAMEWORK

What are the primary advantages and disadvantages in your jurisdiction of incurring indebtedness in the form of bank loans versus debt securities?

From the perspective of the Cayman Islands’ regulations and local laws, there are no particular advantages or disadvantages between incurring indebtedness in the form of bank loans versus debt securities. In the vast majority of cases with international finance transactions, Cayman Islands law is not the governing law of the underlying transaction documents, except in relation to certain security agreements. Cayman Islands law will otherwise impact the documents in relation to corporate requirements where a borrower, guarantor or debt security issuer is a Cayman Islands incorporated vehicle. As such, the initial structuring of those deals will typically be driven by ‘onshore’ factors connected with the general governing law of the documents (usually English or New York law).

What are the most common forms of bank loan facilities? Discuss any other types of facilities commonly made available to the debtor in addition to, or as part of, the bank loan facilities.

Owing to the robust but flexible nature of Cayman Islands law, Cayman Islands incorporated entities are commonly seen in all forms of international cross-border business and finance transactions. The Cayman Islands is a principal offshore jurisdiction for private equity funds and hedge funds, and it is a market leader in the structured and asset-backed finance space. It is also a domicile of choice for registering and financing ships and aircraft, as well as for international real estate finance, project finance and joint ventures and other structures for property, oil and gas, energy and other infrastructure projects. Given this broad popularity, we see a full range of debt facilities made available on deals. The type of facility used in any given transaction varies and is mostly driven by wider commercial and legal factors affecting the borrower and guarantor parties and their immediate business needs.

Describe the types of investors (eg, traditional banks, hedge funds, pension funds) that participate in bank loan financings and the overlap with the investors that participate in debt securities financings.

There are a wide variety of investors participating across the different transactions in this space. However, these investors are rarely domiciled in the Cayman Islands, and their participation is driven by commercial and legal factors outside the Cayman Islands.

How are the terms of a bank loan facility affected by the type of investors participating in such facility?

The terms of a bank loan facility are determined by the governing law of the facility’s credit documents. If a Cayman Islands entity is a credit party to a facility, this will inevitably impact the drafting of representations and warranties, undertakings and conditions precedent under the financing documents, which must be tailored accordingly and taken into account when structuring any proposed security package.

Are bank loan facilities used as ‘bridges’ to permanent debt security financings? How do the structure and terms of bridge facilities deviate from those of a typical bank loan facility?

Cayman Islands private equity funds often use bridge facilities to meet working capital or portfolio investment requirements in advance of calling for capital from investors. Similarly, they are used in the collateralised loan obligation space to bridge the initial acquisition of corporate loans at the warehouse stage. The structure and terms of these bridge facilities are not driven by matters of Cayman Islands law.

What role do agents or trustees play in administering bank loan facilities with multiple investors?

This will be documented in accordance with the market standards and laws of the jurisdiction of the principal credit documents.

Describe the primary roles and typical fees of the financial institutions that arrange and syndicate bank loan facilities.

This will be determined in accordance with the market standards and laws of the jurisdiction of the principal credit documents, as well as the commercial input of the finance parties.

In cross-border transactions or secured transactions involving guarantees or collateral from entities organised in multiple jurisdictions, which jurisdiction’s laws govern the bank loan documentation?

Except for certain security documents that may be governed by Cayman Islands law, bank loan documentation will generally be governed by another jurisdiction’s law. The most common governing laws for those transactions are English and New York law.

REGULATION

Describe how capital and liquidity requirements impact the structure of bank loan facilities, including the availability of related facilities.

To the extent they are involved, under Cayman Islands law, all locally incorporated banks are generally required to maintain a minimum net worth of CI$400,000 or its equivalent in other currencies, although this is subject to certain exceptions for smaller banking institutions operating in the Islands. The Cayman Islands Monetary Authority (CIMA) has adopted the guidelines set by the Basel Committee for Bank Regulation and Supervisory Practices for capital adequacy requirements. The Basel Committee recommends a minimum risk asset ratio of 8 per cent; however, CIMA has applied a minimum risk asset ratio of 10 per cent under the relevant law.

For public company debtors, are there disclosure requirements applicable to bank loan facilities?

Where a debtor company is listed on the Cayman Islands Stock Exchange (the Exchange), there will be continuing obligations in this regard. Obligations will be specific to the type of listed securities in question but generally, as stated by the Exchange:

[T]he issuer must keep the Exchange, the members of the issuer and other holders of its listed securities informed as soon as reasonably practicable, by way of public announcements or circulars, of any information relating to the group that:

is necessary to enable them and the public to appraise the financial position of the group;
is necessary to avoid the establishment of a false market in its securities; or
might reasonably be expected materially to affect market activity in and the price of its securities.

How is the use of bank loan proceeds by the debtor regulated? What liability could investors be exposed to if the debtor uses the proceeds contrary to regulations? Can investors mitigate their liability?

The Cayman Islands observes all international sanctions extended to it by the United Kingdom and has robust anti-money laundering, proceeds of crime and antiterrorism legislation; thus, debtors may be exposed to criminal sanctions and fines if bank loan proceeds are used in connection with any criminal or terrorist activity by a Cayman Islands entity (in particular the Cayman Islands Terrorism Act (as revised), the Proceeds of Crime Act (as revised), the Anti-Money Laundering Regulations (as revised) and the Guidance Notes on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands).

Are there regulations that limit an investor’s ability to extend credit to debtors organised or operating in particular jurisdictions? What liability are investors exposed to if they lend to such debtors? Can the investors mitigate their liability?

Cayman Islands bank lending is largely limited to the domestic market. However, where an international bank is lending through a Cayman Islands branch, there are regulations that may limit the ability to extend credit to debtors organised in or operating from certain jurisdictions. The Cayman Islands observes and applies all international sanctions extended to it by the United Kingdom. These UN, UK, US and EU sanctions are policed by CIMA. However, it is the responsibility of the relevant financial service provider to ensure that all relevant sanctions are complied with. A breach of sanctions incurs various penalties in accordance with the particular terms of the sanctions.

In restricted circumstances, it is possible for a financial services provider that is incorporated and operating in the Cayman Islands to apply to the Financial Secretary of the Cayman Islands, pursuant to various restrictive measures or the UN Sanctions (Overseas Territories) Orders for a licence to proceed with certain activities that would otherwise be prohibited.

Are there limitations on an investor’s ability to extend credit to a debtor based on the debtor’s leverage profile?

There are no limitations as a matter of Cayman Islands law.

Do regulations limit the rate of interest that can be charged on bank loans?

There is no statutory provision for the rate of interest that can be charged on bank loans. However, when determining the amount of interest under any financing documents, a lender should have regard to the fact that the rate of interest should not be set at a level which is out of all proportion to the legitimate interests of the applicable obligor under the particular documents, such that it could be regarded as a penalty. A penalty is generally unenforceable under Cayman Islands law.

What limitations are there on investors funding bank loans in a currency other than the local currency?

There are no limitations as a matter of Cayman Islands law on the currency used in any financing transaction. We typically would not see local currency (the Cayman Islands dollar) used in international finance. The most common currency used in cross-border bank loans is either in US dollars or euros.

Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.

Where a Cayman Islands entity is regulated by CIMA, there may be certain restrictions imposed by the regulator on that company’s business plan or relevant regulations that may impact the structuring of the security package in connection with a bank loan facility, as there may be restrictions on granting security, or security being granted, over the company’s shares. Capital adequacy requirements may also have an impact on the availability of bank loan facilities where the loan is being financed by a local Cayman Islands banking institution or branch based in the Islands.

COLLATERAL AND GUARANTEE SUPPORT

Which entities in the organisational structure typically provide collateral and guarantee support for bank loan financings? Are there limitations (regulatory, tax or otherwise) on which entities in the organisational structure are permitted to provide such support?

There are Cayman Islands entities operating at all levels of a given corporate structure across bank loan financing transactions, whether as borrowers, parent companies, holding companies, affiliates or subsidiaries. Regardless of their particular position within the organisational structure, Cayman Islands entities are often required to provide security as collateral or guarantees for the transaction, and it is in this context that Cayman Islands legal considerations will most frequently arise on an international bank financing. There are no statutory or other limitations that arise as a matter of Cayman Islands law; however, particular restrictions or limitations on borrowing or providing security or guarantees may be set out in an entity’s constitutional documents.

In the context of the provision of guarantees, the issue of corporate benefit for the entity in question must be taken into account. Due consideration and confirmation of corporate benefit (ie, that the provision of the guarantees is in the best interests of the particular entity), particularly in the case of subsidiaries providing upstream guarantees, should be clearly addressed in the resolutions of the applicable Cayman Islands guarantor.

What types of obligations typically share with the bank loan obligations in the collateral and guarantee support? If so, are all such obligations equally and ratably covered by the collateral and guarantee support?

This turns on the definition of ‘secured obligations’ (or an equivalent term) as set out in the finance documents in a particular transaction. Any security document or guarantee governed by Cayman Islands law will generally be drafted to extend to those secured obligations, subject to any restrictions or limitations arising under the constitutional documents.

Which categories of assets are commonly pledged to secure bank loan financings? Describe any limitations on the pledge of assets.

The most common categories of assets pledged to secure bank loan financings are:

interests in a Cayman Islands entity (eg, shares in an exempted company, limited partnership interests of an exempted limited partnership and interests in a limited liability company);
contractual rights under various contracts governed by Cayman Islands law (eg, for a capital call financing, an assignment of call rights under the partnership agreement of a Cayman Islands exempted limited partnership);
movable assets registered in the Cayman Islands (eg, ships and aircraft); and
Cayman Islands bank accounts.

There are no statutory limitations on the pledge of assets under Cayman Islands law. However, regard should always be had to any limitations contained in an entity’s constitutional documents.

Describe the method of creating or attaching a security interest on the main categories of assets.

The most common methods of creating or attaching a security interest under Cayman Islands law over the main categories of assets are by way of:

an equitable share mortgage over shares in a Cayman Islands exempted company;
a charge over Cayman Islands exempted limited partnership or limited liability company interests;
an assignment of rights (by way of security) under various Cayman Islands law-governed contracts (eg, for a capital call financing, the assignment of call rights under the partnership agreement of a Cayman Islands exempted limited partnership will grant security over the rights of the partnership and its general partner to call for capital from its investors);
mortgages over ships or aircraft, where the aircraft or vessel is registered in the Cayman Islands;
all asset debenture (fixed and floating charge) over the assets of a Cayman Islands company; and
a charge over a Cayman Islands bank account.

In respect of a Cayman Islands share mortgage or a charge over a limited partnership’s or a limited liability company’s interests, these security interests are equitable in nature. The shareholder or limited partner grants the security in favour of the bank but remains the legal title-holder of record until the bank enforces the security following an event of default under the finance documents.

While a legal mortgage or charge is possible under Cayman Islands law and would avoid the risk of being defeated by a bona fide third-party purchaser for value, many banks prefer to take the equitable interest since the legal interest would require the bank to hold legal title to the shares or interests throughout the security period, and this often holds tax, regulatory and practical concerns for the bank.

Various steps are taken under the Cayman Islands security documents to protect the bank’s position, and ancillary documents are provided to the bank as part of the enforcement package (including but not limited to, in each case, annotations against the relevant interest on the applicable corporate register and a pre-signed but undated form of appropriate transfer document given in favour of the bank or its nominee) to enable the bank to step in to become the title holder of record of the interest in question smoothly and as quickly as possible upon an event of default.

What steps are necessary to perfect a security interest on the main categories of assets? What are the consequences of failing to perfect a security interest?

Subject to certain exceptions, there are generally no perfection requirements in the Cayman Islands, and a security document does not need to be filed, registered or recorded in the Cayman Islands as there is no public or central register of security in the Cayman Islands, and priority of security is broadly determined by the ‘first in time’ principle. Certain Cayman Islands entities are required to maintain a register of mortgages and charges in respect of securities granted by it, but entry on such a register does not determine perfection or priority; it will merely assist from an evidentiary perspective to establish priority.

Central registers for security exist in relation to certain specific assets, including ships and aircraft registered in the Cayman Islands and real property situated in the Cayman Islands. Entry of the security on a register is not a perfection step, but it does provide priority to a lender or security agent based on the order of registration.

In limited circumstances perfection steps must be taken under Cayman Islands law. Whenever a security interest is created by way of an assignment of contractual rights under a Cayman Islands law-governed agreement (eg, an assignment of call rights in connection with security over capital contributions on a capital call financing), or is granted over limited partnership interests or limited liability company interests, then (as prescribed by either common law or statute) service of notice on certain third parties is required to perfect the legal interest and establish priority.

In each of those cases, priority will be determined by the order of service of notice. Failure to serve notice will result in the security interest being equitable rather legal.

Can security interests extend to future-acquired assets? Can security interests secure future-incurred obligations?

Cayman Islands law follows the English law position that security over future assets is valid in equity. As such, with the exception of pledges and liens, where delivery of the physical asset is required, it is possible to take an equitable security interest over future assets under a security document. Such equitable interest will automatically become a legal interest at the time the future secured property is created.

Describe any maintenance requirements to avoid the automatic termination or expiration of security interests.

There are no such requirements under Cayman Islands law.

Are security interests on an asset automatically released following its sale by the debtor? If so, are the releases mandated by law or contract?

This is not dictated by Cayman Islands law and is typically a matter of contract between the parties. It is customary for the parties to enter into a deed of release or an equivalent document confirming or evidencing the release of any security. The document can be presented to the registered office of the Cayman Islands entity in connection with noting the discharge date on any applicable register. There is no prescribed form for the document, nor does the document need to be governed by Cayman Islands law.

What defences does a guarantor have against claims for non-fulfilment of guarantee obligations? Can such defences be waived?

A guarantor has no particular defence against claims for non-fulfilment of guarantee obligations under Cayman Islands law. There are rarely Cayman Islands law guarantees on cross-border financing transactions.

With regard to defences, where a Cayman Islands law guarantee is used, it will include standard defences against waiver provisions. However, the efficacy of those provisions has not yet been confirmed in the Cayman Islands courts.

Describe any parallel debt or similar requirements applicable in a secured bank loan financing where an agent acts for multiple investors.

There are no requirements under Cayman Islands law.

What are the most common methods of enforcing security interests? What are the limitations on enforcement?

With the exception of certain limited circumstances in connection with foreclosure in respect of specific assets, such as ships and aircraft, a secured party can enforce its security pursuant to a Cayman Islands security agreement without a court order or any government consent. The applicable Cayman Islands law security agreement will set out the rights of the secured party upon enforcement. It will typically contain a power of sale and the right to appoint a receiver, and it will otherwise set out various self-help remedies, often specific to the type of security being taken, that the secured party can employ upon enforcement.

In the case of security over shares, limited partnership interests or limited liability company interests, the chargor will have granted (among other rights) a right to the secured party (or its nominee) to be entered in the relevant register of shareholders, limited partners or members, as applicable, in place of the chargor. The registration of the secured party on the relevant register converts the bank’s security from an equitable to a legal interest and places the secured party in the position of ‘mortgagee-in-possession’, enabling it to exercise control rights attaching to the interests (ie, to vote and receive dividends) and to sell the interests to realise their value and discharge the secured obligations under the finance documents.

The remedy of appropriation (which is available under English law and elsewhere) is not available under Cayman Islands law. The charged property does not become the unqualified property of the secured party upon enforcement.

The rights of a secured party upon the insolvency of a Cayman Islands entity are protected by statute, ensuring priority of any secured creditor. However, any disposition of property or transfer of shares made while a Cayman Islands company is subject to a winding up order or liquidation will be void without the consent of the court or liquidator, depending on the circumstances.

Describe the impact of fraudulent conveyance, financial assistance, thin capitalisation, corporate benefit and similar doctrines on the structure of bank loan financings.

Where a Cayman Islands entity is part of the borrower group and is granting security as part of a bank loan financing, a lender or secured party should have regard to the fact that upon the insolvency of the Cayman Islands entity, the security could potentially be challenged, rendered voidable or set aside under the rules for voidable preference, fraudulent dispositions (transactions at an undervalue) or fraudulent trading under Cayman Islands law.

There is no concept of financial assistance or thin capitalisation under Cayman Islands law.

INTERCREDITOR MATTERS

What types of payment or lien subordination arrangements, or both, are common where the debtor has obligations owing to more than one class of creditors?

Those issues are usually a matter of contract between the parties. Cayman Islands law does not typically govern subordination arrangements, and the law would not impact those arrangements.

What creditor groups are typically included as parties to the intercreditor agreement? Are all creditor groups treated the same under the intercreditor agreement?

This will be matter of contract between the creditors. Cayman Islands law does not typically govern intercreditor arrangements, and Cayman Islands law would not impact those arrangements.

Are junior creditors typically stayed from enforcing remedies until senior creditors have been repaid? What enforcement rights do junior creditors have prior to the repayment of senior debt?

Cayman Islands law would not impact such arrangements.

What rights do junior creditors have during a bankruptcy or insolvency proceeding involving the debtor?

Cayman Islands law would not impact such proceedings.

How do the terms of the intercreditor arrangement change if creditor groups will be secured on a pari passu basis?

Cayman Islands law would not impact such arrangements.

LOAN DOCUMENT TERMS

What forms or standardised terms are commonly used to prepare the bank loan documentation?

There are no standardised terms for Cayman Islands law governed finance or security documents. However, standard market practice has evolved as between the firms in the Islands, in connection with agreeing such documentation.

What are the customary pricing or interest rate structures for bank loans? Do the pricing or interest rate structures change if the bank loan is denominated in a currency other than the domestic currency?

Cayman Islands law would not impact such arrangements. As noted above, Cayman Islands law is typically not the governing law of the loan documents.

Have any procedures been adopted in bank loan documentation in your jurisdiction to replace LIBOR as a benchmark interest rate for loans?