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Thursday, 18th April 2024 |
| Catastrophe bonds drive structured finance growth in the Caymans |
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By: Tim Frawley, Tim Frawley
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| The ability of the Cayman Islands product to be adapted to different uses by both the onshore and Cayman offshore financial community has assisted in year on year growth for its securitisation market. Tim Frawley explains the latest developments in the area and highlights the growth in catastrophe bonds. |
The number of structured finance transactions coming to the global financial markets continues to show dramatic increases. In 2006 CDO issuance rose by almost 50 per cent to $918 billion, according to a recent Bloomberg article. According to the European Securitisation Forum, European funded CDO volume grew by close to 60 per cent in 2006, reaching ?80 billion by year end, and based on FactSet Global Filings data, the European asset-backed and CDO markets have grown by 235 per cent and 310 per cent respectively since 2003. A recent article in Captive and ART Review indicates that there was $4.69 billion in catastrophe bond issuance compared to $1.99 billion in 2005 (a 136 per cent increase) and $1.14 billion in 2004 (a 311 per cent increase). The growth seen by the global financial markets is also being reflected in the deal volume growth being seen in the Cayman Islands and this trend appears to be continuing well into 2007.
The Cayman market
Notwithstanding the choice of domiciles now available for structured finance transactions, Cayman is still seeing healthy growth in the amount of securitisation and structured finance work being done. Although as a jurisdiction Cayman is theoretically interchangeable with any number of zero tax jurisdictions, it dominates the landscape partly because of its professional infrastructure and partly because of its long established involvement in the capital markets arena. The financial institutions and leading law firms that continue to send work to Cayman evidence this. The rating agencies are also very familiar with Cayman as a jurisdiction and rarely have any issues from a structural perspective. This provides additional credibility to the Cayman brand.
Onshore/offshore
The securitisation and structured finance market in Europe, that is in relation to European assets or deals sold to European investors, has tended not to use vehicles established in the usual offshore jurisdictions such as Cayman. The principal reasons for this are:
- Imposition of withholding taxes on payments in relation to European assets
- Marketing restrictions on debt securities of Cayman issuers or other non-OECD issuers
- Investor perception fuelled by international scandals (e.g. Enron and Parmalat)
There is also a feeling among some that acquiring the necessary ratings to penetrate the more conservative pension fund and institutional product markets is more easily achieved with an onshore EU jurisdiction such as Ireland, although this is entirely unsubstantiated by the rating agencies.
Vehicles established in the Cayman Islands or other traditional zero tax jurisdictions pay no tax and as a result do not have the benefit of a double tax treaty network. This makes Cayman vehicles less attractive for transactions involving certain types of European assets, payments on which are subject to a withholding tax.
Innovation
The appetite for offshore multi-issue vehicles in US structured finance deals has changed in recent years. The growth of the market for bespoke single tranche synthetic collateralised debt obligation (CDO) transactions appears to have provided the spur to the development of this particular product. This coincided with amendments to the Companies Law in Cayman that allowed for the segregated portfolio company (SPC) to be used outside its traditional insurance related role. To execute single-tranche synthetic deals with lower principal amounts but greater volumes, a more commoditised approach was required than the traditional CDO structure involving a one-time issue by a single-issue vehicle. The SPC provides a convenient solution.
Catastrophic growth
Following the events of September 2001, the debt capital markets became more important as a way for the insurance market to lay off risk. Catastrophe bond vehicles had already been well established but that year a number of 'sidecars' were also formed. The sidecar is a special purpose vehicle that allows equity investors to assume the return (and corresponding risk) on a book of business written by an insurer (or reinsurer) that cedes that risk to the sidecar. Hurricane Katrina has only accelerated the growth of the sidecar phenomenon as well as the use of catastrophe bonds. Cat-bond vehicles and sidecars assume their risks by either writing reinsurance cover or through the use of credit default swap technology. The insurance regulatory environment in Cayman has been instrumental in the growth of this product area through the application of sensible regulatory standards. With the increasing sophistication of these products, Cayman is now seeing new and different risks being securitised and more participants becoming involved in this space.
Continuing to captivate
The prominence of Cayman in the offshore structured finance arena evidently grows year on year. The ability of the Cayman product to be adapted to different uses by both the onshore and Cayman offshore financial community will have assisted in this growth. With global financial markets continually becoming more transparent, any perceived disadvantages of the Cayman product in Europe may well pass and be replaced with something more captivating. |
Tim Frawley is a partner with Maples and Calder in the Cayman Islands.
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