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1. PROJECT FINANCING PANORAMA
1.1 Sponsors and lenders
As the Cayman Islands is generally used as a tax neutral jurisdiction which is an efficient and neutral platform for sponsors and investors, a wide variety of participants in the international project finance space can be found, from construction companies to national and foreign international infrastructure companies on the sponsor side, government-owned development banks, institutional lending banks, and private equity and hedge funds on the lender side.
1.2 Public-private partnership transactions
Historically, non-binding guidelines from the administrative authorities of the Cayman Islands were the primary source of PPP regulation for local PPP projects. However, the introduction of a legal framework for government procurement in 2018 allowed the Cayman Islands to have one of the most recent model PPP law and regulation in the world. This framework was used as the basis to assess and regulate the current expansion of, for example, Owen Roberts International Airport located in Grand Cayman, Cayman Islands, as well as a new waste management and treatment facility. As might be expected, the framework does not apply to international structured project finance transactions through Cayman Islands vehicles.
1.3 Structure the agreement
Cayman Islands as Jurisdiction of Choice
The Cayman Islands continues to be one of the main tax neutral jurisdictions for structuring international project finance transactions where a tax neutral jurisdiction is required for the debt instruments and bank loans involved. The four main categories of benefits that contribute to the attractiveness of the Cayman Islands structures for international transactions are presented as follows.
Sophistication as a jurisdiction
The Cayman Islands are a British Overseas Territory. The UK is responsible for the Cayman Islands’ external affairs as well as its defense and internal security, but otherwise the Cayman Islands is self-governing and has a democratically elected legislature. The Cayman Islands make their own laws and have independent legal and judicial systems.
Well-recognized legal concepts (including limited liability and separate legal personality) underpin the Cayman Islands corporate vehicle, as well as the principles governing lending and the granting of collateral on assets. Decades of experience and extensive due diligence have demonstrated to investors, banks, development agencies, counterparties, regulators and international authorities that these foundations are strong and reliable. In addition, international lenders and rating agencies have rigorously reviewed and stress tested Cayman Islands’ laws governing lending and the granting of margins and guarantees on assets.
There are dedicated commercial courts in the Cayman Islands, including a financial services division of the Grand Court which recognizes the need for special procedures and skills to deal with the more complex civil cases that arise from the financial sector in the Cayman Islands. The courts in the Cayman Islands are very active, efficient and respected. In addition, the final court of appeal is the Privy Council of London; as a result, there is great certainty regarding the judicial process. This is a great source of comfort for investors and counterparties, who may want to be reassured that if the rights are to be enforced in court, it will be in a familiar and reliable system.
The Cayman Islands government and its primary regulator, the Cayman Islands Monetary Authority, have worked continuously with governments and international authorities for many years to ensure that the Cayman Islands are seen as a well-regulated, cooperative and transparent jurisdiction. . For example, the Cayman Islands were among the first to adopt:
- comprehensive and strict anti-money laundering laws (AML) and know-your-customer rules and regulations (KYC), which are at least equivalent to those of established member states of the Organization for Economic Co-operation and Development (OECD ); and
- the Foreign Account Tax Compliance Act and the OECD Common Reporting Standard, so investor tax information is now exchanged with more than 100 other countries.
As a result, the Cayman Islands are classified by the OECD as broadly compliant on transparency and information exchange: the same rating given to the UK, Germany and the US.
The Cayman Islands is an ideal tax-neutral domicile for international project finance transactions, as it creates a level playing field for investors by not adding an additional tax layer, and it does not have any form of tax. tax on income, companies or capital gains and no inheritance tax, inheritance tax or gift tax.
Simplicity of constitution of entities and flexibility of their administration
The formalities for setting up companies are straightforward and straightforward, so that they can be incorporated on the same day and relatively inexpensively.
Cayman Islands vehicle types
While there is a range of Cayman Islands vehicles to choose from in these transactions (including exempt limited partnerships, limited liability companies, and trusts), “Cayman Islands exempt companies” remain the most common form. popular vehicles used to structure the “issuers” of debt securities and “borrowers” of bank loans. The Cayman Islands exempt non-resident company (or exempt company) is a legal person limited by shares and its form is similar to “private companies limited by shares” and “corporations” in jurisdictions such as the England, Wales and the United States, respectively.
Cayman Islands’ corporate laws provide a framework that can be adapted to give effect to a wide range of commercially agreed requirements, including bespoke objects for which exempt companies can be incorporated and very individual corporate governance agreements. This makes it possible to adapt the constitution of companies to many different situations.
Typical financing techniques
The vast majority of PPP contracts are funded in one of three ways:
- repackaged structured finance securities, in which the underlying assets are infrastructure-linked certificates issued by the government at the completion of agreed milestones;
- project finance transactions, which rely on cash flows generated by project assets for repayment;
- securities repackaged in accordance with the above, when the debt is guaranteed by the State.
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This article first appeared Global Practice Guide: Project Finance 2021 published by Chambers and Partners in November 2021.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.