CAYMAN ISLANDS Law and Practice Contributed by: Agnes Molnar, Jason Ta, Paul Walters and Gemma Walters, Travers Thorp Alberga
• Participations: A participation interest is created where an SPE acquires, or is trans - ferred, an interest in an asset, commonly in exchange for a financial contribution to the originator. Pursuant to such arrangement, the SPE avoids acquiring legal title or an absolute ownership interest in such asset. As a result, the SPE avoids triggering any prohibitions on transfers or other restrictions related to the ownership of the underlying assets and has no servicing obligations with respect to the underlying assets. However, such participa - tion results in a contractual relationship only with the originator and therefore the SPE can - not sue the underlying obligor upon a default without joining the originator in an enforce - ment. The SPE will generally have the right to receive payments of principal, interest and fees only from the originator, and only upon receipt by such originator of such payments from the underlying obligor. The SPE gener - ally will have no right to enforce compliance by the underlying obligor with the terms of the agreement governing the receivable, no rights of set-off or netting, and the SPE may not directly benefit from the security and related rights that support the asset. • Due Diligence: Due diligence should be car - ried out on the underlying assets to ensure that there are no prohibitions on transfer, that the requirements of transfer (eg, notice, con - sent, registration, formalities) will be complied with, and that there are no material hidden economic or other risks for the SPE which have not been disclosed. • CFO-Specific Issues: The Cayman Islands- established originator fund’s constitutional documents must be reviewed for restrictions, ensuring that the securitisation will not trig - ger any leverage limits or require consent of the limited partners. In addition, transferring Cayman Islands law-governed partnership
interests typically requires the consent of the general partner even if the actual fund inter - est is not transferred, only the right relating to such fund interest to receive distributions. • Derivative Transactions: The form of swaps that may be entered into vary, but they are commonly based on forms provided by the International Swaps and Derivatives Associa - tion. Total return swaps and credit default swaps are commonly used. Interest rate and currency swaps may, in the case of securiti - sations with rate or currency mismatches, be included. Swaps are used in all synthetic securitisations where title of ownership of the underlying assets are not transferred, only certain economic rights and/or obligations related to such assets. • Declaration of Trust: An originator, seller or original lender (as trustee), declares a trust over its equitable rights to the distributions from the receivables in favour of the SPE (as beneficiary) ringfencing those rights for the beneficiary SPE and hence removing them from the bankruptcy estate of the originator. 3.2 Principal Warranties Material warranties fall into two separate catego - ries: corporate warranties and asset warranties. Each of the SPE and transferor will typically pro - vide standard warranties regarding solvency, corporate authority and ability to enter into the transaction, respectively. Asset warranties are of particular importance in a securitisation. The most important of which cover the transferability of the assets to the SPE. Other material warranties include, in respect of the assets: enforceability, compliance with law and regulation, no known or reasonably discov -
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