The coronavirus pandemic has created unprecedented circumstances for business operations globally. Economists have warned the fallout could be similar to that of the 2008 recession causing governments and central banks around the world to implement numerous measures to counteract the economic disruption caused by the pandemic. These measures include lowering interest rates, loan programs, tax cuts and various new programs to help market liquidity.
Fund managers are as affected as anyone by the coronavirus shutdown and while many fund managers concerned with liquidity issues are activating their gating provisions in order to limit redemptions or suspending redemptions altogether, some fund managers are taking advantage of opportunities generated by such distressed economic conditions. And these opportunities continue to flow into the Cayman Islands in the form of new fund formations.
One such opportunity is the Term Asset-Backed Securities Loan Facility (TALF) which was first created by the U.S. Federal Reserve in 2008 to boost consumer spending in order to jump-start the economy during that recession. The TALF was restarted on 23 March 2020 for the Covid-19 crisis. Under the TALF, the U.S. Federal Reserve will provide up to USD100 billion of loans to borrowers who pledge certain AAA-rated asset-backed securities (ABS) secured by pools of assets, such as student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other riskier assets such as certain commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs). In recent times we have seen managers actively move their investment strategy to invest in assets and securities that are eligible for the TALF to take advantage of the favourable loan terms in an attempt to generate higher returns.
We have also seen an increase in activity in the distressed debt space. The coronavirus' overwhelming toll on businesses has created a dislocation of valuations in the debt and equity markets at an incredibly fast rate leading fund managers to believe that the opportunity to purchase undervalued assets is one of the best investment opportunities in these market conditions.
Even though the full impact of the coronavirus is not yet known, and despite the volatility in global credit markets, credit funds continue to be formed. Fund managers are employing lessons learned during the 2008 financial crisis to mitigate risk during the current crisis.
Even during these uncertain times, the Cayman Islands are the principal offshore jurisdiction for establishing investments funds. Due to its stability and strong financial services industry, the Cayman Islands maintain functionality during this pandemic and continue "business as usual". With service providers, the companies/partnerships registry and the Cayman Islands Monetary Authority working remotely and processing applications electronically, investments funds in the Cayman Islands are being formed and registered with the same speed and ease as before the coronavirus hit our shores.
Originally published 12 June 2020
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