1. Project Finance Panorama
1.1 Recent Trends and Developments
Recent years have witnessed a general shift in the international project finance market from financing via standalone bank loans to financing through a combination of debt securities and bank loans, together with a significant increase in the use of Cayman Islands vehicles to finance Latin American project finance transactions.
The success of these transactions has been widely seen as a positive development for project finance generally in the Latin America region, where most countries have historically had very limited access to traditional commercial lending sources and have instead had to rely on state-owned lenders for support. This success is in no small part due to the:
- continued strength of international capital markets;
- increased investment participation in the project finance space by a wide variety of public and private institutions; and
- improvements made by various governments over the last few years to their public-private partnership (PPP) or concessions legislation.
These types of transactions are usually funded by "structured finance repackaged securities". These are described in further detail in 1.4 Structuring the Deal, but are essentially bonds backed by government-issued payment certificates.
In our experience, this success has not been undermined by COVID-19 which has, at worst, caused delays (but not cancellations) of ongoing transactions. While many countries in Latin America have had recent success in financing PPPs in the last few years, unfortunately not all of them have achieved this success. Argentina, for example, introduced new PPP legislation in 2017 aimed at encouraging foreign direct investment to finance much-needed improvements to its transportation infrastructure, one result of which was the planned expenditure on six upgrading projects to finance the construction of various toll roads. It is understood that the intention was to finance these projects using the types of "structured finance repackaged securities" described above. However, due to the current unfavourable economic and political climate in Argentina, now compounded by the prolonged economic fallout from COVID-19, and the fact that such repackaged securities would ultimately rely on the credit-worthiness of the Argentine government, these projects have been postponed indefinitely.
1.2 Sponsors and Lenders
As the Cayman Islands is typically used as a tax-neutral jurisdiction that is an efficient and neutral platform for sponsors and investors alike, a broad variety of participants in the international project finance space can be found, from domestic construction companies and foreign international infrastructure companies on the sponsor side, to government-owned development banks, institutional lending banks, and private equity and hedge funds, on the lender side.
1.3 Public-Private Partnership Transactions
Historically, soft-law guidelines from administrative authorities in the Cayman Islands were the main source of PPP regulation for local PPP projects. However, the introduction of a public procurement legal framework in 2018 has resulted in the Cayman Islands having one of the youngest PPP law and regulation models in the world. This framework has been used as the basis for assessing and regulating the current expansion of, for instance, the Owen Roberts International Airport located on Grand Cayman, Cayman Islands, as well as a proposed cruise ship pier/terminal and a new waste-management and treatment facility. As may be expected, the framework does not apply to international project finance transactions structured through Cayman Islands vehicles.
1.4 Structuring the Deal
The Cayman Islands as a Jurisdiction of Choice
The Cayman Islands continues to be one of the leading taxneutral jurisdictions through which to structure international project finance transactions where a tax-neutral jurisdiction is required for the relevant debt securities and bank loans. The four broad categories of benefits that contribute to the appeal of Cayman Islands structures for international transactions are set out below.
Sophistication as a jurisdiction
The Cayman Islands is a British Overseas Territory. The United Kingdom is responsible for the external affairs of the Cayman Islands and its defence and internal security but, otherwise, the Cayman Islands is self-governing with a democratically elected legislature. The Cayman Islands makes its own laws and has independent legal and judicial systems.
Well-recognised legal concepts (including limited liability and separate corporate personality) underpin the Cayman Islands corporate vehicle, as well as the principles governing lending and the granting of security over assets. Decades of experience and extensive due diligence have demonstrated to investors, banks, development agencies, counterparties, regulators and international authorities that these foundations are solid and reliable. Furthermore, international lenders and rating agencies have rigorously reviewed and stress-tested Cayman Islands laws governing lending and the granting of margin and security over assets.
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This article first appeared Global Practice Guide: Project Finance 2020 published by Chambers and Partners in November 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.