CFOs and Rated Note Feeders: Structured Finance Technology in Fund Finance

Cayman Islands CFOs, Rated Note Feeders and Bankruptcy-Remote Structures

Collateralised fund obligations (“CFOs”), rated note feeders and other highly structured fundraising vehicles are transforming the fund finance landscape. These structures can help managers to secure more favourable financing terms, achieve investment grade credit ratings and access new pools of capital, including insurance capital.

These structures borrow heavily from the structured finance playbook, deploying bankruptcy-remote Cayman Islands special purpose vehicles (“SPVs”) that are already familiar to global debt investors and rating agencies. The Cayman Islands offers a commercially flexible, tax-neutral and creditor-friendly framework for implementing these structures, and the Maples Group’s market-leading structured finance practice allows us to draw on decades of relevant structuring and transactional experience.

This article explores the growing use of CFOs, rated note feeders and other bankruptcy-remote structures in fund finance, how they work in the Cayman Islands, and why the Maples Group’s deep structured finance experience can give managers a significant structuring advantage.

Why are CFOs and rated note feeders gaining traction?

CFOs and rated note feeders use a bankruptcy-remote SPV to isolate collateral from the rest of the fund group, providing debt investors with structural protections that are standard in the CLO and broader securitisation markets. In debt financings, this isolation may support securitisation-style pricing, potentially resulting in improved financing terms.

Critically, it can also unlock an investment grade credit rating, opening the door to insurance companies, pension funds and other institutional investors that require, or strongly prefer, rated exposure.

The on-balance sheet SPV has historically been the most commonly used bankruptcy-remote structure adopted in fund finance and is our primary focus below. These structures have the benefit of allowing the fund to retain a residual economic and ownership interest in the collateral that supports the financing.

This residual interest also facilitates the distribution of collateral at the end of the financing and may make the SPV easier to wind down. This typically makes on-balance sheet SPVs well-suited to “downstream” financings where capital is being raised at a subsidiary level.

Orphan structures, where the SPV is wholly independent of the fund, are also being utilised in fund finance, and we are seeing a growing number of orphan GP structures. As fund finance continues to converge with structured finance, CFOs and rated note feeders are increasingly adopting the orphan model together with other features drawn from the securitisation toolkit.

How do bankruptcy-remote structures work in the Cayman Islands?

Exempted limited partnerships (“ELPs”), limited liability companies (“LLCs”) and exempted companies are the Cayman Islands entities most commonly used as bankruptcy-remote SPVs. While each has a different governance and legal framework, the common mechanism to achieve bankruptcy remoteness is the introduction of an independent party whose consent is required for any action by the SPV that could lead to its insolvency or dissolution (typically referred to as “Material Action”). Separateness covenants in the SPV’s organisational documents help to preserve its distinct identity and establish guardrails against the commingling of assets or liabilities with its affiliates.

In an orphan context, the SPV is structured to be “independent” from the outset, with an independent shareholder and independent board of directors – although managers may retain some control or economics (for example, through preference shares or board appointments).

Cayman Islands Exempted Limited Partnerships

Cayman Islands ELPs do not have separate legal personality and act through their general partner. As such, bankruptcy remoteness is achieved through both the terms of the exempted limited partnership agreement (“LPA”) and the structure of the general partner. In summary, the LPA will typically contain certain protections, including “special purpose entity” or separateness covenants, and the general partner will appoint an independent director or manager who must consent to any Material Action in relation to both the ELP and the general partner.

It is also possible to achieve an equivalent outcome through an orphan GP, which, as noted, is already wholly independent. In such structures, the manager is typically appointed in an advisory and administrative capacity under an arm’s-length investment management agreement and exercises commercial decision-making on behalf of the orphan GP.

Cayman Islands Limited Liability Companies

Cayman Islands LLCs are increasingly popular, offering similar flexibility to ELPs but having separate legal personality, more akin to exempted companies. For on-balance sheet SPVs, bankruptcy remoteness can be achieved solely at the LLC level by appointing an independent manager (or, potentially but less commonly, an independent member).

Given the similarities with a Delaware LLC, using a Cayman Islands LLC can often produce significant efficiencies, particularly if there is a Delaware precedent that should be followed or there are bankruptcy-remote Delaware LLCs in the structure.

Cayman Islands LLCs are less commonly used as orphan vehicles, although the general principles and structure (independent shareholder or member, and independent board of directors or manager) are equivalent to exempted companies, as discussed below.

Cayman Islands Exempted Companies

For an on-balance sheet SPV, bankruptcy remoteness in a Cayman Islands company is achieved through the issuance of a special voting share (sometimes called a “golden share”) to an independent fiduciary service provider.

In summary, this is because shareholders have certain statutory rights that cannot be disapplied, removed or transferred, so those rights are instead vested in an independent shareholder (not dissimilar to reserved matters in, for example, a joint venture context).

The special voting share is held by the independent shareholder on charitable trust and typically has de minimis economic rights, but consent of the holder is required prior to any Material Action. The declaration of trust sets out the terms on which the independent shareholder may exercise its rights in relation to the share. It is common, although not essential, for an independent director to be appointed in addition to the issuance of a special voting share.

In an orphan context, the entire issued share capital (save for any preference shares) is held by the independent shareholder on charitable trust. All directors are independent, although it is not uncommon for managers to appoint representatives to assist with oversight and commercial decision-making.

As such, the SPV is already remote as it is not owned or controlled by the manager and does not have economic dependency on the wider fund group, save for any contractual arrangements that are implemented as part of the fundraising (such as the contribution and management of revenue-generating collateral).

Why use the Cayman Islands for bankruptcy-remote structures?

For managers familiar with Delaware bankruptcy-remote structures, the Cayman Islands offers an immediately recognisable and well-tested framework for achieving equivalent outcomes under US bankruptcy law:

• Creditor-Friendly Jurisdiction: The Cayman Islands is recognised globally as a creditor-friendly jurisdiction, with a robust legal framework that prioritises the enforcement of creditor rights and contractual arrangements, which is a critical consideration for investors in bankruptcy-remote structures.
• Proven Roadmap – From CLOs to Fund Finance: The Maples Group has been at the forefront of Cayman Islands CLO and capital markets transactions for decades. Bankruptcy-remote SPV structures, independent directors, golden shares and separateness covenants are core features of the structured finance market, and we are now deploying these tools in fund finance. This means managers and their counsel benefit from a well-tested structural framework.
• Flexibility: Cayman Islands corporate and partnership law allows bespoke governance arrangements tailored to each transaction.
• Established Ecosystem: The Cayman Islands has a deep professional ecosystem which includes internationally recognised fiduciary service providers, such as the Maples Group, that can provide the independent directors, managers and trustees essential to these structures.
• Execution: Familiarity among debt investors and their counsel reduces execution risk and accelerates timelines, with less time spent bringing counterparties up to speed on the proposed structure.
• Ratings: The Cayman Islands is a leading offshore jurisdiction with a long history of rated securitisation transactions, and the major rating agencies routinely rate our clients’ Cayman Islands SPV structures. Rating agencies are familiar with our documentation and structural conventions, which can facilitate smoother execution for structures seeking an investment grade rating.

How the Maples Group Supports CFOs and Bankruptcy-Remote Structures

The Maples Group has advised on Cayman Islands bankruptcy-remote structures since their inception in the fund finance market. Our ability to draw on decades of structured finance experience gives us valuable insights and practical know-how that can be a significant advantage for our clients. Early engagement with our Cayman Islands legal team is key to ensuring that the vehicle and governance arrangements are fit for purpose and that managers, debt investors, rating agencies and counsel are aligned from the outset.

Alongside our market-leading legal team, the Maples Group offers the full range of complementary fiduciary services necessary to implement these structures, in both the Cayman Islands and Delaware. Our fiduciary services business has extensive experience providing independent directors and managers, as well as acting as share trustee. Our teams can also provide ancillary services, including board support, FATCA / CRS compliance, AML officers and the preparation of management accounts.

All our service offerings are provided in-house and are entirely Maples Group-owned and operated. Our services have evolved in partnership with our clients to meet their needs as they push the boundaries of the market.

We would be delighted to discuss how these Cayman Islands fund finance structures might support your debt finance and fundraising objectives.

For further information, please reach out to your usual Maples Group contact or any of the persons listed.