Maples Group - FUNDed - June 2023

FUNDed

GLOBAL Market Reviews

IRELAND

Cascading Pledge Arrangements in Irish Fund Structures

JERSEY

Lending to Jersey Cell Structures

AN INDUSTRY NEWSLETTER FOR THE GLOBAL FUND FINANCE MARKET | JUNE 2023

The Maples Group is delighted to present our June 2023 edition of FUNDed.

US Market Review

2023 has been a very interesting year so far for fund finance, with deal volume and structure focus changing throughout the year. Market volatility and rising interest rates led to a slow but steady start for the fund finance community, and we are now seeing significant deal movement and a change in fund behaviour and approach that we anticipate will continue through the end of the year.

The use of subscription lines across all private funds is now usual course, if not expected, in the US market. Those facilities may now be smaller and more flexible than historical products, however, their overall number and use has not decreased. However, the significant shift has been the huge, and arguably long-awaited, uptick in the use of NAV facilities.

Market valuations have, of course, been a concern over the last few months, which has led to private funds extending their life beyond the expected commitment and investment periods. Portfolios being retained for longer creates the need for further financing, whether for follow on investment purposes or for new investments identified in the market. Sponsors are looking to the future and wish to take advantage of financing now that they have obtained dynamic portfolios, with the majority of sponsors now putting sophisticated and comprehensive facilities in place to support that book.

Continuation funds now tend to feature a concentrated asset base and this area is rapidly developing and is also very attractive to secondary's investors. Investors have also increased trading in the secondary market following more active management by sponsors of their portfolios, arguably as a result of increased pressure and regulation for banks that has meant sponsors need to be nimble and innovative in their financing solutions.

Capital adequacy requirements and bank regulation are squarely in the sights of all fund finance market participants, in every form. Bank lending remains very much at the forefront of the market, however, we see a lot of competition for the banks emerging in the form of non-financial institutions, as well as a significant uptick in the creation and use of direct lending funds. With lesser regulation, sponsors are actively taking the opportunity to dip into the lending space. Given their clear understanding of the structures and portfolios in play, those sponsors are able to take advantage of this knowledge and experience, and offer immediate liquidity solutions for their fellow sponsors.

Deal flow generally has increased significantly this year, particularly over the last quarter. We are looking forward to this trend continuing through 2023.

For further details, please contact:

Tina Meigh

+1 345 814 5242

tina.meigh@maples.com

Deal flow generally has increased significantly this year, particularly over the last quarter

The Increasing Focus on Environmental, Social and Governance Strategies in Fund Finance

The COVID-19 pandemic, the increasing effects of climate change and the war in Ukraine have all intensified the focus on ESG principles in the fund finance market. It is arguable that funds which focus on ESG principles are better prepared to weather future risks and best placed to take advantage of future opportunities, thus representing a better credit risk to lenders. As a result, limited partners are encouraging general partners to focus more on their ESG objectives and strategies when looking at new investments in fund financing.

Sponsors are also becoming more focused on sustainable investments and are now more than ever required to focus on ESG, both in terms of the fund itself and the investments it makes. Their investors' ESG policies and general public pressure require it.

It is only a matter of time before credit risk analysis begins to specifically incorporate ESG metrics.

What ESG terms are we seeing in the fund finance market?

We are seeing margin adjustments, both up and down, of 5-25 basis points depending on whether ESG goals are met. It is important to note that margins can be adjusted downwards if certain goals are met representing opportunities for companies to improve their ESG focus resulting in lower margins being paid for their financing. Margin is adjusted upwards where ESG targets are not reached. Margin ratchets can therefore help break down long-term ESG goals into achievable and measurable shorter-term actions for the relevant company, with the additional benefit of lower financing costs.

We have also seen consideration given as to what is to be done with any margin discount achieved where ESG targets are met, for example, whether the discounts should be donated to ESG aims and conversely, whether ESG penalties should be offset by the purchase of carbon credits.

How have ESG metrics been reported and tracked in the past?

Tracking and reporting of ESG goals can be difficult with no standardised approach or framework to measure key performance indicators ("KPIs"). Over the last few years, we have seen many different reporting standards used with limited standardised approaches which has led to a lack of consistency and comparability of those KPIs.

ESG metrics need to be quantifiable and meaningful to be of any use and to avoid allegations of greenwashing, i.e. where things are inaccurately marketed as green or sustainable. They also need to fit the life of the facility such that over time, if investment strategies change, the ESG goals have room for growth and are flexible enough to continue to be relevant.

What developments are we seeing in the market to address ESG reporting and tracking concerns?

We are seeing a number of developments occurring that seek to address ESG reporting and tracking concerns with certain trends coming to light. Firstly, parties are questioning whether third-party validation of ESG reporting is appropriate given the complexity of certain KPIs and

in order to bolster the credibility of their ESG strategies via verification procedures. This may be because of the administrative burden that tracking certain KPIs represents to a fund. Engaging a third party to verify and assess ESG metrics can work to not only bolster ESG credibility but can also allow the third party to apply a standardised approach to ESG assessment which can be used for peer comparison purposes and result in increased transparency in monitoring and reporting ESG metrics.

It must be noted however that a number of factors will feed into whether this is appropriate for a particular fund; for example, cost benefit analysis considerations will need to be made given the significant up-front time and investment this would involve and depending on what the specific KPIs are, it may not be appropriate for a third party to reliably report on them.

Secondly, where flexibility is required, side letters may now be introduced to allow mechanics to be put in place to address KPIs at a future date. This may be to work around tight deadlines required to put facilities in place, however, attention must be paid to ensure that where this is the case, KPIs are indeed addressed in the future.

Finally, as the focus on ESG continues to grow, we are seeing a number of bodies produce guidance, mandatory requirements, regulations, white papers, recommendations and principles relating to ESG. One topical regulation is the Sustainable Finance Disclosure Regulation (the "SFDR") introduced by the EU. The regulation sought to define and introduce transparency requirements on financial products' characteristic that can be used and compared to assess their degree of sustainability. In the US, the Securities and Exchange Commission is also in the process of preparing guidelines to promote consistent, comparable and reliable information for investors regarding certain ESG factors. Such guidance is expected to be published this year.

What does the future of ESG in fund finance hold?

The increased prevalence of ESG considerations in the fund finance market is an exciting area that is evolving and represents both challenges and opportunities to market participants. We expect ESG considerations to become a common feature on fund finance matters and in time, we expect a more homogenised approach to be taken as regulations and mandatory disclosure policies are developed and implemented.

For further details, please contact:

European Market Review

We have seen an encouraging start to 2023 throughout the first quarter in the fund financing space across our European offices despite the somewhat tumultuous lending market with recent banking failures in the US and the acquisition of Credit Suisse by UBS and SvB in the UK by HSBC. Despite this uncertain economic backdrop, we have experienced a steady flow of European fund finance deals throughout the first quarter 2023 with a marked increase in deal flow from March onwards.

Our investment fund clients continue to look at sublines, NAVs, GP and hybrid facilities across their various fund structures. We expect to remain busy throughout 2023 considering the current market conditions and the continuing need to finance transactions, liquidity requirements and a desire to diversify funding lines.

Our Luxembourg team in particular has observed some interesting new developments and trends. Recently, there has been an uptick in Luxembourg-based funds with a dual general partner structure, where one general partner is a Luxembourg-incorporated entity and the second general partner is often an entity incorporated in another jurisdiction (frequently Delaware). While the intention is typically to have only the Luxembourg-incorporated general party carry out administrative functions and duties (including negotiating and entering into financing transactions for the fund), the wording of the relevant clauses in the fund's constituent documents is frequently less than optimal, particularly in circumstances where the non-Luxembourg general partner has not been foreseen and appointed at the time of the fund's initial set up. In such circumstances, uncertainty can arise when funds with a dual general partner structure negotiate and enter into financing arrangements, which inevitably involves close scrutiny of the approval documentation necessary for such transactions. In this regard, it is very important to review carefully any such fund's constituent documents (in particular the limited partnership agreement) and to resolve as early as possible any related issues among all legal advisors involved in the matter. Depending on the outcome of such analysis, the non-Luxembourg-

incorporated general partner may need to be involved with the negotiation, approval and / or entry into and execution of transaction documents, despite pushback on the borrower's side which may not necessarily have foreseen any involvement in such transactions by the nonLuxembourg-incorporated general partner.

Another interesting trend that we have observed is the increasing use of securitisation vehicles embedded within Luxembourg based fund structures. Luxembourg securitisation undertakings have served as popular vehicles for the implementation of structured finance deals since the Luxembourg legal framework dedicated to securitisation was introduced in 2004¹. The current trend is unsurprising since vehicles that fall within the scope of the Luxembourg securitisation legal framework can benefit from certain useful features such as, notably, the ability to create one or more ring-fenced compartments, whereby assets and liabilities of a given compartment are segregated, i.e. without joint and several liability between or among compartments, from those of the fund's other compartments. While practical from a legal perspective, we have historically seen that the use of such vehicles within a fund structure can trigger questions from foreign counsel and clients in the context of negotiating such financing arrangements. In this respect, the amendments to the 2004 law adopted last year² have been helpful, particularly because they removed certain historical limitations with respect to granting guarantees and security interests, both of which may now be provided, directly or indirectly, to any creditor.

Another positive market trend that we have observed is that Luxembourg practitioners seem to be moving more towards consensus with respect to the role of a fund's AIFM in the context of negotiating and entering into financing arrangements. After several years of frequently diverging views and reticence to discuss the meaning and scope of the risk and portfolio management functions, practitioners seem more readily inclined to anticipate and address these issues from the outset. In this regard, we are increasingly seeing the terms of fund documents (notably limited partnership and AIFM agreements) adopting a more standardised approach.

Of course, the specific terms of a given fund's constituent documents ultimately remain key for the purpose of determining whether (and, if so, to what extent and how) a particular fund's AIFM needs to be involved in the process of negotiating, approving and entering (including the execution of transaction documents) into such transactions.

On the market more generally, we understand that there are around 50 to 60 banks currently active in the market and supply side constraints remain due to banks (the main lenders in the market) hitting concentration limits, balance sheet capacity and risk-weighted asset requirements. An interesting development in the market is the publication of a draft ratings methodology by Fitch Ratings for the rating criteria of subscription-backed finance facilities. The draft methodology was out for consultation and closed on 19 March 2023.

This is potentially good news as it should help widen the lender base and ease supply side constraints as many existing active lenders in the market are reaching concentration limits and balance sheet capacity. Sub-line origination is now a very large market having grown hugely from US$400 billion in 2017 to around US$750 billion at the end of 2022.

Fitch will firstly examine the credit quality of the funds' LP pools using LPs existing ratings if they have them. For unrated LPs the proposed Fitch Ratings' methodology will assist market participants to assess the credit quality of sub-line facilities by analysing each level of the financing structure, being the manager, the fund and also the limited partner through certain key rating criteria, such as:

• The capabilities of the sub-line's originator / lender as well as the constitutional documents of the fund as well as the strength of the covenant package in the relevant facility.

• Public or private ratings assigned to the relevant LPs and an LP rating cannot be derived, the entity type and other factors based on the entity’s historic performance, assets under management and usage, and will then assign a tiered rating from 'CCC' to 'BBB-' per LP.

• LP capital call defaults and potential losses will be projected at the applicable rating levels at the maximum permitted borrowing specified in the fund documentation mainly based on LP rating assumptions and domiciles.

• Fitch Ratings will also review the manager (for example resources and scale and historical performance), fund (such as strategy, alignment with the manager and/or sponsor, funded percentage, performance and, default remediation provisions) and documented facility structure in order to adjust or cap the rating.

• Sensitivity to additional scenarios and stresses linked to the credit product will also be reviewed.

• Monitoring of performance will continue post initial rating in line with any updates to the collateral pool, structure and modelling, or changes to the manager. Ratings will be reviewed at least annually and on an ad hoc basis if material changes occur or macroeconomic conditions change.

This rating development could lead to the possibility of capital markets / structured finance exits in the secondary market for this historically buy and hold product, if the challenges of sub-lines relatively short term tenor and their revolving nature can be overcome. If such exits can occur, it would potentially broaden the investor base and ease supply side constraints as it could enable banks to deploy more capital at a time when banks are increasingly focusing on their capital adequacy requirements with Basel IV reforms. We understand that Fitch may also be looking at a NAV loan rating methodology.

We will be joined by members of our global fund finance team at the upcoming FFA Global Leadership Summit at the Belfry and also at the European Symposium in London where we hope to have the opportunity to connect with everyone and discuss these developments further.

For further details, please contact:

Jonathan Caulton +44 20 7466 1612

jonathan.caulton@maples.com

Cascading Pledge Arrangements in Irish Fund Structures

The Irish collective asset-management vehicle, more commonly known as the ICAV, is the most commonplace Irish fund vehicle in the fund finance market in Ireland. In a previous FUNDed issue, we discussed the key features of an ICAV, in its capacity as a borrower, in a subscription line financing.

In this article, we will be focusing on the Irish law security package for a subscription line financing, what the ICAV, as a non-borrower, can and cannot do and the alternative arrangements which are often key considerations for lenders and lead counsel jurisdictions in structuring the overall financing terms.

Can an ICAV give a guarantee?

An ICAV, as a regulated fund the subject of the Central Bank of Ireland's AIF Rulebook, is prohibited from acting as a guarantor on behalf of a third party, which includes another sub-fund within the same umbrella structure. The term "guarantor" is not defined, but in practical terms, it is understood to mean that regulated funds, though they can guarantee and secure their own obligations and the obligations of their wholly owned subsidiaries, cannot guarantee or give security for any third party's obligations.

It is important to emphasise that where there are multiple borrowers in a financing, which includes an ICAV or indeed another regulated Irish fund, the ICAV cannot cross guarantee or cross collateralise the obligations of any other borrower.

What is the alternative security package?

The impact of the guarantee restriction arises in transactions where an Irish fund is acting as a feeder fund to a third party master fund as part of a wider structure. The issue for the lender in a subscription line financing is that it cannot take direct security over the uncalled capital commitments and capital call rights of the Irish feeder fund, i.e. the Irish fund cannot act as a guarantor or third party obligor as might otherwise be the case in other jurisdictions. However, all is not lost as, what is commonly known in the market as, the "cascading pledge" arrangement can be availed of. A "cascading pledge" is essentially a series of security assignments that ensures

lenders have a route, albeit indirect, to the ultimate source of capital commitments. The ICAV feeder fund creates security over its uncalled capital commitments in favour of the master fund in order to secure its obligations to fund its capital commitments to the master fund and the master fund, in turn, makes an onward assignment of that security interest to the lender. In other words, a security assignment over a security assignment.

Set out below is a simple example:

The master fund, a Cayman LP, is the borrower (the "Borrower") under a subscription line financing with the lender. The lender needs access to / security over the right to call for capital in the investors in the ICAV sitting at the top of the structure as that asset is the primary source of repayment for the lender. In order to navigate the guarantee restriction on the ICAV granting third party security for the master fund's obligations to the lender, a "cascading pledge" arrangement is structured as follows:

• The ICAV has obligations to the Borrower to fund capital calls pursuant to the Borrower's Limited Partnership Agreement ("LPA").

• The ICAV gives security to the Borrower over: (i) the ICAV's rights to call for capital from the ICAV's investors (under the ICAV's subscription agreement) and it will also likely include security over; (ii) the ICAV's bank accounts (subject to jurisdictional considerations) into which investors in the ICAV pay the capital calls (the "ICAV Security").

• The ICAV Security secures the ICAV's obligations to fund capital calls to the Master Fund / Borrower pursuant to the Borrower's LPA.

• The Borrower then gives security to the Lender over: (i) the Borrower's rights to call for capital from the ICAV under the LPA; (ii) the Borrower's rights, title and interest under the ICAV Security; and (iii) possibly, the Borrower's bank accounts into which capital calls from the ICAV are paid. Such security secures the Borrower's obligations under the subscription line facility agreement to the lender.

This cascading pledge arrangement facilitates the lender, in an enforcement scenario, to step into the shoes of: (i) the Borrower and make a capital call under the LPA; and (ii) the ICAV (via enforcement of the Borrower's rights under the ICAV Security) and call capital from the investors.

We regularly see the above cascading security used in a variety of fund finance structures that contain upper-tier feeder funds, intermediate feeder funds and lower-tier master funds (these typically can include Delaware and Cayman LPs, Luxembourg funds, Irish funds and Irish SPVs).

What are the considerations in structuring a cascading pledge arrangement?

Many of the considerations for a cascading security package will be similar to those which would typically be considered when direct security is being taken over capital calls, such as who can call for capital / make the capital calls and whether the fund documents permit security to be granted over the uncalled capital commitments and capital call rights. As a result, the usual suite of side letters will need to be put in place with the AIFM, the administrator and the investment manager, as applicable albeit tailored to reflect the cascading pledge arrangements.In addition to the above and what is unique to the cascading pledge arrangement is that the feeder security documents will typically contain a specific acknowledgment clause whereby the feeder fund / ICAV will acknowledge:

(i) the financing being provided by the lender to the master fund as Borrower;

(ii) the cascading pledge arrangement in place and the onward assignment of its security by the master fund to the lender;

(iii) that the ICAV will cooperate with any requests for information from the lender; and (iv) that it will action any capital calls made at the request of the lender;

(iv) that it will action any capital calls made at the request of the lender.

This is all subject to the proviso, and stated for the avoidance of doubt, that notwithstanding any of the above, the feeder fund is not required to guarantee directly any of the obligations of the Borrower.

The terms of such acknowledgement would also usually be included in the above-mentioned side letters or security acknowledgments from any other parties who may be involved in the capital call process (e.g. AIFMs, investment managers, administrators).

As a result of the above, the feeder fund ICAV should not be a party to the subscription facility agreement. Consequently very little reference should be made to the feeder fund in the facility agreement other than, and importantly, the Events of Default being extended to include any default by the feeder fund under its cascading security documents and the corresponding condition precedent deliverables.

Does the cascading security structure apply to ICAVs only?

In short, the answer is no. It applies to other Irish fund structures including the Irish Investment Limited Partnership (the "ILP"), which is similar to partnership fund structures in other domiciles.

The ILP was modernised under the Investment Limited Partnership (Amendment) Act, 2020 and since its implementation in 2021, 29 ILPs have been established to date. We have seen the ILP in a number of cascading security arrangements owing to the same guarantee restrictions which apply to an ICAV applying to an ILP, albeit subject to tailoring the documents for an ILP as distinct to an ICAV.

The cascading pledge arrangement is a well-established security structure in subscription line financing which, with careful drafting and attention to detail, provides all the necessary protections to the lender.

For further details, please contact:

Elizabeth Bradley +353 1 619 2737 elizabeth.bradley@maples.com

Sarah Francis +353 1 619 2753 sarah.francis@maples.com

Alma O'Sullivan +353 1 619 2055 alma.osullivan@maples.com

Vanessa Lawlor +353 1 619 7005 vanessa.lawlor@maples.com

Lending to Jersey Cell Structures

Jersey has a wide choice of different entity types available, to cater for many different promoter requirements, including companies, LLCs, LLPs, unit trusts and three different types of limited partnership.

Among these options, the Maples Group Jersey funds team has recently seen a number of managers, from different parts of the globe, using cell structures for their Jersey funds and other investment structures. There are two types of cell structure available in Jersey, each with their different characteristics, and therefore, different considerations for lenders.

Cells Structures in Jersey – Available Options

The two types of cell structure available in Jersey are the 'Protected Cell Company' ("PCC") and the 'Incorporated Cell Company' ("ICC"), both of which are provided for in the main Jersey company law legislation: the Companies (Jersey) Law 1991, as amended (the "Companies Law").

Both PCCs and ICCs share the characteristics that generally make cell structures attractive to managers: once a structure is set up, they provide a quick and straightforward way for subsequent transactions to be carried out, each within a new cell with assets and liabilities segregated from the other parts of the structure.

In both cases, cells may be formed by passing a shareholder resolution, and each cell may have different shareholders and directors (as compared to the cell company and / or other cells).

PCCs

Jersey PCCs will be familiar to industry professionals, whether or not they have experience of using Jersey, as they are structurally similar to cell structures or segregated portfolio companies established in other jurisdictions. A cell

of a PCC is not itself a body corporate and has no separate legal personality, rather the PCC and all of its cells are together one legal entity. The assets and liabilities of each cell are separated from the other cells and the PCC through 'ring-fencing' provisions in the Companies Law. In addition, the Companies Law contains provisions designed to ensure that a creditor of one cell who gains access to the assets of another cell does not obtain an advantage or recourse to the assets of other cells.

ICCs

ICCs share many of the characteristics of PCCs. However, the key difference between ICCs and PCCs is that each cell of an ICC is a body corporate in its own right, with separate legal personality. Accordingly, each cell may act like an 'ordinary' company, including holding assets or suing / being sued in its own name.

Uses

Recent market activity has seen, for example, PCC structures being used by US managers setting up Jersey private funds, with the ICC structures often being used by Middle Eastern promoters to segregate different single asset investments.

Secured Party Position

One of the principal reason lenders have confidence in lending to Jersey structures is, as previously reported in this publication, the creditor-friendly Jersey law of security interests. Whether an ICC or a PCC structure is used, Jersey

law security can be granted over the shares issued by a cell, or over the uncalled commitment from each shareholder. In the case of security over commitments, such security can be perfected without a signed acknowledgment from the investor.

When taking security over shares issued by a PCC, or in general, lending to a PCC, a finance party will generally require that the PCC is the contracting party to finance documents (acting on behalf of the relevant cell), and therefore it is common to include limited recourse provisions making it clear that it is only the assets of the relevant cell which the lender has recourse to.

Conclusion

In some cases, PCC structures can, by virtue of being one legal entity, benefit from certain efficiencies relating to, for example, financial reporting. While cell structures with the characteristics of a PCC (whether or not Jersey structures) are extremely popular across the globe, there remains a perceived risk that the statutory ring-fencing of assets and liabilities between cells may not be respected in jurisdictions which do not themselves allow for cell structures. The Companies Law contains detailed provisions to minimise this risk with Jersey PCCs. However, for promoters or creditors for whom this remains a concern, the ICC offers an alternative based on structural protections against involuntary cross-default while maintaining the advantages of a cell structure.

In either case, a secured party will be able to take security in a familiar form, with only relatively minor adjustments.

For further details, please contact:

Mark Crichton +44 1534 671 323 mark.crichton@maples.com

Tim Morgan +44 1534 671 325 tim.morgan@maples.com

Paul Burton +44 1534 671 312 paul.burton@maples.com

Simon Hopwood +44 1534 671 314 simon.hopwood@maples.com

US Chapter 11 – Impact on Cayman Islands Security

We are often asked to consider the impact of Chapter 11 proceedings on Cayman Islands security, either at the outset of a transaction or in some instances, way down the line when the borrower group is in financial distress. Invariably, the question boils down to whether the Chapter 11 global stay will put a stop on a creditor's right to enforce its Cayman Islands security – but that isn't usually the end of the matter.

This article briefly outlines the position as a matter of Cayman Islands law, explains where and how Cayman Islands security is likely to arise in a transaction and the associated benefits, and highlights some of the allimportant practical aspects that can sometimes be overlooked.

Cayman Islands Restructuring Landscape –a Brief Overview

First, let's start by outlining the domestic insolvency and restructuring regime in the Cayman Islands. While a detailed overview is beyond the scope of this article, the salient points, when considering secured creditors' rights, are as follows:

• the primary restructuring tool is a scheme of arrangement, which is a court-led process that largely mirrors the English law equivalent and can be used to compromise dissenting creditors within the same class (but, importantly, there is no cross-class cram down);

• a scheme of arrangement is the mechanism by which creditor claims can be compromised, but it does not provide any interim protection for the debtor via a stay or moratorium on creditor claims;

• therefore, a scheme is typically coupled with either provisional liquidator or the appointment of a restructuring officer ("RO") under the new regime that was brought in last year;

• provisional liquidation and the RO regime are both flexible processes allowing the debtor to continue its operations for an interim period while a rescue package is worked out; and

• both include a moratorium on creditor claims but, importantly, the moratorium does not apply to secured creditors.

In summary, secured creditors will not be bound by any stay or moratorium under Cayman Islands law and will be free to enforce their security in accordance with its terms.

As an aside, it's also worth noting that, equivalent to the position under English law, there is no consolidation of debtors under insolvency and restructuring proceedings in the Cayman Islands.

Companies are dealt with individually and, while cooperation between insolvency practitioners of related companies is not uncommon, proceedings are still filed and dealt with on a company-by-company basis.

Recognition of Chapter 11 Proceedings

So far so good for secured creditors. But what about recognition of Chapter 11 proceedings in the Cayman Islands?

The Cayman Islands has not adopted the UNCITRAL Model Law on Cross-Border Insolvency and, therefore, Chapter 11 proceedings and the ensuing global stay will not be recognised by the Cayman Islands courts.

Non-recognition is the reason why debtors and supportive creditors often choose to institute parallel proceedings in the Cayman Islands in order to implement a restructuring or protect against the filing of competing proceedings. But, as noted above, secured creditors will not be bound by any stay or moratorium under Cayman Islands law, meaning that the rights of secured creditors to enforce their security will not be affected – and the bringing of parallel proceedings will not change this.

When will Cayman Islands security feature in a transaction, and what are the benefits?

In most cross-border arrangements that feature a Cayman Islands debtor, the number of Cayman Islands assets will likely be limited. As a result, there isn't much opportunity (or need) for Cayman Islands law-governed security. While all asset security can be taken under a debenture governed by Cayman Islands law, there are usually good reasons why this isn't considered desirable where all (or at least the valuable) assets are in other jurisdictions. So, from a Cayman Islands perspective, the focus is typically on security over the ownership interest in the Cayman Islands debtor – which, by its nature, is a Cayman Islands asset.

We'll use the example of a Cayman Islands exempted company, as this is a common vehicle in structured finance transactions, but broadly speaking the same principles apply to other vehicles (e.g. limited liability companies and exempted limited partnerships). Strictly speaking the security does not need to be governed by Cayman Islands law but convention is that it generally is – and, given the position of secured creditors under Cayman Islands law as we have seen, this has obvious benefits.

There is no statutory regime in the Cayman Islands governing the granting, perfection and / or enforcement of share security and, instead, the method of taking share security follows English common law principles. While a legal mortgage is possible, this is unusual – as it would result in the chargee (e.g. the lender or administrative agent) becoming shareholder in the company, and this is generally undesirable. Typically, therefore, share security takes the form of a charge or equitable mortgage over shares (practically speaking, there is not much difference between the two and the substance of the security will prevail). This security is equitable in nature, i.e. the chargor will remain legal owner of the shares but the chargee has the right to become the legal owner on enforcement, subject to the terms of the security.

The exercise of this right is an out-of-court process and, ideally, the terms of the security (and the constitutional documents of the company whose shares are secured) should permit enforcement without any consent or approval from the chargor or any other person. At its simplest, enforcement is achieved by executing the share transfer form provided at closing (more on this below) and delivering it to the registered office of the company whose shares are secured. Coupled with the absence of a stay on secured creditors' rights under Cayman Islands law, this puts the secured creditor in a much stronger position in an insolvency scenario compared to an unsecured creditor (or a creditor whose security is defective and / or not readily enforceable).

There are, of course, other benefits to share security (or its equivalent) that are certainly not unique to the Cayman Islands. In particular, it creates a single point of enforcement over multiple assets that may otherwise be desperate and therefore more difficult, costly and timeconsuming to enforce against. Instead of having to enforce over those individual assets, through a share charge (assuming it is a charge over all shares) ownership and control can be taken over the company and thus, indirectly, over those individual assets.

Admittedly this is a relatively blunt tool (it is not, for example, possible to cherry pick assets of the company or take the company with its assets but free of its liabilities). There may also be change of control or other issues that under the contractual arrangements of the company that could hinder enforcement. But it is nevertheless generally considered to be helpful, especially where there is value in the company as a going concern.

Share security (or its equivalent) also creates a neat way of separating the Cayman Islands debtor from the rest of the group – again, assuming it is a charge over all shares. It is possible, through enforcing the share security, to "hive-off" the debtor from the rest of the group.

This can, in theory, be particularly useful in a Chapter 11 scenario where the stay-behind group is subject to Chapter 11 proceedings and the secured creditor would like the option of extracting the Cayman Islands debtor and its assets. There are, of course, other (non-Cayman Islands) reasons why this might not be an appropriate course of action – but, as a matter of Cayman Islands law, there is no barrier to doing this.

Get the Deliverables Right

While each law firm will have their preferred form, generally speaking most Cayman Islands share charges will cover much of the same ground. The nature and extent of any representations and covenants (particularly those that apply pre-enforcement) is a matter for commercial negotiation, but only a limited number will go to efficacy of the security. The key, in most instances, is ensuring that the security is readily and immediately enforceable, on a unilateral basis, should an enforcement event occur. This requires the chargee to have the legal right to enforce, as well as the practical ability. For obvious reasons, the secured creditor does not want to be asking the chargor for assistance (even if it is obliged, under the terms of the security, to give it).A lot therefore depends on:

(a) the rights of the chargee under the security, i.e. whether the chargee has the right, upon enforcement, to transfer or otherwise deal with the shares;

(b) legal counsel having done the requisite due diligence on the constitutional documents of the company whose shares are secured (e.g. do directors have discretion to decide whether or not to register share transfers, or is there a lien on the charged shares – in which case amendment may be required); and

(c) the chargor having provided the requisite supporting documents (usually referred to as deliverables) at closing in order to facilitate enforcement.

It is important to note that: (i) there is no central registry or public filing in the Cayman Islands that perfects security over shares; and (ii) the terms of the security are open to negotiation and are, in essence, a contractual arrangement between chargor and chargee.

So there is understandably a lot of focus on what the security says and the deliverables that support it. In the context of share security, the key deliverables usually include:

1. all share certificates (if any) with respect to the charged shares;

2. signed but undated share transfer forms which can be completed and delivered by the secured creditor or its nominee on enforcement, and an accompanying letter of authorisation to the registered office provider with respect to such transfers;

3. an irrevocable proxy to vote and attend general meetings in favour of the secured creditor, exercisable on enforcement (coupled with a power of attorney set out in the security agreement);

4. if the security is over all the shares in the relevant Cayman Islands debtor, signed but undated director resignation letters and accompanying letters of authorisation;

5. annotation of the charge on the company's register of members (with a certified copy provided evidencing this annotation);

6. a letter of instructions from the company to its registered office ("RO Provider") and corresponding acknowledgment and agreement from the RO Provider under which, inter alia, the company instructs the RO Provider, and the RO Provider agrees, to register any transfer of shares in the company to or at the direction of the chargee upon the RO Provider having been notified that the security has become enforceable; and

7. a letter of undertaking and acknowledgment from the company to the chargee under which, inter alia, the Company acknowledges the security and agrees to maintain its register of members in the Cayman Islands and not to charge its RO Provider or appoint any administrator or similar service provider with respect to its shares.

The above are intended to allow enforcement to be quick and efficient, without involving the Cayman Islands courts. Some of these may not be provided on every deal, but others are absolute necessities that should always be provided regardless of any transaction-specific considerations. While the temptation can be to see them as boilerplate or backstops, they should instead be front and centre of the security – and shouldn't be forgotten about in the condition precedent checklist.

Summary

As we have seen, the Chapter 11 global stay will not, as a matter of Cayman Islands law, prevent secured creditors from enforcing their security – and there is no domestic equivalent in the Cayman Islands. This is usually wellreceived by secured creditors who may be concerned with how their security may be impacted in a downside scenario.

For this reason, use of a Cayman Islands debtor in the transaction structure can have advantages for secured creditors, particularly when coupled with Cayman Islands law security over the shares or other ownership interest in the relevant debtor.

Ensuring such security is well-drafted, and that proper diligence has been done, is key – and, importantly, emphasis should be placed on ensuring that the chargor has provided the right supporting documents so that enforcement can take place quickly and efficiently should it ever be necessary. Without these, secured creditors may find it harder to put theory into practice.

For further details, please contact:

Global Expertise

Combining the Maples Group's leading finance and investment funds capability, our Fund Finance team has widespread experience in advising on all aspects of fund finance and related security structures for both lenders and borrowers.

We advise on issues relating to taking security over assets, including shares, limited partnership interests and other forms of securities issued by British Virgin Islands, Cayman Islands, Irish, Jersey and Luxembourg vehicles.

For further information, please speak with your usual Maples Group contact, or the following primary Fund Finance contacts:

British Virgin Islands

Richard May +1 284 852 3027 richard.may@maples.com

Cayman Islands

Tina Meigh +1 345 814 5242 tina.meigh@maples.com

Dubai

Manuela Belmontes +971 4 360 4074 manuela.belmontes@maples.com

Dublin

Elizabeth Bradley +353 1 619 2737 elizabeth.bradley@maples.com

Hong Kong

Lorraine Pao +852 2971 3096 lorraine.pao@maples.com

Jersey

Paul Burton +44 1534 495 312 paul.burton@maples.com

London

Jonathan Caulton +44 20 7466 1612

jonathan.caulton@maples.com

Luxembourg

Arnaud Arrecgros +352 28 55 1241

arnaud.arrecgros@maples.com

Singapore

Michael Gagie

+65 6922 8402

michael.gagie@maples.com