Quarterly Review


Coalition government divided on electoral system

A lengthy political wrangle over proposals to fundamentally change the Cayman Islands election system finished in a dramatic tie vote that raised questions about the unity of Cayman’s Progressives-led coalition government.

A private member’s motion to introduce “one man, one vote” single-member constituencies ended in a 6-to-6 draw vote with several government ministers absent from the Legislative Assembly chamber.

Legislative Assembly rules state that members must be in their seats when a vote is called by the speaker to participate. With several government members in the building but unable to get to their seats in time, only 12 of the 18 votes were cast. Two Progressive Party members voted in favor of the motion.

The Speaker of the House, Juliana O’Connor-Connolly, who joined the Progressives after the May 2013 general election, was forced to cast the deciding vote. Including her no vote the motion was ultimately defeated.

The motion called for 18 single-member voting districts to be implemented within three months. Currently Cayman’s six voting districts send between one and six members to the Legislative Assemble according to the number of voters in each district.

The Progressives party ran on a campaign supporting a move to “one man, one vote” single-member constituencies during the 2013 elections.

Opposition members said with the vote the Progressives had broken a campaign promise.

Opposition Leader McKeeva Bush and independent MLAs Ezzard Miller and Arden McLean, diametrically opposed on “one man, one vote,”  both said the Progressives government is not serious about implementing single-member voting districts before the next general election.

Premier McLaughlin said the government still supports single-member constituencies, perhaps just not in its “pure” form, with 18 or 19 members in separate districts.

He said his government needed more time to look at voting options, including the potential creation of at-large districts, in which Legislative Assembly members would receive votes from the islands’ entire voting population, rather than from the citizens of just one district.

For instance, the government could create 14 or 15 single-member districts that each sent one representative to the Legislative Assembly and another four or five at-large members, whom all voters in the Cayman Islands could elect. Such a system would end up with each elector having five or six votes to cast, but they would have an equal number of votes, the premier said.

Government rejected minimum wage

A legislative proposal asking the ruling Progressives government to accept a $5 per hour minimum wage was defeated in February with all government members and backbenchers opposing it.

However, Employment Minister Tara Rivers said during the debate on the private members’ motion that the government would bring forward a proposal for a minimum wage at an unspecified rate for consideration under the current provisions of the Cayman Islands Labor Law. Those provisions include the formation of a Minimum Wage Advisory Committee to recommend a base wage rate.

Rivers said the government felt that passing a minimum wage without conducting proper research into the matter would be reckless.

“As minister of employment, I am not interested in putting forward a regime without knowing how this will be implemented,” Rivers said during the debate on North Side MLA Ezzard Miller’s motion for the base wage rate. “[It is] incumbent on this government to try to determine what the potential effects of introducing a minimum wage would have on the [private] sector.”

Miller, who has put forward the same motion backing a $5 per hour minimum wage for Cayman before, said he was unsure whether that $5 figure was “correct,” but he said it was a place to start and “get it done.”

A minimum wage, Miller said, would be a step in the direction of preventing employers from “taking advantage of people from other countries with lower income levels.”

“[Employers] pay them these ridiculously low wages, which all of us know nobody can live reasonably well in this country receiving $2 and $3 per hour, and often having to work nine, 10, 12-hour days,” Miller said.

Minister Rivers questioned, with the current cost of living in Cayman, what the implementation of a $5 per hour minimum wage would achieve. She also wondered what such a proposal might cost in the short to medium term.

The National Assessment of Living Conditions report recommended several years ago the establishment of a minimum wage, but it did not state what that rate should be.

Although he did not speak on it in the assembly during the debate, Premier McLaughlin had stated his government’s intent regarding minimum wage proposals during the Cayman Economic Outlook forum in February.

“We will [implement a minimum wage] only on the basis of a proper assessment and advice,” he said. “We will proceed with care.”

Government incentives aim to attract shipping industry

Government is preparing a set of incentives to entice shipping industry companies to set up a physical presence in the Cayman Islands.

“The Cayman Islands is an ideal hub for the shipping and maritime industry that we intend to build upon,” Premier Alden McLaughlin said.

Speaking at the second Cayman Islands Shipping Summit in March, McLaughlin said the development of the shipping industry would provide new opportunities for employment in human resources, transportation, logistics, communication, naval architecture, surveying and research and development.

“Our government is firmly committed to introducing a framework of incentives to attract maritime services companies more efficiently and cost-effectively to set up a substantial physical presence in the Cayman Islands,” he said.

Government is in discussions with special economic zone Cayman Enterprise City to determine how best to introduce the appropriate framework within a short period, McLaughlin said.

The incentives could be delivered to the shipping firms through a marine services park that would be part of the special economic zone.

Zone companies can take advantage of Cayman’s tax benefits in combination with reduced red tape, lower registration fees and no work permit fees.

Cayman Enterprise City CEO Charlie Kirkconnell said there is already interest from a number of companies to create a physical presence in the proposed park.

Currently, only companies from defined sectors, including IT, Internet, media, commodities, derivatives, biotechnology and education, are able to establish their business in Cayman Enterprise City.

To accommodate marine services companies in the special economic zone, government would need to pass an order in Cabinet extending the types of companies that can set up a physical presence in the zone.


(Left – right:  Alden McLaughlin; McKeeva Bush; Sheree Ebanks; Ezzard Miller; Arden McLean)


Credit rating remains high

Rating agency Moody’s has maintained the credit rating of the Cayman Islands with a stable outlook. In its latest ratings report, Moody’s listed Cayman as retaining an Aa3, indicating a very low credit risk, for example, for investors who have bought bonds issued by the Cayman Islands government. It is the fourth highest of 10 ratings that are considered investment grade and of 21 ratings in total.

According to Moody’s, Cayman’s high per capita gross domestic product of $53,037 in 2012 is a key support of the rating because it increases the ability to deal with natural disasters such as hurricanes.

The rating agency expects a modest economic recovery for 2013 and 2014 at a growth rate of 1.5 percent.

Meanwhile, a sensible macroeconomic approach explains the high economic development and low debt burden compared to other rated jurisdiction, according to Moody’s.

“The main industries, off-shore financial services and tourism, are very well established and, barring major structural changes, should continue ensuring modest rates of growth in the medium term. Diversification efforts and private investment could bolster growth going forward and there are a few major projects in the pipeline.”

Moody’s named in particular Cayman Health City, Cayman Enterprise City, and the plans for a cruise pier as initiatives that could both bolster existing industries and diversify the economy.

Global tax transparency initiatives are unlikely to affect the financial industry, Moody’s noted. “Cayman’s authorities have proven adept at satisfying all such requirements, and our base scenario is that they will continue to do so.”

Other factors supporting the rating were Cayman’s strong institutions and a long history of policy consensus. “The United Kingdom (Aa1) provides further institutional support through fiscal oversight and ultimate judicial review,” the ratings agency said.


Government finances  

The rating agency predicts that Cayman’s debt burden will decline to a debt to GDP ratio of 22.4 percent in 2013 and 21.9 percent in 2014, after peaking at 24.5 percent in 2011.

Government’s estimated fiscal surplus of 3.6 percent of GDP in 2013 in Moody’s view indicates “a gradual convergence to the government’s goal of a balanced budget.”

Interest payments as a percentage of government revenues, a key measure for Moody’s of government financial strength and debt affordability, have increased to 6 percent in 2012 from 1.8 percent in 2006, but remain relatively low.

However, government has renegotiated the interest terms for five existing loans held with local commercial banks. The new, lower fixed-term interest rates will result in interest savings of $6.2 million over the next 10 years, the Ministry of Finance and Economic Development said.

The five loans totalled $88.4 million on Nov. 30, 2013, and the new lower fixed-term annual interest rates range from 1.25 percent to 2.71 percent, down from levels of 2.82 percent to 4.25 percent for the preceding five years of 2008-2013.

The interest rates are now fixed for the remaining life of each of the five loans.


Finance industry

Activity in the finance industry presented a mixed picture in 2013.

The total number of hedge funds increased by 5 percent to 11,379. However, this included master funds, which did not have to be registered before 2012. Excluding master funds, the number of funds actually declined by 2.3 percent, the lowest figure since 2007.

The number of banks and trust licenses continued its decline, dropping by 4 percent to 213. In contrast, bank cross-border deposits recovered, according to the latest available figures. Cayman still ranked fifth and sixth globally in terms of cross-border liabilities and assets, respectively, a position that reflects its status as a global financial intermediary.

The captive insurance sector in turn remained fundamentally solid. Following a strong 2012 with 53 licenses granted and the largest number of new captives since the hard market of 2004, 2013 continued to show steady growth. A combined total of 39 new licenses resulted in a 3 percent increase, with the total number rising to 761. Total premiums of US$12.6 billion and total assets of US$69.2 billion as of Dec. 31, 2013, remained strong.

The number of trust companies saw a modest 1.4 percent drop, but this was offset by the growth of controlled subsidiaries (13.3 percent) and private trust companies (14.3 percent).

New company registrations also experienced a resurgence in 2013 with 9,433 new companies registered, a 5.2 percent jump over 2012. It was the highest number of new formations since 2008 (11,861). Active companies on the register reached a record high of 95,530 last year.

New partnership registrations increased 16.25 percent in 2013 (2,368) and surpassed the previously highest annual number of 2,188 from 2008. Active partnerships on the register reached a record high last year at 14,355, compared to 12,947 in 2012. 




Tourism was one of Cayman’s major economic drivers last year, despite a contrasting performance in stay-over and cruise tourism. As air arrivals soared to near record highs, cruise arrivals dropped to a 10-year low.

The total 345,387 stay-over visitors were just 10,000 shy of the record and still the best result since 2000.

Cruise tourism, an important source of revenue for tour operators, taxi drivers and other small businesses, on the other hand, struggled with the worst arrival figures since 2001. But a turnaround is expected for 2014 and 2015 as bookings have improved and new itineraries will come online. Further improvements will hinge on the ability to develop a cruise berthing facility, despite constrained government finances.

Tourism Minister Moses Kirkconnell is confident that the upward momentum will continue in the coming years.

“I am very pleased with the solid increase in air arrivals, which represents our best arrival figures since 2000, and I am optimistic that the proposed airport enhancements, in collaboration with our ongoing marketing initiatives, will help to maintain the positive momentum,” he said.

Better airlift, accessibility and a better visitor experience will be key to improving the numbers.

 “In terms of cruise visitation, while the reduction in passengers is regrettable, it underscores the critical importance and necessity for the cruise berthing facility, which my ministry is working exceedingly hard to bring about, to help balance cruise arrivals with stay-over arrivals,” the tourism minister said.
Work permits 

In January 2014, the number of work permits tumbled 4 percent compared to four months earlier, as 550 former Term Limit Exemption Permits holders left the islands. Another 300 work permit holders decided to leave at the same time.

As a result, total work permit numbers of 19,793 (end of Jan. 2014) are now even lower than at the end of 2011, the year which saw the nadir of work permit numbers during the past 10 years. The last year work permit numbers were lower at the end of a calendar year was 2003.


Financial services

CLO market activity returns

The U.S. market for collateralized loan obligations, securities that are backed by different types of loans mostly to below investment grade companies, surged in 2013.

The total number of U.S.-based CLO deals in 2013 was up 56 percent over 2012, according to a report by law and fiduciary firm Appleby. The CLO Insider report noted that the 182 CLOs issued in 2013 represented a total value of US$86 billion, surpassing the total issuance for 2012 by US$33.5 billion. The average deal size also increased by 5 percent in 2013 compared to 2012.

The return of this type of securitization is significant for the Cayman Islands, which dominated the market before the financial crisis, as more than 90 percent of the transactions are estimated to be structured using special purpose vehicles registered in Cayman.

Appleby predicts steady activity through 2014 and that the U.S. CLO market will remain similar to 2013

In the second half of 2013, deal activity slowed from 96 to 86 transaction with the average deal size of US$464 million 3 percent lower than in the first six months of the year.

In the wake of the financial crisis, CLO issuance had dropped significantly from nearly $100 billion in 2007. In particular, more complex structured credit transactions were blamed for exacerbating the credit crisis. However, as The Economist argued in February, not only CLOs but securitization in general is making a comeback. Policymakers and regulators want to rehabilitate parts of the market for its ability to generate more lending activity, which, it is hoped, will kick-start ailing economies.

Banks that are subject to higher capital requirements designed by regulators to make them safer are looking to CLOs and other securitization instruments to move assets off their balance sheets. The resulting improved capital ratios will allow the banks to issue more loans.

Current CLO deals are different from the pre-crisis days. New CLO transactions feature higher levels of subordination, tighter collateral eligibility requirements, and shorter non-call and reinvestment periods, Appleby said.

The firm’s report forecasts the total deal value for 2014 to range from US$60 billion to US$80 billion, but notes that new risk retention rules, which may take effect in the first quarter of the year, could impact the market.

Cayman led offshore M&A in 2013

The Cayman Islands remained the most popular jurisdiction for mergers and acquisitions in the fourth quarter of 2013, with a 6 percent increase in the number of deals and a 16 percent jump in the total deal value over the previous quarter, according to law and fiduciary firm Appleby.
Appleby’s Offshore-I report, which tracks M&A activity in major offshore centers, noted considerable quarterly gains across jurisdictions in the number of deals, their cumulative value and average deal size.

“Cayman is starting to see heightened deal activity in the M&A space across all sectors, particularly oil and gas and financial services,” said Simon Raftopoulos, a Cayman-based corporate partner at Appleby.

“Generally, there was more confidence in the funds market, contributing to a strong 2013 and active fourth quarter.”

During 2013, Cayman companies dominated offshore M&A activity as the target for most deals in three of the four quarters. In the fourth quarter, Cayman targets represented more than a quarter of the transactions and a third of the total deal value.

In the last quarter, the Cayman Islands saw 168 deals with a combined worth of $15.6 billion, compared to 158 deals worth $13.4 billion in the previous quarter. When compared to the same quarter a year ago, the volume levels remain broadly consistent, but value is more than $4 billion higher than during the same period in 2012.

In the quarter’s largest offshore transaction, worth $2.4 billion, Cayman-incorporated telecommunications service provider HKT acquired Bermuda-based telecoms group CSL New World Mobility. The quarter’s only other $2 billion-plus deal also involved a Cayman entity, the takeover of Cayman-based Coastal Energy, an oil exploration business, for $2.2 billion.

Bermuda experienced unusually high deal activity as an offshore target and more than doubled the value of transactions involving Bermudan entities, almost equaling Cayman in terms of deal value.

For the year, offshore companies have been busy and were involved in transactions across a wide range of sectors and geographies, Appleby said.

Improving equity capital markets, more IPO activity and a growing frequency of deals in the $1 billion-plus range were the notable features of 2013, the law firm said. The cumulative 12-month deal value of $151 billion of 2013 was surpassed only three times during the past decade.

“While the final quarter of the year is typically the busiest, every one of the principal indicators has progressively improved,” said Cameron Adderley, partner and global head of Corporate and Commercial. “Indeed, the global M&A environment is fragile and to an extent lacks depth, but we can’t help but view these year-end numbers as positive.”

In the fourth quarter, offshore markets ranked sixth among world regions for deal volume, fifth for deal value and third for average deal size. Only North America and South and Central America came in with a higher deal average, the report showed.

CISPA welcomes new CEO

The Cayman Islands Society of Professional Accountants elected a new board and welcomed the organization’s new CEO, Sheree Ebanks, at its annual general meeting Feb. 27.

Past president Graeme Sunley looked back at a successful 2013, when CISPA was formally admitted as a full member of the International Federation of Accountants.

“Full membership of IFAC is a big thing for us and it elevates CISPA’s standing on the global stage,” he noted.

However, full membership also means increasing obligations and a general raising of the bar for CISPA members and practitioners. Sunley said a couple of examples of this were evident in 2013, when ICAEW completed a first round of quality inspections at a selection of Cayman’s accounting firms.
“The results were really positive,” he said. According to the ICAEW review cycle, each firm will be visited at least once every three years.

Reviews of the continuing professional development at the accounting firms were not perfect, he said, but CISPA will work with the membership to help improve professional development programs.

Due to the size of the organization and its increasing role in regulating the profession, Sunley said, the organization decided to appoint a chief executive officer for the first time.

“We have got nearly 1,000 members. We have got a growing role in regulating our profession, a growing role in monitoring the quality in our profession and we have got a growing role in promoting and speaking for the profession locally and internationally,” he said.

“To date, CISPA has been run by volunteers,” he said. “I think the executives have done a terrific job … but I do also think there is a logical next step for CISPA to move to the next level. And part of that is making the decision to move forward with a CEO.”

The CEO, Sheree Ebanks, said CISPA “has huge potential to really drive the discussion on the sustainability of the financial services sector in Cayman.”