Quarterly review

Cayman retained leadership in offshore deals in 2014

Cayman once again topped the league table for offshore deals in 2014. Law firm Appleby’s latest Offshore-i report, which covers mergers, acquisitions and IPOs in the major offshore financial centers, found that 2014 was a peak year for offshore M&A activity, with 2,687 deals worth US$277 billion. 

Last year, Cayman dominated offshore deals in the technology sector, not least as a result of the $21.8 billion listing of Alibaba Group, the Chinese Internet firm incorporated in Cayman, on the New York Stock Exchange in September. In another major technology transaction, Giant Interactive Group of Cayman was sold to a Chinese investment consortium for $3 billion.

In terms of overall deal volume last year, Cayman clearly led Bermuda, the BVI and Hong Kong, which were trailing on equal footing. In value terms, Bermuda attracted $20 billion of deals, 29 percent of the offshore total, followed by Guernsey and Cayman. 

Simon Raftopoulos

“Cayman undeniably played a key role in what was the best year for offshore-targeted M&A and IPOs in the past decade,” said Simon Raftopoulos, a Cayman-based partner and member of the firm’s corporate finance and insurance teams.

“In each quarter of 2014, Cayman attracted the highest volume of offshore M&A transactions and the jurisdiction was also home to some of the year’s biggest deals in terms of dollars spent.”

In the last quarter of 2014 the average deal size was $110 million, the second highest quarter of the year, but also the fourth highest quarter in the past 11 years. As a result, an average deal size of $103 million made 2014 a record year. 

There were 12 deals worth at least $1 billion each in the period, and 49 in total during the year, compared to just 28 throughout 2013. 

Appleby’s outlook for the offshore transactions is mixed. 

“U.S. President Barack Obama called the end of the financial crisis in his State of the Union address in January, and that is a sentiment we tend to share,” said Frances Woo, group chairman of Appleby. 

“But still, global financial markets are far from stable and capable of seriously unsettling dealmakers at short notice. Faltering growth in parts of Asia, ongoing government austerity programs, fluctuating oil prices and a pending general election in the United Kingdom, may all have the capacity to dampen M&A activity during 2015,” she said.

Record year for US CLO issuance

Issuance of collateralized loan obligations reached a record high US$123.8 billion from 237 deals in 2014, according to a separate report by offshore law and fiduciary firm Appleby.
Sales of the debt securities comprised of leveraged loans made to low-rated companies even exceeded the levels during the credit boom before the financial crisis in 2006.

Issuance of new CLOs surged last year as companies took advantage of low refinancing costs and investors looked for higher yielding assets. The asset class has experienced a remarkable resurgence since 2008, when only eight deals worth $3.2 billion were issued. In 2013, 188 CLO deals were sold for a total value of $89 billion, the CLO Insider Report for the second half of 2014 noted.

Despite the record issuance, new regulations, including Dodd-Frank risk retention rules, the Volcker rule and requirements under Basel III, may slow growth next year.

The 2010 Dodd-Frank financial law requires banks and other firms to retain some of the risk from asset-backed securities they structure, manage and sell to investors. The final rules stipulate that CLO managers have to retain a 5 percent interest in the loans underlying the securities.

While regulators have warned of the creation of another debt bubble, the Loan Syndications and Trading Association said today’s deals are safer than their pre-crisis counterparts, and most of the new CLOs are refinancing older ones rather than funding new deals.

The industry body has lobbied regulators hard not to impede the CLO market, saying that risk retention rules would disproportionately punish a market segment that, unlike the more complex collateralized debt obligations, was not involved in the credit crisis, and that provides important financing to below investment grade companies.

In Europe, CLO deals have recovered from a post-financial crisis low, but issuance is still well below the €35.5 billion (US$41.8 billion) high issued in 2006.

Government launches FATCA portal

The Cayman Islands Department for International Tax Cooperation has launched an Automatic Exchange of Information portal that allows Cayman’s financial institutions to register and report customer data under the U.S. Foreign Account Tax Compliance Act. 

FATCA is a U.S. tax-reporting initiative that forces financial institutions and certain nonfinancial entities worldwide to report bank accounts and ownership interests of U.S. taxpayers or face a 30 percent withholding tax on transactions with the United States. 

In December 2013, Cayman signed a FATCA Model 1 intergovernmental agreement with the U.S. which stipulates that entities in Cayman report this information to the Cayman Islands government rather than send it directly to the Internal Revenue Service. The government developed the new website to receive and collect the data from local institutions and then transfer the records to the IRS. 

The portal will also enable the filing of tax information in relation to the U.K.’s version of FATCA beginning in 2016 and to other countries that have signed up to the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters and its common reporting standard from 2017.

Minister for Financial Services Wayne Panton said the multilateral exchange of tax information is now a global standard. “It is not one that Cayman is simply adopting on its own initiative. 

Wayne Panton

“Cayman as a player in the world’s financial architecture needs to meet global standards and comply with global obligations. That’s why the launch of this portal is very important to us. We can safely say that we are ready.”

Cayman’s significant role in the international financial system “is evidenced by the fact that we have the highest number of financial institutions that are registered with the IRS under U.S. FATCA,” Minister Panton added.

A total of 28,559 financial institutions registered under FATCA come from Cayman, according to an IRS online database. This means Cayman’s finance industry represents 18.27 percent, or nearly one fifth, of all registered reporting institutions under the U.S. law.

Reporting institutions under FATCA first have to register with the IRS and obtain a Global Intermediary Identification Number before they can register with the new portal and upload their U.S. customer or client data.

The portal can be accessed through a link on the Department for Tax Cooperation website.

The portal is not Cayman’s first foray into the automatic exchange of tax information. Cayman has automatically reported interest income for EU citizens from Cayman Islands bank accounts under the EU Savings Tax Directive since 2005. However, the OECD’s common reporting standard and FATCA will collect much more taxpayer income data and they will be much wider than existing individual exchanges of tax information on request on the basis of bilateral agreements.

“The common reporting standard will become the new global standard for the exchange of information for tax purposes. This does not mean that the method of exchange of information on request will cease in the future. But automatic exchange of information is the standard against which all jurisdictions will ultimately be assessed,” Duncan Nicol, the head of the Department of International Tax Cooperation, said. 

More than 90 countries have committed to implementing the new global standard and the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes will establish a peer review process to ensure the implementation of automatic tax information exchange. 

Last year, Cayman was one of 51 countries that signed the OECD Multilateral Competent Authority Agreement. The agreement activates the automatic exchange of information based on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Early adopters like the Cayman Islands have pledged to work toward launching their first information exchanges by September 2017. Others are expected to follow in 2018.

Caledonian bankrupt and in liquidation after SEC files lawsuit

After more than 44 years in business, Cayman bank Caledonian filed for bankruptcy in February, just days after the U.S. Securities and Exchange Commission filed a law suit against Caledonian Bank, Caledonian Securities and three other broker dealers in Belize and Panama in connection with sham stock offerings and penny stock pump and dump schemes that allegedly netted the orchestrators of the fraud US$75 million.

As of January 2015 Caledonian Bank had total assets of approximately US$585 million, about 1,550 customers and nearly 1,900 active accounts.

After U.S. courts froze all of Caledonian’s U.S. assets, depositors tried to withdraw US$68 million in a virtual run on the bank and all banking operations were suspended.

The Cayman Islands Monetary Authority placed the bank in controllership on Feb. 10, four days after the lawsuit was filed by the SEC, and revoked Caledonian’s banking license on Feb. 16.

The bank’s controllers filed for bankruptcy protection in the U.S. Bankruptcy Court of the Southern District of New York on Feb. 18 and later in Australia to prevent depositors from taking legal action in these countries before proceedings in the Cayman Islands are resolved.

The Cayman Islands Grand Court first confirmed the CIMA-appointed controllers and on Feb. 23 ordered the winding up of Caledonian Bank and Caledonian Securities making the controllers joint official liquidators of the two entities.

Caledonian and its co-defendants Clearwater Securities Inc. and Legacy Global Markets SA in Belize and Verdmont Capital SA in Panama are accused of offering stocks for sale to investors in the U.S. without the required registration of the shares for public sale.

The SEC alleges that shares in four shell companies – Swingplane Ventures, Goff Corp., Nostra Energy and Xumanii Inc. – were subject to bogus registration statements that purported the stock had been sold to public shareholders in Serbia, Mexico, Ireland, Norway, Panama and Jamaica.

The agency claims that the stock offerings were a sham and the shares remained in the control of the issuers and their affiliates. The restricted securities were then “passed off” as free-trading shares and sold to the public in the United States in alleged violation of Section 5 a) and c) of the Securities Act.

Caledonian’s co-defendant Verdmont later claimed that as broker it was exempt from Section 5 because it had made a reasonable inquiry into the circumstances of its customers’ proposed sales. 

The Panamanian broker which submitted evidence of its know-your-customer compliance and enquiries into whether the shares were restricted in any way subsequently had its freezing order reduced from $19 million to $2 million.

The reduction raised questions over the size of the $76 million freezing order for Caledonian – apparently double the estimated turnover of four alleged penny stock pump-and-dump schemes traded through Caledonian Securities – which directly contributed to the bank’s bankruptcy.

On March 23, six weeks after the collapse of the bank, the freeze order was reduced to $7 million.

Caledonian Trust and Caledonian Directors Ltd., two Caledonian entities that were not put into controllership by CIMA, were sold in March to Bahamas-based Sterling Financial Group.



Caledonian House, George Town
Previous articleThe invisible increase in real income
Next articleQuarterly review
Michael Klein
Michael Klein Editor Compass Media Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: [email protected] Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

Compass Media Ltd

Cayman Financial Review is the only magazine which promotes the Cayman Islands financial services industry at a local and international level. The Cayman Financial Review is published quarterly and is distributed in print and online to organisations and associations worldwide as well as at key financial conferences. Over 30,000 online and targeted printed copies are distributed to clients, their nominated local and international contacts, relevant conference participation lists and a current researched international contact list continuously updated and prepared by Compass Media Ltd. In addition the product has a fully integrated website, a link of which will be sent to ‘Top 500’ legal, accountant, government, insurance, financial service and hedge fund contact list in United States, United Kingdom, Europe, South East Asia, Dubai and the South Americas.
The Compass Centre Shedden Road PO Box 1365 GT Grand Cayman Cayman Islands British West Indies KY1-1108 T: +1 (345) 949-5111 F: +1 (345) 949-7675 W: www.caycompass.com