Publicado en internet por Legalinfo-Panama
The Protected Cell Companies in a Nutshell
Intense competition among traditionally known "offshore" jurisdictions and "onshore" players, such as various States of the United States of America, have caused a visible trend on increasing innovation in the creation and evolution of legal structures, all with the aim of providing better and cost-effective financial services to the international markets. The Protected Cell Company, a multi-use corporate structure, constitutes a clear reflection of this legal-financial engineering dynamic phenomenon, whose success in the marketplace remains on challenge.
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i. There is no uniform meaning for "offshore jurisdiction". For purposes of this article I refer to the traditionally known low-tax/zero-tax jurisdictions like, for example, Cayman Islands, Bahamas, Channel Islands, the British Virgin Islands, Panama, etc., which impose either no tax or low rate taxes on extraterritorial operations carried out by entities incorporated in their respective territories.
ii. Available in many offshore jurisdictions such as the Bahamas, Cayman Islands, and the British Virgin Islands, the latter being the preferred choice for incorporation in the past recent years.
iii. According to the Business Insurance Captive Report, Bermuda had remained the largest captive domicile in the world, followed by Cayman Islands and, in third place, Guernsey. Despite new insurance, reinsurance and captive insurance legislation (Laws 59, 60, 63 of 1996) Panama remains far behind from the above mentioned jurisdictions. In the United States, for example, Vermont remained the largest captive domicile, followed by Hawaii, Georgia and Colorado (Business Insurance Captive Report, Vol. 34, Num. 18 of May 1, 2000 published at http://web2.westlaw.com October 21, 2000). See also Spurling, Richard; "Bermuda. A New Force in the Reinsurance Marketplace", The OFC Report 1996/97, Campden Publishing Limited, London, UK, 1996, p. 107.
iv. See, for example, Eaton, Chris; "Demand for Creation of New Offshore Products Increases", The OFC Report 1997/98, Campden Publishing Limited, London, UK, 1997, pp. 23-24.
v. These entities, under their Germanic name stiftungs, were originally created in Liechtenstein (1926). Panama adopted a similar but more flexible vehicle by means of Law 25 of 1995 (see the author's publication Las Fundaciones de Interés Privado en Panamá, (Private Interest Foundations in Panama), Portobelo Edit., Panama, 1997). Austria and the Netherlands Antilles followed path by adopting the privatstiftung and stichting, respectively.
vi. See Budd, Elizabeth; "Open-ended Investment Companies. An Emerging Form of Investment Fund", PLC Practical Law for Companies, Vol. IX, No. 7, Legal & Commercial Publishing Limited, London, Aug. 1998, pp. 29-37.
vii. These are trusts created under Cayman Islands Special Trusts [Alternative Regime] Law of 1997. As an alternate regime to the common law trust, this law allows the formation of purpose trusts and avoids the rule against perpetuities; see STAR Trusts by Antony Duckworth, edited by Gostick Hall Publications, 1998.
viii. I follow the provisions of these acts when briefly describing the structure, rights and obligations of a PCC.
ix. See "St. Vincent and The Grenadines. Law on Confidentiality, Insurance and Mutual Funds", The OFC Report 1999, Campden Publishing Limited, London, UK, 1999, pp. 149-150.
x. The financial services sector have become somewhat commoditized, thus in some circumstances the market refers to the available legal instruments in terms of "products".
xi. See Tamosius, Alwin; "The Enigma of Offshore Captives", The OFC Report 1996/97, Campden Publishing Limited, London, UK, 1996, p. 65.
xii. See Milroy, Robert; "Offshore Investment Funds in Jersey, Guernsey, and the Isle of Man", Offshore Finance U.S.A., Vol. 1, No. 1, March-April 1999, pp. 58-60. The Cayman Islands, for instance, have restricted the Segregated Portfolio Companies to the captive insurance business.
xiii. Using a multiple entities structure would entail multiplication of expenses.
xiv. I have defined "Securitization" as "the legal, operative, financial and structural process of transferring and packaging from an originating entity a group of determined predictable-cash-flow-generating assets into a distinct and separate pool - legally owned by a special limited purpose vehicle or conduit- which exclusively backs up debt, equity or hybrid securities or instruments issued by such separate entity, with the aim of reducing and reallocating risks inherent in owning or providing credit against the grouped underlying financial assets from the originating entity to investors in the capital markets"; see "Securitization in Panama", Independent Research paper on file with the Center for Law and Financial Markets (2001).
xv. See "Catastrophe Risk Securitization. Insurer and Investor Perspectives" by Glenn Meyers and John Kollar of Insurance Services Office, Inc.; "Insurance Securitization: The Developments of a New Asset Class" by Richard W. Gorvett, both papers presented at the 1999 Casualty Actuarial Society "Securitization of Risk" discussion program, http://www.casact.org. For literature on the use of SPVs and PCCs for securitizing insurance risks see, among others, "Special Purpose Risk Financing Vehicles", by Kate Westover, published at http://www.captive.com/service/srs/SPV_p4.html, October 4, 2000; Lisa Howard's article "Protected Cells Ease Access to Capital Markets", National Underwriter Property & Casualty-Risk & Benefits Management, Vol. 104, Issue 15, April 10, 2000; "Legal and Regulatory Issues Affecting Insurance Derivatives and Securitization", Practising Law Institute, November 1999, written by Michael P. Goldman, Michael J. Pinsel and Natalie Spadaccini Rosenberg; Shann, Jonathan; "The Art of Securitizing Catastrophe Risk", International Financial Law Review, August 1999; A. Levin, P McWeeney and R. Gugliada, "Criteria for Insurance Securitization", published at http://www.wtexec.com, October 4, 2000.
xvi. See "Illinois Among First to Pass Protected Cell Legislation", The Underwriters' Wire Report on June 18, 1999, published at http://www.uwreport.com/wire/news0699/0618ill.htm, October 6, 2000; and Illinois Insurance, The Regulatory Newsletter of the Illinois Department of Insurance, #5, October 1999, published at http://www.state.il.us/INS/1099/99octnet.htm, October 6, 2000).
xvii. Section 179A-5; see http://www.legis.state.il.us/ilcs/ch215/ch215act5articles/ch215act5Sub23.htm, October 4, 2000.
xviii. See http://www.rilin.state.ri.us/Statutes/TITLE27/27-64/S00004.HTM, October 4, 2000.
xix. See §6001 paragraph 22 of Chapter 141 Captive Insurance Companies under Title 8 Vermont Statutes Annotated, published at http://www.thinkvermont.com/business/captive/statutes.shtml, October 6, 2000.
xx. See Mark Hofmann's report "State regulators eyeing securitization developments" at Business Insurance, Vol. 34, Number 12, March 20, 2000.
xxi. See Giampaolo Salsi's comment on the roundtable panel discussion "The Renaissance in European Securitization", International Financial Law Review, August 1999, p. 25 and "Italy. The New Italian Securitization Law" by Giuseppe Scassellati Sforzolini and Roberto Bonsignore, published at Securitization Yearbook, International Financial Law Review, 1999, pp. 43-45.
xxii. For a discussion on the Chilean system see Martorell, Ernesto E.; Tratado de los Contratos de Empresa, (Treaty on Enterprise Contracts); María Alejandra Saldías Asun's thesis "Experiencias de Securitización en Latinoamérica" (Securitization Experiences in Latinamerica), Graduate School, School of Economic and Managerial Sciences, Universidad de Chile, M.S. in Finance, Fall 2000, Santiago, Chile; and Priscilla Fuica's thesis "Securitización" (Securitization), Graduate School, School of Economic and Managerial Sciences, Universidad de Chile, M.S. in Finance, 1999, Santiago, Chile.
xxiii. To allow diversification and levels of separateness between financial originators and the securitizadoras, under the Chilean law no securitizadora may hold in each separate patrimony more than 35% of the assets which were originated by the same bank or financial institution related to the securitizadora. The 35% threshold was established as an incentive for banking and finance institutions to join the Chilean ABS market (the original version of the law contemplated a 15% threshold).
xxiv. A Companhia Securitizadora (the securitization company), for comments see "O Instituto da Securitização de Créditos no Brasil" by Walter Douglas Stuber, Enrico Jucá Bentivegna and Henrique Bonjardim Filizzola, published at http://www.pavarini.com.br/secrefin.htm as of October 10, 2000. A list of the Brazilian regulations on the capital market may be seen at http://www.pentagonotrustee.com.br/legislacao.htm.
Brazil's mother nation, Portugal, also adopted the concept: sociedades de titularização de créditos (credit securitization companies); see "Portugese Securitization Law" at http://www.vinodkothari.com/seclawportu.htm; and "Portugal. A New Securities Code", Capital Markets Yearbook, International Financial Law Review, 2000, pp. 39-41, by Cristina Galhardo Vião.
xxv. Sociedades Securitizadoras (securitization companies), see http://www.pla.net.py/cnv/registros as of October 10, 2000.
xxvi. The trustee-issuers of the securities is known as "sociedades titulizadoras" (securitization companies), see González Torre, Roberto, "La Titularización de Activos a la Luz de la Ley de Mercado de Valores" (Asset Securitization under the Securities Markets Law), http://www.vinodkothari.com/sececuad.htm, September 28, 2000.
xxvii. Ecuador adopted the concept, notwithstanding by means of its new securities law of 1998 it eliminated the securitization companies and adopted the mortgage secondary market development corporations (corporaciones de desarrollo de mercado secundario de hipotecas), see González Torre, Roberto, "La Titularización de Activos a la Luz de la Ley de Mercado de Valores" (Asset Securitization under the Securities Markets Law), http://www.vinodkothari.com/sececuad.htm, September 28, 2000.
xxviii. See "Insurance Securitization Broadened" by William D. Boyd, http://www.namic.org/s/ey/naic1099is.htm, as of October 5, 2000.
xxix. According to reports shown at http://www.vinodkothari.com/secnews11.htm.
xxx. In this regard, I see no obstacle -for example- for Panama to adopt the PCC concept and thus allow these entities to fulfill the role of multi-series special purpose vehicles, by means of a special law. The following factors may support this position:
a) Panama's longstanding tradition in rendering offshore services;
b) Legislative experience in the adoption of foreign law concepts and traditions;
c) The existing flexible and modern legal regimes for captive insurance companies, captive management companies and reinsurance business;
d) The existence of a new and modern securities legislation (including regulations on mutual funds). See the author's article "Panama's New Securities Law in a Nutshell", published at http://www.legalinfo-panama.com, November 2000, and also at Patton Moreno & Asvat's website http://www.pmalawyers.com.
xxxi. Obviously, following the diversification criteria for the pools established by the rating agencies.
xxxii. "Tranching" and establishing levels of subordination among the different tranches is a way of enhancing the structure for the protection of investors. In this case, the subordinated tranche bears the default risk on the underlying financial asset, and only if the subordinated tranche and other forms of credit support are insufficient to bear the loss does the (investment grade) tranche carry any risk.
xxxiii. Even though I have not explore in depth the issue, with a clear regulatory framework and if properly structured, PCCs may be also used in the creation of timesharing schemes, by having each protected cell constituted with the different assets subject to the regime, securing each cell the rights of the various co-owners.