CAYMAN ISLANDS: Your Investment Home Away From Home?

6 September 2012

CAYMAN ISLANDS: Your Investment Home Away From Home?

No, this isn’t a vacation brochure by any means but I’m glad that I got your attention! This week we would like to highlight a credit that’s familiar to most financial institutions within the world of emerging markets.

Given current market conditions, we feel that its yield of 3.51% (at current price of 115.50) in USD provides a much more attractive option than the estimated 3.36% yield on 7- year GOTT TTD paper.

Just so we’re on the same page, take a look at the terms below:

Issuer: Government of the Cayman Islands

Ratings: Aa3 (Stable)

Format: Rule 144A / Regulation S

Currency: U.S. Dollars

Principal Amount: $312,000,000

Maturity: November 24, 2019

Coupon Rate: 5.95%

Interest Basis: Payable semi-annually in arrears

CAYMAN 5.95% 11/24/2019 Price Trend

As you can see, the bond has steadily traded up over the period, barring Sept – Oct. 2011 when there was massive volatility marketwide, which could recur in 2012. We expect this uptrend to continue should no major systemic or credit events take place in the near future. Also, the credit remains in high demand given its solid rating and relatively low spend.

In terms of government structure the Cayman Islands form a British Overseas Territory with a large measure of self-government. Under the 2009 Constitution, the islands are administered by a government that is headed by a Governor, a Legislative Assembly, and a Cabinet. The Governor is recruited from the U.K. Government Service, serves as the British government administrator, and retains responsibility for the civil service, defense, external affairs, and internal security.

Economically, international finance and tourism are considered the Cayman Islands’ “twin pillars” of economic development. It is estimated that financial services represent 40% and tourism between 30%-40% of gross domestic product. (U.S. Department of State)

With no direct taxation, the islands are a thriving offshore financial center. More than 93,000 companies were registered in the Cayman Islands as of 2008, including almost 300 banks, 800 insurers, and 10,000 mutual funds. Nearly 90% of the islands’ food and consumer goods must be imported. The Caymanians enjoy a standard of living comparable to that of Switzerland. (Index Mundi)

In terms of prospects, RBC economist Marla Dukharan in Q1 2012 indicated that “while the expectations of the entire region are heavily influenced by the US’ fortunes, Cayman’s relationship with the US is more like a hand in glove. That’s not a bad thing in the current state of global affairs, given the relative strength of the US economy compared to the EU or the UK, but in the longer term Cayman should look to forge other connections to emerging countries in Latin America and Asia, Dukharan said.”

While the Cayman Islands remain susceptible to external shocks such as hurricanes (we are in the hurricane season) and contagion effects from the U.S., there are no suggestions that they will be unable to withstand the headwinds faced by several economies within the current context/ mantra of ‘extreme caution’ or ‘cautious optimism’. As stated earlier, the yield on the bond in USD surpasses the return on similar duration investments in TTD. Even if one were to point out the fairly small issue size (USD 312mm) in terms of potential liquidity constraints, the option to pick up bonds (or at the very least consider it) remains a very viable one. For more details by way of an offering memorandum or pricing, please feel free to give us a call.

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