Cayman-issued securities still in demand in the US

In 2008 US holdings of foreign securities dropped by 40 per cent amidst the impact of the financial crisis, according to a preliminary report released by the US Treasury Department on Monday.

US investors held a total of US$4.3 trillion in foreign securities in 2008 down from US$7.2 trillion in 2007.

Debt and equity securities originated in the Cayman Islands alone accounted for US$315 billion of the total of US$4.3 trillion. This makes Cayman the fourth largest target country for US security investments behind the UK (US$647 billion), Japan (US$403 billion) and Canada (US$378 billion) but well ahead of large economies such as France (US$285 billion) or Germany (US$255 billion).

As a result, Cayman maintained its position from 2007. However, the total value of US holdings of securities from the Cayman Islands declined by 42 per cent with equity securities losing 59 per cent in value and short-term debt securities falling by 56 per cent. In contrast, the value of US holdings of Cayman long-term debt only decreased by 25.5 per cent to US$202 billion.

The vast majority of investments attributed to the Cayman Islands consist of securities issued by companies that are incorporated in the Cayman Islands but that maintain their centre of economic activity elsewhere.

In 2007, approximately a fifth of Cayman Islands-issued equity held in the US was in the form of fund shares.

US investments in long-term debt issued by Cayman-resident issuers consisted largely of asset-backed securities, as Cayman has long been known as a premier offshore centre for securitisation.

In 2007, before the financial crisis seriously affected the securitisation market, asset-backed securities accounted for nearly three-quarters of US investors’ holdings of long-term debt issued through the Cayman Islands.

Maples and Calder estimates that five per cent of over 18,000 companies registered at Ugland House are wholly owned by US citizens. The law firm approximated, on the request of the US General Accountability Office, that according to their billing addresses, between 40 and 50 per cent of the entities at Ugland House are US-related. However, ownership is difficult to assess for entities related to investment fund or structured finance activities.

Nearly a quarter of the entities registered at Ugland House in 2008 were structured finance vehicles used for securitisation or related to project finance.

According to Maples and Calder, 38 per cent of the entities were of a general corporate nature and included trading companies, joint ventures, holding companies, wholly owned subsidiaries and captive insurance companies.

The remaining 38 per cent of the registered entities were some form of hedge fund or private equity fund, the GAO report said.

Currently, a total of 9,825 investment funds are registered in the Cayman Islands. The large number explains why Cayman is conversely also the fourth largest holder of debt and equity securities issued in the US.

A Treasury Department report from April 2009 showed that in June 2008 Cayman-based investors or custodians held US$832 billion in US-issued securities. Only Japan (US$1,250 billion), China (US$1,205 billion) and the UK (US$864 billion) were larger investors in US-issued debt and equity securities.