Frequently asked questions
Ratings
Offerings are not rated
Ratings serve investors when:
• The credit worthiness of an offering stands in question due to complexity (e.g., credit worthiness depends upon the performance or balance sheet of an issuer) or
• Investors do not have the in-house expertise to assess credit worthiness themselves.
Rating agencies can only provide an opinion based on their analysis.
In the period since the global financial crises, insurance and banking regulators - across the globe - have called into question the validity and objectiveness of ratings on structured products and principal protected notes. In the United States, the Federal Reserve and the National Association of Insurance Commissioners have adopted policies whereby they will no longer accept ratings for use in the Risk Based Capital classifications, which determine regulatory capital reserve requirements for the institutions they oversee.
Stronghold designed instruments address these concerns.
• For each bond program, Pendragon sets up a dedicated segregated portfolio, a legal framework defined as bankruptcy proof to legal certainty.
• The segregated portfolio issues the bonds.
• At closing, the segregated portfolio places a portion of the purchase price of the bond in trust. The segregated portfolio, as issuer, directs the trustee to purchase instruments that will indisputably have the required values at the required times to meet all contractual obligations to the bond holders. The trust assets constitute Tier-1 reserves of the segregated portfolio that collateralize its embedded credit insurance which guarantees principal repayment of the bonds – a perfect asset to liability match. The Cayman Islands Monetary Authority (“CIMA”) requires this capital reserve adequacy.
Assets of each segregated portfolio stand as ring-fenced from the balance sheet of the forming company (Pendragon) and other segregated portfolios formed by Pendragon. RSM (Cayman) serves as Pendragon’s auditor and as “Certifying Agent” for each program to verify that each program has assets to satisfy its liabilities at all times.
What entity provides the credit insurance?
Each segregated portfolio issuing a bond provides fully collaterized embedded credit insurance, guaranteeing the repayment of principal, under Pendragon’s insurance and segregated portfolio company (SPC) licenses.
Pendragon’s credit rating?
Pendragon does not operate with or require a credit rating as its general account does not write insurance coverage.
All embedded credit insurance coverage that Pendragon writes gets written with respect to dedicated segregated portfolios that ring-fence the coverage and fully secure the obligations of the segregated portfolio to repay bond principal.
Under the conditions of its insurance license Pendragon maintains required regulatory reserves. The company holds additional reserves in its general account to address “black swan” events that might threaten its individual segregated portfolio programs.
Because each Stronghold-designed segregated portfolio holds assets in trust for the sole benefit of bond holders that indisputably produce the required payments at the required times to meet the embedded credit insurance obligations of each issuance, there is no circumstance under which the segregated portfolio will be unable to meet its obligation to repay bond principal as and when due.
Other features?
Stronghold and Pendragon believe that the bonds have a number of prospective investment merits, including:
• Anticipated favorable accounting treatment
• Reduced capital reserve requirements for certain investors
• Investment-grade debt class allocation
• Protections afforded by Cayman Islands Segregated Portfolio Legislation
• Potential yield enhancement
Regulatory requirements?
Full transparency.
Perfect asset to liability match for the program’s assets held in Trust for the sole benefit of bond buyers.
These assets represent the Tier-1 capital of the issuer against the issuer’s embedded credit insurance obligation to repay principal.
How does the issuer defease the risk?
Disclosure available under NDA.
Under NDA, prospective bond buyers will receive full transparency into all details of the programs.
This stands as a regulatory requirement of Pendragon’s licensed business plan.
Does a BBB expected return imply BBB risk?
No, these instruments do not have “BBB risk.” BBB risk carries a risk of total loss.
The issuer guarantees the return of principal. No BBB insurance risk or any other BBB instrument does that. The credit risk of Stronghold designed bonds is equivalent to the credit of the U.S. Government defaulting on its debts.
Program performance investments?
Disclosure available under NDA.
Prospective bond buyers will receive all underwriting and due diligence materials assembled by Stronghold and Pendragon.
This stands as a regulatory requirement of Pendragon’s licensed business plan.
Why the Cayman Islands?
The Cayman Islands government and CIMA, its finance, insurance, and banking regulator, has supported a policy of deliberate and prudent business innovation.
The Cayman Islands operates as a premier global insurance, banking, and financial center, well known and trusted by regulators, governments, and global business. Cayman has positioned itself as a leading reinsurance jurisdiction. It serves as the second largest domicile for the captive insurance industry and home to over 70% of the world's hedge funds. Cayman businesses represent the seventh largest foreign holding of U.S. Treasury securities and the 16th largest holder of international banking assets.
CIMA currently oversees 686 insurance companies, 158 banks 13,016 mutual funds, and 15,662 private funds.
The Cayman Islands segregated portfolio legislation provides a versatile legal framework within which to conduct business. Finance, investment, insurance, and commercial enterprises have embraced the legal framework to ring fence investments, projects, and a wide variety of risk.
The Cayman Islands, a British Overseas Territory, has a legal framework based on UK common law. Moody's has assigned a credit rating of Aa3 with a stable outlook.
The Organization for Economic Co-operation and Development (“OECD”) provides The Cayman Islands with the same rating for transparency and exchange of information as Australia, Bermuda, Canada, Germany, and Qatar. The Cayman Islands’ continued focus on balancing regulatory and commercial priorities with its adherence to the highest global standards has helped fuel continued growth of its financial sector.
CIMA has aligned its risk-based capital requirements for the insurance industry conducted in the Cayman Islands with those in the United States. Predominately U.S. facing, The Cayman Islands international insurance industry conducts 90% of its business in respect to North America-based coverage.
Despite its position as a global financial hub, Cayman Islands was included on the Financial Action Task Force (FATF) List of Countries having AML deficiencies. CIMA and The Cayman Islands Parliament have work with FATF to address these deficiencies and CIMA reports that they have corrected them.
The Cayman Islands has an established anti-money laundering/combating the financing of terrorism/counter-proliferation financing (AML/CFT/CFP) regime. The government has committed to strengthening its framework.
In October 2020, the EU removed The Cayman Islands from its tax blacklist after the Cayman Islands adopted new reforms to its framework on Collective Investment Funds.
Internal controls?
Pendragon operates as a relevant financial business with respect to CIMA’s anti-money laundering, anti-terrorist financing, anti-human trafficking, and sanctions monitoring oversight. As such, Pendragon is subject to oversight that is as rigorous as that anywhere on the globe. CIMA requires Pendragon to submit policy, process, and procedures to comply with its regulatory requirements and conducts regular compliance audits.
Pendragon’s key operational consultants, including its insurance manager, auditor, certifying agent, AML compliance, bank, trustee, and custodian all stand as regulated entities subject to compliance oversite.
Segregated portfolios?
Cayman Islands segregated portfolio legislation was originally designed for use by insurance companies. However, while protected cells are widely used in the insurance, reinsurance, captive insurance and insurance linked securities industries, it is also used in the banking industry and for certain general corporate commercial uses.
While segregated portfolios are similar to subsidiaries, they are not considered to be distinct legal persons from their forming entities. Consequently, licensing (e.g., insurance, banking, investment fund) governing the forming company and the regulatory obligations of the forming company extend to its segregated portfolios or protected cells.
Segregated portfolio legislation describes these protected cells as bankruptcy proof to legal certainty.
In practice this means, that if the forming entity or another segregated portfolio could not meet its obligations (even if in bankruptcy) went into receivership, it would have no access to the assets of a segregated portfolio’s assets, and vice versa.
The UK Privy Council has supported this position.
Risk?
Stronghold designed these instruments as senior fully secured debt instruments of an insurance company.
The (universally recognized) risk free assets providing the security stand as a regulated quantity.
Instruments designed by Stronghold do have certain risks (full risk disclosure available in associated Private Placement Memorandum), including:
Opportunity cost – An institutional investor assesses every investment in respect to other investments it has available to it. While Stronghold instruments guarantee a return of principal, they do not guarantee a return. That said, Stronghold-designed instruments present investors with an investment decision similar to those they would make in respective of the purchase of a convertible bond. A convertible bond provides the same principal risk as an ordinary corporate bond from the same issuer but not a return commensurate with a nonconvertible bond with the same credit risk exposure. Investors assess convertible bonds relative to their expectation that receiving a lower promised return, the investor will realize a higher total return if the conversion right proves to be valuable but also bears the risk that its entire investment will become worthless.
Stronghold-designed instruments present investors a similar set of criteria, by providing investors with a certainty that it will always receive back its investment and with the potential but not the certainty that it will receive a higher return that a risk-free asset would normally warrant.
No redemption – An associated project investment made by the issuing segregated portfolio that fails to meet its obligations could leave the segregated portfolio with insufficient resources to redeem the bond at the expected enhanced yield, but under all scenarios, the bond holder will receive back its entire principal.
Tier-1 capital, hold-to-maturity, & stable value?
As a senior full-secured debt instruments of an insurance company, Stronghold instruments qualify as Tier-1 capital for insurance, reinsurance, and bank bond holders.
CIMA, the program’s insurance regulator, requires fully transparency, with regard to the assets that collateralize the security,
The programs have a perfect asset to liability match.
A trust holds the collateral for the sole benefit of the bond buyers.
The instruments have no embedded derivatives.
These mechanics support every insurance and banking regulator’s requirement for Tier-1 capital treatment.
Note, German bunds received Tier-1 capital treatment under Solvency 2 and Basel 3 even when they paid negative interest rates – a guaranteed negative return.
Regulators place strict restrictions on the sale of Tier-1 capital carried as hold-to-maturity. If a regulated entity sells a hold-to-maturity instrument prior to maturity, the regulator can mark the entire hold-to-maturity portfolio to market. Regulators extend the benefits of hold-to-maturity (e.g., stable value), but they can take draconian action if a regulated entity treats it cavalierly.
Regulators do not treat a redemption (in this case by compensated prepayment), where the option to prepay sits with the issuer as a “sale” by the regulated bond holder. As such, a redemption does not adversely affect hold-to-maturity treatment.
What if a performance investment fails?
Stronghold and Pendragon vet performance investments for their capacity to enable the issuing segregated portfolio to redeem the bond within an expected period (typically 5-7 years).
Stronghold designed programs only make secured loans to projects.
Redemption of a bond requires that the bond buyer receive a compensated prepayment comprised of the return of principal plus a floating rate BBB return (calculated as the one-year US Treasuries yield plus 200 bps) through redemption.
If a project fails to meet its obligations to the segregated portfolio and the segregated portfolio recovers nothing of its investment in the project, the bond buyer will receive at minimum 31 payments of principal, which in total will equal the purchase price of the bond. If the segregated portfolio recovers something on its investment but not enough to redeem the bonds, the recovered amounts will accelerate repayment of the bond principal. Details of these payments and the instruments that support them available under NDA.
In any scenario affecting the instrument, the bond holder receives the value of and return generated by the assets held in trust over the life of the instrument or as part of a compensated prepayment.
A performance investment “failure” would not necessarily mean total loss of the loan amount, as a program would recapture a significant percentage of the senior secured loan to the performance investment in a foreclosure.
Will inflation erode a bond issuances’ return?
Stronghold designed instruments’ floating rate enhanced yield provides a hedge against inflation and interest rate risk by providing short duration to interest rate exposure.
Geopolitical factors, changing climate and weather patterns, energy, food costs, supply chain reconfigurations, and other factors compound the difficulty of forecasting future business cycles and thus interest rates. The floating rate can help to manage that uncertainty.
Fixed income buyers can continually roll their maturing issuances into new Stronghold designed bond issues to achieve attractive risk-adjusted returns, while controlling interest rate risk.
Can the issuer call the instruments?
No. The issuer can cannot call the bonds. The issuer can only redeem the bonds under the conditions of:
Returning the entire purchase price of the bond plus
Delivering a contracted compensated prepayment (e.g., equivalent to a BBB floating rate return - 200 basis points over one-year treasuries over the time the bond is outstanding).
Tax efficient?
The Cayman Islands has a longstanding tax treaty with the U.S.
The treaty treats interest on a Cayman insurance company's loans to a U.S. entity as qualifying for the treaty's portfolio interest exemption and thereby as not subject to U.S. withholding taxes.
The portfolio interest exemption and The Cayman Island's having no income tax of international businesses makes for a highly tax efficient offering.