What is an SPV?
Special Purpose Vehicles are companies that are newly-created to be the central participant in any financing or securitisation transaction.
SPVs play a critical role in global financial markets, creating vital opportunities for both borrowers and investors that would not be possible without them.
What do SPVs do?
- SPVs buy assets from an originator
- SPVs issue notes to investors that are backed by these assets
- SPVs are also known as ‘issuers’
Why are SPVs needed?
SPVs are created to protect investors (the bondholders) from the potential that the borrower (also known as the originator) becomes insolvent. The ratings agencies describe this concept as insolvency remoteness.
Insolvency remoteness: To enable the use of bonds as a means to raise finance, the originator first has to sell the assets that will back the bonds to the SPV.
This removes the assets from the originator’s balance sheet and prevents them from being claimed by other parties in the event that the originator becomes insolvent.
Moreover, the shares of the SPV are not owned by the originator but, typically, by a charitable trust established solely for that purpose.
Once effectively isolated from the potential insolvency of the originator, the bonds can be rated for risk as investment opportunities and, hence, for trading.
It follows that SPVs also need to be as remote as possible from any other liabilities that could otherwise increase the risk to an investor.
It is this required remoteness from liabilities and insolvency that determines what SPVs are and how they are created:
- SPV incorporation specifically limits their activity only to what is necessary to play their part in the transaction
- SPVs shares are typically owned by a charitable trust, not the originator
- SPVs have no pre-existing liabilities
- SPVs have no employees
- SPVs are created to be separate from the borrower for tax and accounting purposes