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The Uses of Special Purpose Vehicles in Asset Securitization

SPVs are frequently used in structured finance transactions such as asset securitizations. In an asset securitization, a company can sell a pool of assets to an SPV created to acquire those assets. The SPV issues securities to investors to pay for the assets, with interest and principal paid from the income of the underlying assets. For off-balance sheet treatment, the risks and rewards must genuinely be transferred to the SPV. An experienced professional can properly structure the SPV transaction to comply with accounting rules and determine if the costs outweigh the benefits for a company.

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303 views2 pages

The Uses of Special Purpose Vehicles in Asset Securitization

SPVs are frequently used in structured finance transactions such as asset securitizations. In an asset securitization, a company can sell a pool of assets to an SPV created to acquire those assets. The SPV issues securities to investors to pay for the assets, with interest and principal paid from the income of the underlying assets. For off-balance sheet treatment, the risks and rewards must genuinely be transferred to the SPV. An experienced professional can properly structure the SPV transaction to comply with accounting rules and determine if the costs outweigh the benefits for a company.

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was00266
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THEUSESOFSPECIALPURPOSEVEHICLESINASSETSECURITIZATION

By:WilmingtonTrust Aspecialpurposeentity(SPE),moreoftencalledaspecialpurposevehicle(SPV),iscreatedtocarryouta specificbusinesspurposeoractivity.SPVsarefrequentlyusedinstructuredfinancetransactions,suchasin assetsecuritizations,jointventures,ortoisolatecertaincompanyassetsoroperations.SPVscanbecreated throughavarietyofentities,suchastrusts,corporations,limitedpartnerships,andlimitedliability corporations. SPVsareusedbymanycompaniesforanarrayoffinancingpurposes.Theyare,andshouldcontinuetobe, anintegralpartofmoststructuredfinancetransactions.AnexplanationofhowSPVsareusedinasset securitizationscanclarifysomeoftheissuesinvolved. Howthetransactionisstructured AssetsecuritizationspermitacompanytosellapoolofassetstoanSPVcreatedspecificallytoacquire them.Apercentageequityinvestment(typically320%)isrequiredfromanindependentthirdparty investorrepresentingalegalequityownershipintheSPV.Theinvestmentmustbe"atrisk,"andthe percentageofequityinvestmentisbaseduponthefairmarketvalueoftheassetstransferred. TheSPVpaysfortheassetsbyissuingsecuritiestoinvestorsinthecapitalmarkets.Thesecuritiescanbear interestatfixedorvariableratesandaretypicallyhighlyratedinvestmentgradesecuritiesthatcanattract abroadbaseofinvestors.Theinterestandprincipaldueunderthesecuritiesarepaidfromtheincome streamoftheassetspurchasedbytheSPV. Offbalancesheettreatment Undersomecircumstances,itmaybedesirabletoremoveassetsandtheircorrespondingliabilitiesfrom thebalancesheetofthecompany,andasaleoftheassetstoanSPVwillaccomplishthis.However,thesale hastobeproperlystructuredtoactuallytransferboththesubstantialrisksandtherewardsofownership. So,forexample,ifthesaleiscoupledwithguaranteesfromthesellerconcerningperformanceofthe financialassetsbeingtransferred,therisksarenotreallybeingtransferred.Insuchacase,itcouldbe misleadingtoshareholdersnottodisclosetheriskretainedonthebalancesheet. Similarly,athirdpartyequityinvestormustcontroltheSPV'sactivitiesandbeartheriskoftheinvestment inorderforthesaletoconstituteanarm'slengthtransfer.IftheSPVtrulyassumestheriskandcontrolsthe assetstransferred,itsactivitiesarenotcontrolledbyoronbehalfofthecompanythatsoldtheassetsto theSPV,thenoffbalancesheettreatment,ratherthanconsolidationonthebalancesheetofthecompany, usuallywillbeappropriate.Theissue,then,isnotwhetherSPVscanbeusedforassetsecuritizations,but whetherthesecuritizationhasbeenstructuredandaccountedforaccordingtotherulesapplicabletosuch structuredfinancialtransactions. MakinganSPV"bankruptcyremote" TheSPVusuallyiscreatedinsuchawaythatitis"bankruptcyremote,"whichmeansthattheassetssoldto theSPVarenotatriskifeithertheSPVorthecompanywhoseassetsarebeingsecuritizedbecome

insolvent.Also,iftheSPVhasnoindebtednessotherthantheassetsecuredloansortradepayables,the SPVisunlikelytobecomeinsolventasaresultofitsownactivities. Experiencedprofessionalsmakeadifference Assetsecuritizationprovidesanotherwayforacompanytoraisecashinthecapitalmarketsaswellas transfertheriskofdefaultonhighriskdebt,suchascreditcardreceivables.Ifassetsecuritizationcouldbe adesirablewayforyourcompanytoraisecash,anexperiencedprofessionalcanhelpyouevaluatewhether thecostsofthetransactionoutweighthebenefits.Experiencedprofessionalsalsocanproperlystructurean SPVtransactionandadviseonhowitshouldbeaccountedtocomplywithexistingrules. Updated:January1,2013 Thisarticleisforinformationalpurposesonlyandisnotintendedasanofferorsolicitationforthesaleof anyfinancialproductorserviceorasadeterminationthatanyinvestmentstrategyissuitableforaspecific investor.Investorsshouldseekfinancialadviceregardingthesuitabilityofanyinvestmentstrategybased ontheirobjectives,financialsituations,andparticularneeds.Thisarticleisnotdesignedorintendedto providefinancial,tax,legal,accounting,orotherprofessionaladvicesincesuchadvicealwaysrequires considerationofindividualcircumstances.Ifprofessionaladviceisneeded,theservicesofaprofessional advisorshouldbesought. 2013WilmingtonTrustCorporation.

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