What is SPV in finance?
A special purpose vehicle (SPV), often referred to as a special purpose entity (SPE), can be created to carry out a specific activity or purpose for business. Companies often use these SPVs in structured finance transactions. These include isolating certain company operations, joint ventures, or SPV asset securitizations.
Companies can use a variety of entities to create an SPV startup. These can include limited liability corporations, limited partnerships, corporations, and trusts.
Many companies use SPVs for a variety of purposes for financing. For most structured financial transactions, they are an integrated part of the process. To clarify some of the issues, it’s important to understand how SPV asset securitization works.
Asset Securitization Using An SPV
Per the outline, the SPV process doesn’t necessarily look as complicated as it may have sounded before. It’s a simple process to secure your assets with an SPV, but it’s not the only way to do this either. The following guide will explain this diagram in more detail and help you decide whether you should use SPV asset securitization or not. When done correctly, it can make your life easier as a business owner and foster a good relationship with your investors.
The Structure of the Transaction
Companies specifically create SPVs to acquire a pool of assets after a company has secured those assets. An independent third-party investor requires the SPV’s legal equity ownership to have a 3-20% equity investment.
The percentage of the equity investment must be based upon the value at fair market prices of the transferred assets, in addition to the requirement that the investment is “at-risk.”
Securities are issued to capital markets’ investors for the SPV to pay for the asses. These securities may bear interest at a variable or fixed rates. They can attract a broad base of investors because they are typically investment-grade securities. The principal and interest due under the securities are paid from the asset’s income stream that the SPV management services have purchased.
Off-Balance Sheet
It is best to remove from the balance sheet of the company the assets and their corresponding liabilities in some cases. Companies can accomplish this by selling assets to an SPV. However, to transfer both the rewards of ownership and substantial risks, the sale must be properly structured.
Consider a case in which a company is not truly transferring their risks if the sale couples with a seller guarantee the transferred financial assets’ performance. In this case, not disclosing the balance sheet risks can mislead shareholders.
In a similar case, for sale to be considered an arm’s length transfer, a third-party equity investor must bear the risk of the investment and control the SPV activities. Say an SPV controls the transferred assets and truly assumes the risk. The company that sold the assets to the SPV has no control of its activities. In this case, it’s appropriate to use off-balance sheet treatment instead of consolidation on the balance sheet.
The question then becomes whether or not the company has accounted for and structured its SPV asset securitization according to applicable rules in such structured financial transactions. Also, it comes into question whether or not the SPVs can be used for asset securitizations.
Setting Up an SPV to Be Bankruptcy Remote
There are a couple of benefits to be had if you choose to set up your SPV to be bankruptcy remote. Here’s what this means in more detail:
Should the company seeking SPV asset securitization become insolvent, assets it has sold to the SPV aren’t risked. But, this is only the case when they create the SPV in such a way that it is bankruptcy remote. And, there is little likelihood that the activities of the SPV will cause it to become insolvent. This is especially true if it’s not indebted other than trade payables or asset-secured loans.
Professionals with Experience Make a Difference
When a company needs to transfer the risk of default on credit card receivables or other high-risk debt or raise cash in the capital markets, SPV asset securitization provides another way to do this. A professional with experience in asset securitization can help you determine if there will benefit your company. These can take form if you raise cash that outweighs any transaction costs.
It may seem like another investment to you, but if you don’t have a crystal-clear understanding of your asset management, it’s always better to outsource. Any discrepancies that can arise by mistake can cause major risks for your company. Think of it as investing in your own personal and financial security to hire asset management professional.
So, we hope that this article made the details of an SPV a little bit more clear. These processes can get a little bit complicated, so it’s important to know the basics before you make a decision on whether to use an SPV or not. SPV asset securitization can be a key part of many types of companies. So, what do you think you should do that remains in the best interest of your company?
Let us know in the comments if you have any insight on SPVs, whether you use one or not, or if you have any further questions about the article. We’re happy to get back to you and discuss anything SPV-related! We wish you the best of luck on your journey in the meantime.
