Special Purpose Vehicle (SPV)

A special purpose vehicle (SPV), also called a special purpose entity (SPE), is a legal entity, usually a company, trust or limited partnership, set up to carry out one specific and limited purpose, such as holding a portfolio of assets, financing a project or issuing securities. The SPV is legally separate from the company that creates it, known as the sponsor or originator, so its assets and liabilities are isolated from the sponsor's. If the sponsor fails, the SPV's assets should be protected from the sponsor's creditors, and if the SPV fails, the sponsor's other assets are generally protected from the SPV's creditors.

SPVs are fundamental to securitization, project finance, aircraft and ship leasing, Islamic capital markets and many investment structures. They have also been associated with notable abuses, most famously in the collapse of Enron in 2001.

An SPV is designed to be bankruptcy-remote. Typical features include:

• Restricted purpose: its constitutional documents limit its activities to the transaction for which it was formed, so it cannot take on unrelated debts.
• True sale of assets: in securitization, the originator transfers assets to the SPV in a true sale, so they are no longer the originator's property in an insolvency.
• Independent ownership and directors: many SPVs are "orphan" entities whose shares are held by a charitable trust rather than the sponsor, with independent directors whose consent is needed for actions such as filing for bankruptcy.
• Non-petition and limited recourse: investors and service providers agree not to push the SPV into insolvency and to limit their claims to the SPV's assets.

Securitization

A bank or finance company sells loans, such as mortgages, car loans or credit-card receivables, to an SPV, which pays for them by issuing bonds backed by the cash flows from the loans. Investors take the credit risk of the asset pool rather than of the originator. Structures such as collateralized debt obligations use SPVs to divide the pool into tranches of different seniority.

Project and asset finance

Infrastructure and energy projects are usually developed through a dedicated project company, so that lenders look to the project's revenues and the sponsor's exposure is limited to its equity. Aircraft, ships and rail equipment are commonly owned by SPVs that lease them to operators.

Islamic finance

Most sukuk are issued by an SPV that acquires the underlying assets, or rights to them, and holds them on trust for investors. In asset-backed sukuk the SPV's ownership is real and investors bear asset risk; in asset-based structures the originator usually gives a purchase undertaking to buy the assets back, making investors' risk closer to the originator's credit.

Investment and holding structures

Private equity funds, real estate investors and venture syndicates use SPVs to hold single investments or pool co-investors. Such vehicles are often incorporated in an offshore financial centre to achieve tax neutrality, meaning that no additional layer of tax arises at the vehicle level.

Whether an SPV appears on its sponsor's balance sheet depends on accounting consolidation rules. After Enron used unconsolidated SPEs to hide debt and inflate earnings, US standards were tightened, and international standards now generally require consolidation where the sponsor controls the entity, under IFRS 10. The 2008 financial crisis exposed how banks had moved assets into off-balance-sheet vehicles while still bearing the risk, leading to stricter capital, disclosure and risk-retention rules for securitization, including rules requiring originators to keep part of the risk. Offshore SPVs also face economic substance requirements in many jurisdictions.

SPVs are legitimate tools, but their separation from the sponsor can obscure risk. Investors may misjudge assets they cannot easily inspect, as happened with sub-prime mortgages before 2008. Layers of SPVs can conceal the ultimate beneficial owner of assets, which concerns anti-money laundering authorities, and they can be used for regulatory arbitrage. For these reasons, banks onboarding an SPV typically look through it to the sponsor, its investors and the purpose of the structure.