What is a Special Purpose Vehicle (SPV)?
A special purpose vehicle is a subsidiary established by a parent company to segregate financial risk. It is also known as a special purpose entity (SPE) or bankruptcy-remote entity as its obligations remain secured even if the parent company goes bankrupt. The main purpose of creating such an entity is to carry out a risky venture while minimizing any negative financial impact on the parent company or its investors. In short, it is a holding company formed for the securement of debt.Applications of Special Purpose Vehicles
Special Purpose Vehicles (SPVs) serve various purposes, with the most common ones including:
Risk Mitigation
Corporations often undertake projects laden with significant risks. By establishing an SPV, a corporation can legally segregate the risks associated with a particular project and distribute them among different investors.
Securitisation
A prevalent use of SPVs lies in securitising loans. For instance, when issuing mortgage-backed securities derived from a pool of mortgages, a bank can create an SPV to separate these loans from its other liabilities. This arrangement enables investors in mortgage-backed securities to receive loan payments ahead of other bank creditors.
Asset Management
Certain assets pose challenges in terms of transferability. Hence, companies may opt to create SPVs to hold these assets. When the need arises to transfer these assets, the company can simply sell the SPV as part of a merger and acquisition (M&A) process.
Tax Optimization
In cases where property sale taxes exceed the capital gains realised from the sale, companies may establish an SPV to own the properties earmarked for sale. Consequently, the company can sell the SPV itself instead of directly selling the properties and incurring substantial tax liabilities. This approach allows for taxation on the capital gains from the SPV sale rather than facing higher property sale taxes.
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