The world's local bank
Special Purpose Vehicles
Asset swaps and structured finance have developed dramatically in the past ten to fifteen years. Starting in the United States in the early 1980s, the use and development of these structured finance transactions moved across the Atlantic and have now become common in most of the world’s major financial markets. One of the initial uses of the Special Purpose Vehicle ("SPV") in structured finance deals was to create a structure to enhance tax efficiency when companies wished to raise funds on the international eurobond market. An offshore subsidiary would be established, which would issue the bonds and thus any returns could be paid free of tax. The choice of the offshore jurisdiction for the establishment of the SPV was made upon the basis of several key points:
-
Tax efficient jurisdiction
-
Stable jurisdiction with developed financial, legal, judicial and regulatory systems
-
Sound infrastructure, including telecommunications and transportation
-
Satisfactory sovereign risk rating
The Cayman Islands clearly satisfy these requirements and over the years have developed as one of the favoured jurisdictions for the establishment of SPVs. The Cayman Islands’ SPV can be established quickly and cheaply, with a relatively small issued share capital. There are minimal formalities to comply with as long as the securities are not offered in the Cayman Islands, enhancing the speed with which the SPV can be established.
Uses for SPVs
From the initial use of the SPV to enhance tax efficiency, SPVs are now used for a wide variety of transactions as the financial markets have become more and more sophisticated:
-
Securitising loan portfolios of a bank
-
Securitising financial assets such as:
- Auto loans
- Credit card and hire purchase receivables
- Finance leases
- Aircraft operating leases
- Real estate mortgages -
Aircraft and ship financing
-
Catastrophe bond issues
-
Specialised financing deals, such as Ijara financing
The SPV will acquire the underlying asset or asset pool from the originator of the deal, and will then issue the notes, bonds or other securities. The benefits to the originator of proceeding in this manner may include some of the following:
- Removal of the underlying asset or asset pool from the balance sheet
- Improved liquidity
- Reduction of interest, currency and maturity risk to which the originator may have been exposed by the underlying asset pool
- Improving return on assets and capital
- Accelerating the recognition of income or losses
Establishment of an SPV
Firstly, the company will be incorporated in the Cayman Islands. This will usually be an exempted company. In order to ensure that the SPV remains off the balance sheet of the originator and that the SPV is bankruptcy remote, the shares will customarily be held by a charitable trust established for that purpose. The trust will be the sole shareholder in the SPV. There must also be no provision in the constitutional documents of the SPV giving the originator a right to control the affairs of the SPV.
Generally the Articles of Association of the SPV will limit its business activities to the particular activity of the deal, such as the issue of the securities. Originally, SPVs would only issue a single security, but multiple issue vehicles are becoming increasingly common with the SPV issuing series of securities.
In order to maintain the integrity of the structure, the directors, officers and administration of the SPV should be independent of the originator. The SPV must show commercial benefit for entering in to the deal with the originator and as a rule this will be shown by payment of a fee to the SPV.
HSBC Bank (Cayman) Limited can provide the following services in connection with the establishment of an SPV:
- Provision of the registered office, directors and officers of the SPV
- Maintenance of statutory records
- Establishment of the charitable trust and provision of the share trustee
- Provision of administrative services
- Preparation of annual financial statements
