Prepared for
Prepared by
No. Matric
: BG 12110317
Subject
Due Date
: 12 December 2014
What is SPV?
The process above mentioned the typical types of securitization; pooling and
tranching (slicing) of assets. Pooling method minimizes the potential of adverse selection
problem regarding with the selection of the assets to be sold to the SPV. Tranching involves
the division of risk of loss based from underlying assets. Assets are sliced into parts, each
hold in order to minimize risk of loss or cost that came upon the task of securing the asset.
Most securitization method provides a safe outlet for a company to be involved with
SPV since it has a stable and popular market, as well as a variety of options to call for.
There are several issues regarding with SPV in regards of understanding the relation
of the SPV to the parent company. For example, from its legal sense, the SPV entity is an
entirely another part of the company which is used to isolate bankruptcy, as seizure may
occur should that happen, will burn all the asset of the company to the ground. Therefore,
most SPV are set up as a partnership, trust funds (charitable and purpose), corporation and
limited liability companies.
The key issue on SPV is that whether SPV is situated off-balanced sheets or not in
relation with some other entity, mainly the parent company. The issue arise that the transfer of
receivables, assets or liability are considered as a sale or a loan accounting purpose; should
the condition of transferred is met, it is considered as a profit or loss on the sales.
The prominent features of SPV is that it is used to counter bankruptcy. If a situation
occurs where the parent company enter bankruptcy, the firms creditor cannot seize the assets
of the SPV, making the SPV unable to be legally bankrupt. Restriction can be applied to the
SPV in order to further minimize the chance of bankruptcy, by imposing restriction on
objects, power or purpose, ability to incur indebtedness, merging, consolidation, dissolution,
liquidation, winding up, asset sales, transfer of equity interests, and amendments to the
organizational document detailed separateness, and security interests over assets detailed in
U.S legal criteria for recycled SPV.
Taxes are implied in SPV, as it is tax-neutral (profit are not taxed). Most SPV are
treated as exempted companies, protecting them from tax by giving tax holiday in span of
twenty to thirty years tops. However, the SPV can be imposed by taxes based on their
geological location, and must include the financial taxes upon the selection of geological
location. As such, the payment of taxes differs from nation either from the SPV or the parent
company.
However, SPV are often falls on the pitfall of shortages of cash due to the constrained
business activities and inability to incur debt. Due to credit enhancements, SPV have a highly
recommended balance sheet reputation and credit worthiness, making loan transfer from
parent to SPV is easy.
SPV also oppose risks to the parent company such as lack of transparency with often
the extreme usage of multiple layers of securitization assets that can be impossible to track,
monitor and asses the risk that bears within. The problem of SPV underperforming may
damage the reputation of the parent company. The poor performance also can attract a high
degree of attention and assumption to the companys balance sheets, and the parents balance
sheet as well, as the affiliation of both the SPV and the parent company are open to
interpretation from various sources, often bad interpretation given from the coup de grace of
ENRON 2001.
With the underperforming creates the poor performance, it signals a rippling effect to
the associated company, as affiliated SPV can be affected by this sort of damaging relation, as
it will have its tolls on the parent and the orphan. Poor performance can also leads to
inaccessibility of access to the capital market, as a company affiliated with a poor performing
SPV may injured its own parent company in ever hoping to acquire a financing.
Many people believe that the lax regulation of SPV on the balance sheet to be
rewarding, but in fact it is a double-edged sword, as the lax regulation is the main attraction
of the vehicle from time to time, the lax regulation also poses an indirect risk as to whom
does the risk hold true, the SPV or the parent company? Question may arise for the fact that
the SPV operates either on behalf of the parent company or a set-up subsidiaries designed
either to host loans or to conduct business? Or is it permissible for a fact that the SPV carries
all the risk and burden of a loan in part of the parent company, with or without assistance
from the latter? The loose existence of the regulation may create a loopholes that can damage
the company for a short or long term without them knowing it from the first place.
How SPV Mitigate risk?
SPV are used to reduce the financial risk of bankruptcy as well as to provide the
parent company a reachable subsidiaries to relate, transfer and place an asset or liability upon
which the parent company can get their hands off in order to preserve the balance sheets to a
much safer number. This means that the SPV act as a form of risk mitigation for the parent
company against the ever changing environments of the financial worlds; from inflation, tax
increase, resource wastage or shortage, abundant worker, limited options and bankruptcy.
SPV uses the method of securitizations, asset transfer, financing, risk sharing and
financial engineering to reduce risk from the parent company or the SPV itself.
reputation, chance of financing, and management if not handled carefully. SPVs lax
regulation is one of the choosing reason of this method, may also lead to downfall since its
impossible to keep track of all those off-balance sheet transaction if things gone awry.