ERM-115-13: Creating an Understanding of Special Purpose Vehicles


#1

A Fellowship Forums Wiki Community Post

Online Link to this Reading:
https://www.pwc.com/gx/en/banking-capital-markets/publications/assets/pdf/next-chapter-creating-understanding-of-spvs.pdf

Topics Covered in this Reading:

  • Executive summary
  • Market background
  • How SPVs contributed to the 2007 subprime mortgage crisis
  • Features and uses of SPVs
  • SPV structure
  • Key benefits to sponsoring firms
  • Key risks to sponsoring firms
  • Key SPV related features
  • Recent regulatory changes
  • Managing the risks – regulation and scrutiny
  • Managing the risks – reintermediation
  • A view of the solution

This is a wiki post, editable by anyone. Feel free to edit and add key points/extra detail above!


#2

May I ask one question about this chapter?
15
I understand that SPV purchase assets from main corporation by using debt financing from investors and main corporation sell assets to SPV to obtain financing. Based on this chart, I am confused about the position of investment bank. The assets transfer from main corporation to SPV, then move to investment bank, and move back to main corporation again(Seriously???:joy:). Same situation on the transferring of cash, SPV→Main corporation→Investment bank→… :rofl::rofl::rofl:

The key questions are which position do they(cash and asset) stop at? And Why do we have to transfer the assets to investment bank?

Any help will be greatly appreciated!


#3

I view it this way:

The SPV receives assets from the main corporation: For this, they will need to pay money to the Main Corporation. Essentially, they have taken a loan from the Main Corporation/sold equity to the Main Corporation.

Investors can now invest in the SPV and their assets. They give money to the SPV, which the SPV can use to pay back to the Main Corporation for the assets. This can be through independent investors who buy equity in the firm, or an investment bank who gives a loan to the SPV.

When the SPV generates income, this money will partially flow to the Investment Bank (for the loan that they provided), and partially back to the Main Corporation (for whatever the agreement is there).


#4

Thanks for the replying,

May I ask one more question?
I still confused about this sentence. Why SPV have taken a loan or sold equity to Main Corporation?
[Essentially, they have taken a loan from the Main Corporation/sold equity to the Main Corporation.]


#5

@yywq90 With regards to your question earlier about the position of the investment bank, my impression is that it’s mostly there to smooth the process. The manual says it finds investors, does the paperwork, deals with regulators, etc.


#6

@gojetsgo Thanks for the replying.
I still confused about the flow chart. Why SPV have to transfer the assets to investment bank?:joy::joy:


#7

May I ask one more question?
I still confused about this sentence. Why SPV have taken a loan or sold equity to Main Corporation?
[Essentially, they have taken a loan from the Main Corporation/sold equity to the Main Corporation.]

Well the main corporation is transferring assets to the SPV. Surely there must be a cost for that. And surely the main corporation is hoping to benefit from this setup.


#8

The investment bank helps facilitate/broker the transaction. They play a key role in connecting investors with the transaction. They are just an intermediary in the process.


#9

I have a question about SPVs:

The manual states that with the recent regulatory changes, IFRS requirements demand that SPV’s assets are consolidated if the vehicle is controlled by the main entity, and then lists four tests to determine whether the originator is in control (eg. If it receives the majority of benefits of the SPV). My question is, in what circumstance would the originator not be in control of the SPV? Isn’t the whole point of creating an SPV so that the originator can benefit?

Thanks in advance!