Trust and Corporate Services
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:
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 Financial Services (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
|
