A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Abbreviation of Special Purposes Vehicle. Sometimes referred to as a Special Purpose Entity (SPE). An entity created for a specific, limited and sometimes temporary purpose. They are often limited companies or partnerships whose main purpose is to isolate another company from financial risk. Companies move assets to the SPV or use it to finance a large project to avoid exposing themselves to risk. SPVs are often used in the |[[Securitization|securitization of loans or other instruments.
Often it is important that the SPE not be owned by the entity on whose behalf the SPE is being set up (the sponsor). For example, in the context of a loan securitization, if the SPE securitisation vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank's group for regulatory, accounting, and bankruptcy purposes, which would defeat the point of the securitisation. Therefore many SPEs are set up as 'orphan' companies with their shares settled on charitable trust and with professional directors provided by an administration company to ensure that there is no connection with the sponsor.
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Some of the reasons for creating special purpose entities are:
Securitization: SPEs are commonly used to securitise loans (or other receivables). For example, a bank may wish to issue a mortgage-backed security whose payments come from a pool of loans. However, these loans need to be legally separated from the other obligations of the bank. This is done by creating an SPE, and then transferring the loans from the bank to the SPE.