Special Purpose Vehicle (Spv) Definition
A special purpose vehicle/entity (SPV/SPE) is a legal entity created to isolate financial risk. Its purpose is to hold assets and issue debt, equity, or hybrid securities for the benefit of investors. SPVs are also known as bankruptcy-remote vehicles/entities because they are typically structured so that the creditors of the parent company cannot reach the assets held by the SPV in the event of the parent company’s bankruptcy.
The use of special purpose vehicles has increased in recent years as companies have looked for ways to reduce their overall exposure to risk. SPVs can be used for a variety of purposes, including holding assets such as real estate, loans, and securities; issuing debt; and making equity investments.
One example of an SPV is a collateralized debt obligation (CDO). A CDO is a type of security that is backed by a pool of loans or other debt instruments. The cash flows from the underlying loans are used to pay interest and principal to investors in the CDO.
While SPVs can be created for a variety of reasons, they are often used in securitization transactions. In a securitization, a company sells a pool of assets (such as loans) to an SPV. The SPV then issues securities backed by the cash flows from the underlying assets. This allows the original owner of the assets to remove them from its balance sheet and reduces its overall exposure to risk.
