Special purpose vehicle or SPV is a project company that consists of consortium of shareholders specifically created to build and operate projects. It’s also known as special purpose entity/corporation or project company.
Special Purpose Vehicle can be formed either as a single legal entity or a joint venture consortium. The main motto for creating a SPV can be to purchase, own, develop, construct, lend funds and maintain specific assets or projects.
Business structure of a special purpose vehicle
Special purpose vehicles are usually created as a separate legal entity such as a private or public company owned by its equity owners with a specific objective to isolate financial risk. Sponsors or promoters of the SPV can get the public company listed in stock exchanges to lower their risk.
The ownership mechanism can also be defined in a joint venture agreement or partnership agreement subject to the local laws of the country. However, this form of business is unusual for a SPV/SPE.
Why to create a SPV/SPE
Special purpose vehicle or entity is created to purchase, own, develop, construct or maintain specific assets.
SPV enters into contract with all the parties required to complete the project. It obtain all type of approvals and license from the government agencies. To finance the entity, syndicate of banks may enter into agreement with the special purpose vehicle or project company.
Creating a special purpose vehicle or entity depends on the purpose for which you want to form it.
For instance, you can create it for acquiring and financing specific assets to isolate risk. To do this, parent companies create an off-balance-sheet entity and book all assets, liabilities and equity on it instead of taking it to parent company’s own balance sheet. These type of decisions are generally taken for following reasons:
- For higher credit rating of the parent company.
- To lower risk as these project companies entail significant risk.
- For lower funding costs.
- Greater financial flexibility.
By creating SPV, parent company can legally isolate risk of the project and share it with other high risk takers.
If the SPV/SPE is listed trading company, then before investing into these type of companies, value investor analyse the balance sheet of the parent company and special purpose vehicle or entity. In case the special purpose vehicle goes bankrupt, the parent company can carry its operation.
