What Is a Special Purpose Entity?

Special Purpose Entity (SPE), commonly known as Special Purpose Vehicle (SPV) in Europe, is a legal entity established for special purposes. It plays an important role in asset securitization. In the United States, the rise of SPE was in the financial services industry from the 1970s to the 1980s. In fact, most of the current applications of SPE are in the asset-backed securities (ABS) market. SPE usually takes the form of a company, trust or partnership. SPE reduces the cost of securitization through a series of professional methods, solves the problem of financing difficulties, and reduces risks in securities trading through risk isolation. SPE facilitates bank balance sheet management and creates new investment asset classes, thereby benefiting banks and investment companies. SPEs are usually off-balance sheet, bankruptcy, private, and can be onshore or offshore.

Special purpose entity

Right!

Special Purpose Entity (SPE), commonly known as Special Purpose Vehicle (SPV) in Europe, is a legal entity established for special purposes.

SPE refers to the establishment and acceptance of the sponsor by the sponsor

SPEs are established to accomplish limited, ad hoc, or temporary goals, primarily isolation

The following are examples of SPE: Special Purpose Corporations; Unification

(1) Asset securitization In the 1970s, asset securitization began to appear in the United States and developed rapidly. The so-called asset securitization is the sale of assets that can generate a stable cash income stream to an independent entity SPE. The SPE uses these assets as the support to issue securities, and uses the funds raised to issue securities to pay the price of purchasing assets. SPE is at the core of asset securitization operations. SPE is usually used for loan securitization. For example, a bank wants to issue a mortgage-backed security (MBS) whose payments come from a loan pool. However, these loans need to be legally separated from other bank debt. This requires establishing an SPE and then transferring the loan from the bank to the SPE. (II) Risk Isolation SPE can be used to legally separate high-risk assets from the parent company and allow other investors to share the risk. (3) Financial Engineering SPE is often used in complex financial engineering schemes with the main purpose of avoiding taxes or processing financial reports. (IV) Evasion of rules In some cases, the establishment of SPEs can circumvent regulatory restrictions, such as those related to the country of asset ownership. The premise of SPE functioning is that it is not included in the scope of the consolidated company's consolidated statement. Otherwise, the transactions with the originating company will be offset by the merger, and the functions such as off-balance sheet financing and risk isolation will be lost.