Karthik SPV

SPECIALPURPOSE

VEHICLE(SPV)

Introduction

Negative Connotation

1994: Tower Financial Crisis

2001: Enron

2008: Bear Stearns & Lehman Brothers

Market Background

Timeline

Last 30 yrs: How it all began and evolved

2007-2010: The Crisis

Features and uses of SPV

• Securitisation • Asset transfer • Financing • Risk sharing • Raising capital

How are Investors Classified?

Key benefits to Sponsors

• Asset Ownership • Minimal red tape • Tax benefits • Legal protection • Isolation of Financial Risk• Meeting regulatory requirements• Freedom of jurisdiction

Risks of a SPV

• Reputational Risk• Signalling Effect• Liquidity and Funding Risk• Equity Risk• Mark to Market Risk• Lack of Transparency• Regulation

Managing the risks – Regulation and scrutiny

• Oversight• Reporting capability• Governance• Motivation• Regulation• Simplification• Consolidation• External ratings

Managing the risks: Reintermediation

• Reintermediation of off-balance sheet assets back onto the balance sheets of the sponsoring banks.

• Reason: Benefits and uses of SPVs do not justify the risks involved and the potential for them to be misused.– Bankruptcy Remoteness– Only Reputational Risk

SPVs on or off-balance sheet???

• IFRS RequirementsConsolidated into the books of the parent entity if

the entity “controls” SPVControl = PEA

• US GAAP– Change in Rules since 2010

Conclusion

• SPVs have played and continue to play an important role in financial markets both in financing projects and offering investors a greater choice of ventures to invest in.

• Usage of SPVs is not inherently problematic, but rather poor risk management can lead to failures.

• Consolidation may provide a solution for many problems.

• If not: More Transparency and Better Regulation