SPV - Special Purpose Vehicle

Posted in Finance, Accounting and Economics Terms, Total Reads: 1106
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Definition: SPV - Special Purpose Vehicle

An SPV is a legal entity that is created for some specific and normally temporary purpose. It is usually created by a company to isolate itself from financial risk. Companies usually transfer their debt to such an entity to execute a large or a special project without putting the entire company at risk.


An SPV is usually a subsidiary company with an asset and liability structure that makes its obligations secure even if the parent company goes bankrupt. SPVs are often used for securitization of loans and other instruments. It is also known as a Special Purpose Entity (SPE).

 

Uses:-

  • Securitization
  • Debt transfer
  • Risk diversification
  • Financing
  • Raising capital


Example

A bank may issue a mortgage-backed security. Its income is derived from repayments from a pool of mortgage loans. The bank may want to legally separate itself from the loans and does so by setting up an SPV and transferring the loans to it.


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