1/15/2017 Special 

Purpose Vehicle/Entity ­ SPV/SPE

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Special Purpose Vehicle/Entity - SPV/SPE

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What is a 'Special Purpose Vehicle/Entity - SPV/SPE'  

A special purpose vehicle/entity (SPV/SPE) is a subsidiary company with an
asset/liability structure and legal status that makes its obligations secure
even if the parent company goes bankrupt. An SPV/SPE is also a subsidiary
corporation designed to serve as a counterparty for swaps and other credit
sensitive derivative instruments. Although the SPVs/SPEs are used to isolate
financial risk,
risk, due to accounting loopholes
loopholes,, these vehicles may become a
financially devastating way for CFOs to hide debt, as with the Enron

bankruptcy.

BREAKING DOWN 'Special Purpose Vehicle/Entity -

SPV/SPE'   01:36 01:36 
SPVs/SPEs may be formed through limited partnerships, trusts,
corporations, limited liability corporations or other entities. An SPV/SPE may
be designed for independent ownership, management and funding of a company; as protection of a
project from operational or insolvency issues; or for creating a synthetic lease that is expensed on
the company’s income statement rather than recorded as a liability on the balance sheet. They help
companies securitize assets, create joint ventures, isolate corporate assets or perform other
financial transactions.

Off-Balance-Sheet SPV/SPE
An off-balance-sheet SPV/SPE documents its assets, liabilities and equity on its own balance sheet
rather than on the parent company’s balance sheet as equity or debt. The parent company typically
prefers this arrangement due to improved management of assets and liabilities, lower risks, higher
credit ratings, lower funding costs, greater financial flexibility and lower capital requirements.

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SPV's/SPE's mask crucial information from investors who are not aware of a company’s complete
financial situation. Investors need to look at the parent company’s balance sheet as well as the
SPV’s/SPE’s balance sheet before deciding whether to invest in a business. Enron’s massive financial
collapse is a prime example of why this is important.

Enron’s SPVs/SPEs
Enron transferred much of its quickly rising stock to an SPV/SPE and received cash or a note in
return. The SPV/SPE used the stock for hedging assets shown on the company’s balance sheet.
Enron guaranteed the SPVs/SPE's value as a means of reducing risk. When stock prices began
dropping, along with the values of the SPVs/SPEs, the guarantees were forced into play. Enron was
unable to pay the large amounts of money it owed creditors and investors, leading to a massive
financial collapse.

Although the company disclosed its financial information and conflicts of interest on balance sheets
for the company and for the SPVs/SPEs, few investors understood the gravity of the situation and
what ended up being a disastrous ending for Enron.

Example of an SPV/SPE
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Example of an SPV/SPE
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In March 2016, Luxor Capital, a $3.8 billion hedge fund, announced it was placing four illiquid
securities totaling 12% of its investments in an SPV/SPE. The securities included exposure in food
delivery service Delivery Hero, private equity investments in online food ordering company
Foodpanda and drilling company Ascent Resources, as well as preferred stock in Altisource Asset
Management. After losing money for months, the fund began returning 88% of exiting investors’
money. The rest will be returned when the illiquid investments are sold.

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Off Balance Sheet - OBS

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What Does Off­Balance Sheet Mean?


Off balance sheet (OBS) items refer to assets or liabilities that do not appear on a company's balance
sheet but that are nonetheless effectively assets or liabilities of the company. Assets or liabilities
designated off balance sheet are typically ones that a company is not the recognized legal owner of,
or in the case of a liability, does not have direct legal responsibility for. As an example, although
loans issued by a bank are ordinarily kept on the bank's balance sheet, when some loans are
securitized and sold off as investments, that securitized debt will be kept off the bank's books, and
an operating
 lease is one of the most common off-balance items.  
 
BREAKING DOWN 'Off Balance Sheet - OBS'
Off balance sheet items are an important concern for investors in regard to assessing a company's
financial health.
health. Off balance sheet items are often difficult to identify and track within a company's

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1/15/2017 Special Purpose Vehicle/Entity ­ SPV/SPE
financial statements because they usually only appear in the accompanying notes. Another concern
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is that some off balance sheet items have the potential to become hidden liabilities. For example,
collateralized debt obligations (CDO), where assets that make up the CDO are debt obligations, can
become toxic assets — ones that can suddenly become almost completely illiquid — before investors
are aware of the company's financial exposure, because the CDOs are off balance sheet items.

Off balance sheet items are not inherently intended to be deceptive or misleading to investors.
Certain types of businesses routinely keep substantial off balance sheet items. For example,
investment management firms are required to keep clients' investments and assets off balance
sheet. For most companies, off balance sheet items exist in relation to financing, enabling the
company to maintain compliance with existing financial covenants. Off balance sheet items are also
used to share both risks and benefits of assets and liabilities with other companies, as in the case of
joint venture projects.

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