Special Purpose Vehicle: SPV viola-funding January 6, 2024

Special Purpose Vehicle: SPV

Special Purpose vehicles (SPV)
Special Purpose vehicles (SPV)

In the broadest sense, any special purpose vehicles (SPV) refers to an independent subject of commercial law created to implement a specific business idea. In fact, it is a universal tool for organizational interaction between partner companies in the context of a project.

The main advantage of using a project company in the framework of the implementation of investment projects is off-balance sheet financing, which does not burden the balance of the initiating company with debts.

The term “special purpose vehicle” first appeared in the second half of the twentieth century, spreading around the world thanks to the global economic transformation of recent decades. This solution allows the parent company to reduce the risk associated with participation in a new project with significant investments and a high level of uncertainty (for example, immature technologies).

Special purpose vehicles mainly used for the implementation of expensive projects,  including the construction of factories and power plants, water treatment plants, roads and railways, seaports bridges and many other infrastructure facilities.

Viola funding limited offers financing of investment projects and international loans through special Purpose vehicle SPV

Our financial team is ready to provide professional management of a project company and comprehensive consulting services for the implementation of any business project.

Special purpose vehicle is widely used in project finance schemes, financing capital-intensive projects in the framework of public-private partnerships, as well as in various asset securitization schemes.

Special purpose vehicle and project finance

This financial model is based on the establishment of an independent legal entity, the purpose of which will be to develop an investment project, raise funds and service debt.

The PF requires the preparation of an information memorandum or a complete dossier with all the necessary documentation about the project, confirming the attractiveness of the latter for investors and creditors. Our team can arrange project finance from A to Z, ensuring the implementation of your project in the shortest possible time.

The main functions of project finance using Special Purpose vehicles (SPV) are listed below:

• Consistent planning of an investment project, regardless of other activities of the parties, which allows predicting the timing of achieving adequate cash flows and comparing it with the schedule for obtaining borrowed funds.

• In project finance, shareholders risk only their contribution to the SPV’s capital, although in most cases various mechanisms are additionally used to ensure the safety of investors.

• Complete independence of the project, which is reflected in the special legal status of the project company.

• Generation of cash flows sufficient to repay the principal debt and provide profit to creditors and shareholders.

• The financial structure of an SPV is usually dominated by various investor-shareholders interested in the project, including companies other than the original founders.

The PF is characterized by strong initial investments with a small contribution of the initiator (usually 15-35% of the investment) and a long period of project development to achieve the target financial indicators.

General characteristics of a special purpose vehicles (SPV)

From the point of view of project financing, the advantages of an SPV include the possibility of obtaining larger borrowed funds in comparison with the parent company. Such lending, which does not depend on the financial background of the borrower (lending without history), is most suitable for young companies with ambitious plans.

By creating an SPV, the project initiator attracts lenders and investors by reliably isolating its assets from the project.

But the problem may lie in the short life cycle of such a company, which is limited by the life span of the investment project.

According to the meaning of European Union regulations, Special Purpose vehicles (SPV) are mainly limited liability companies and joint stock companies. They are designed for a specific purpose and isolate the financial risk of the founders.

Reasons to use SPV for large projects

Companies of this type are usually complex structures that combine the interests of many shareholders and operate through complex bureaucratic procedures. Executives, aware of the limitations of such a structure, are actively using special purpose vehicles as highly specialized and flexible tools.

The financial structure of projects is designed in such a way that no partner takes all the risk. Risk and responsibility are allocated among the participants based on a complex system of guarantees and various forms of participation. The distribution of project cash flows is carried out in such a way as to minimize potential threats to the project and ensure acceptable financial results for all participants.

Unlike traditional lending, the PF mechanism forms a rational system of risk management. This approach helps participants make coordinated decisions on project implementation, making changes if necessary based on feedback and changes in the business environment.

Infrastructure projects, investments in the energy sector and mining concessions have long been the domain of SPVs. For non-industry companies, this practice may raise questions about the rationale for capital isolation.

The key purpose for funding through Special Purpose vehicles (SPV) / SPE are listed below:

• The cash flows of the project are the source of payment for the return on investment, and the SPV’s assets become collateral.
• A wide variety of legal and organizational forms of the project, depending on the requirements of its participants.

• High leverage: a typical financial structure of a project is 70-90% leveraged.
• Long term implementation of investment projects, which in some cases can reach 25-30 years.

SPV in the context of public-private partnership

These should be mechanisms that ensure the effect of financial leverage and the attraction of private companies to improve the efficiency of the use of public funds. Project finance allows attracting highly specialized private companies for professional management and various types of services on an ongoing basis.

The latter financial instrument is characterized by numerous advantages, such as high financial leverage and flexibility required for the successful implementation of large investment projects with a long payback period.

The implementation of projects on the basis of public-private partnerships requires the use of special mechanisms to search for new sources of funding and further development of projects while maintaining ownership of the public sector.

The most common instruments for financing PPP projects recognized by experts are:

• Project finance, in which loans are provided to a specially created project company. In this case, lenders rely on the future cash flows of the project to recover the funds, and collateral is limited to the project’s assets and future earnings. SPV / SPE debt is not reflected in the balance sheet of the companies that initiate the project.

• Government financing, in which the state attracts borrowed funds through loans to the final borrower, grants, subsidies and guarantees for debt obligations. Usually, government agencies receive loans on more favorable terms, but they are limited by the financial resources of the budget and a large number of capital-intensive state programs. The low efficiency of commercial risk management has a strong impact on these projects.

• Corporate financing, in which the company raises borrowed funds, guaranteeing their return with its assets. This approach requires sufficient assets and involves significant financial risk for the borrower. Most utilities and government companies cannot use this tool widely.

The implementation of such projects can help to improve the credit rating of government bonds issued to attract financing. Government bonds are considered low risk investments as they are backed or guaranteed by the issuing country.

Through public-private partnerships, the SPV can help the government maintain financial or fiscal flexibility by allowing it to issue bonds for other projects as needed. In addition, a high credit rating on outstanding bonds could help lower interest rates, keeping debt service costs low.

If you are interested in the implementation of large PPP projects in energy, transport or other areas, please contact our specialists.

Viola Funding Limited successfully operates in all key sectors of the economy, representing the interests of corporate clients in dozens of countries of the European Union, North America, Latin America, Asia and Africa.

Choice of jurisdiction for SPV / SPE establishment

The right choice of jurisdiction for the SPV / SPE establishment is key to the success of securitization and high investment returns.

Typically, companies choose territories with a favorable tax climate, stable financial regulations, and low political risk.

Also, the host country or jurisdiction should offer low corporate costs and acceptable requirements for share capital and management responsibility.

Considering the above requirements, many companies in recent years have chosen such convenient jurisdictions as the Netherlands, Luxembourg, British Virgin Islands, Jersey, Cayman Islands, as well as Ireland and a number of other jurisdictions.

The complexity of securitization and the ongoing expansion of financial schemes and models of its use force businesses to seek the assistance of qualified financial and legal advisers. Financial market conditions, host country’s legal framework and restrictions, partner requirements and other factors influence the success of securitization.

Do you need professional help establishing and managing an SPV / SPE?
Are you looking for qualified advice on financial modeling and project finance?

Contact US more about our services.

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Website:https://viola-funding.com/

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