Friday, April 8, 2011

The SPE


The special purpose entity (aka SPE, special investment vehicle, SIV, special purpose vehicle, SPV, special purpose corporation, SPC) is a limited-purpose legal vehicle, organized as a corporation, limited liability company, or business trust, that is formed to securitize assets, such as loans and receivables, and sell them as asset-backed securities (ABS). Since most ABSs are sold to institutional investors that require an investment grade credit rating, the SPE provides bankruptcy remoteness from the seller of the assets, which includes banks and finance companies, and allows the credit rating of the SPE to be higher than that of the seller or sponsor of the ABS.

Bankruptcy remoteness is accomplished by legally segregating the collateral from the originator or seller for the benefit of ABS holders. For bankruptcy remoteness to be legally effective, there must be a true sale of the assets at arm's length. The Uniform Commercial Code (UCC) of most states stipulates that this transfer can be accomplished either by transferring the loan documents from the seller to the SPE, or by filing a UCC finance statement. Filing UCC statements is usually done because it is cheaper and faster.

Legal counsel for the seller will render a legal opinion concerning the effectiveness of the transfer, including a true sale opinion and a non consolidation opinion, stating that if the sponsor enters bankruptcy, the assets of SPE would not be consolidated with the assets of the sponsor.

After the special purpose entity is formed, the securitization of assets and their sale to investors involves the following steps:

- The assets, usually loans or receivables, are transferred from the seller to the SPE.
- The SPE securitizes the assets, then sells the resulting securities, mostly as notes, to investors.
- The proceeds of the security sale are then paid to the seller of the assets.
- Credit rating agencies review all documents of the SPE before assigning a rating. While the credit rating agency is not a legal party to any of the agreements for setting up the special purpose entity, it is listed in the documents as the credit rating agency, and the documents also require that specified information be provided to the credit rating agency continually, to ensure that the proper procedures are being followed to maintain credit quality, and that the credit quality is actually being maintained.

Some of the legal documents used to form the SPE and issue securities include: SPE organizational documents. investment/portfolio management agreements, trust agreements , custodial agreements, collateral, pooling, and servicing agreements, loan and sale agreements, mortgages or deeds of trust, liquidity and credit support agreements, swap agreements for converting floating and fixed rates, legal opinions required by the credit rating agencies, trust indenture and offering circular or prospectus for the securities

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