SPECIAL PURPOSE VEHICLE (SPV)

Special Purpose Vehicle, or (SPE Special Purpose Entity, in Europe and India, or, in some cases in each EU jurisdiction – FVC financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives.

SPVs are typically used by companies to isolate the firm from financial risk. They are also commonly used to segregate/protect debts, ownership, and obscure relationships between different entities. Normally a company will transfer assets to the SPV for management or use the SPV to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. SPVs are also commonly used in complex financings to separate different layers of equity infusion.  SPV's allow tax avoidance strategies unavailable in the home district. In addition, they are commonly used to own a single asset and associated permits and contract rights, to allow for easier transfer of that asset. They are an integral part of public private partnerships common which rely on a project finance type structure.

SPVs may be owned by one or more other entities and certain jurisdictions may require ownership by certain parties in specific percentages.  Many SPVs are set up as 'orphan' companies with their shares settled on charitable trust and with professional directors provided by an administration company to ensure that there is no connection with the sponsor. Often it is important that the Special Purpose Vehicle not be owned by the entity on whose behalf the SPE is being set up (the sponsor such as a Structured Finance Management).  For example, in the context of a synthetic securitization, if the SPV securitization vehicle were owned or controlled by the Structured Investment Vehicles whose capital market investment were to be secured, the SPV would be consolidated with the rest of the bank's group for regulatory, accounting.  

STRUCTURED INVESTMENT VEHICLE (SIV)

 Structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues with significantly less leverage (10-15 times) than traditional banks (25-50 times).  SIV's differ from asset-backed securities and collateralized debt obligations in that they are permanently capitalized and have an active management team. They do not wind-down at the end of their financing term, but roll liabilities in the same way that traditional banks. They are generally established as offshore companies and so avoid paying tax and escape the regulation that banks and finance companies are normally subject to. In addition, until changes in regulations, they could often be kept off the balance-sheet of the banks that set them up, escaping even indirect restraints through regulation. Due to their structure, the assets and liabilities of the SIV was more transparent than traditional banks for investors. 

SIVs were given the label by Standard & Poors -- Moody's called them "Limited Purpose Investment Companies" or "LiPICs". They are considered to be part of the non-bank financial system, which has two parts, the shadow banking system comprising the "bank sponsored" SIVs (which operated in the shadows of the bank sponsors balance sheets) and the parallel banking system, made up from independent (i.e. non bank aligned) sponsors.

The strategy of SIVs are to raise capital and then lever that capital by issuing short-term securities, such as commercial paper and medium term notes and public bonds, at lower rates and then use that money to buy longer term securities at higher margins, earning the net credit spread for their investors. Long term assets could include, among other things, residential mortgage-backed security (RMBS), collateralized bond obligation and corporate bonds.

Financial Asset Securitization Investment Trust (FASIT)

 Financial Asset Securitization Investment Trust (or "FASIT") is the tax law's newest creation intended to facilitate the securitization of debt obligations currently securitized through, among other vehicles, master trusts, grantor trusts, and the FASIT's mortgage-backed cousin, Real Estate Mortgage Investment Conduits ("REMICs"). The FASIT legislation will become effective on September 1, 1997.

The flexibility afforded through a FASIT, which is elective, may be, in the right circumstances, an attractive alternative to existing securitization vehicles. For example, the FASIT vehicle does not require a "frozen pool", but allows for revolving or periodic asset funding. Also, the FASIT legislation will facilitate issuances of securities not previously possible, including periodic issuances over the life of the FASIT vehicle, not just at initial funding. However, as more fully discussed in the succeeding portions of this memorandum, there are certain costs generally associated with the election and other negative features which will have to be weighed against the benefits of FASIT. First, the FASIT legislation contains special provisions that will often require comparatively onerous acceleration of tax gain upon transfer of assets to a FASIT. Second, the treatment of residual or equity-like income under the FASIT regime is fairly punitive, even by comparison to the REMIC (and related taxable mortgage pool) regime. Furthermore, several areas of uncertainty in the legislation have been left open, particularly in connection with the transition for pre-existing master trusts that might seek to elect FASIT for post-September 1, 1997, transactions. Absent clarification by the Treasury before then, there may be fewer opportunities to utilize a FASIT in the short term than has been expected.

Real Estate Investment Trust (REIT)

Real EstateMortgage Investment Conduit (REMIC)

Residential Mortgage-Backed Security  (RMBS)

Real Estate Investment Trust (REIT) is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate, ranging from buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate. The REIT structure was designed to provide a real estate investment structure similar to the Structure Mutual Funds provide for investment in stocks.

Real Estate Mortgage Investment Conduit (REMIC) entitles the owner to a claim on the principal and interest payments on the particular mortgages underpinning the security. REMICs pay an interest rate that is usually related to the interest rates, the equivalent of the coupon on a mortgage-backed security is a percentage of the interest and principal paid on the mortgages backing the security. REMICs can take different legal forms: trusts, partnerships, and assets without a legal status. They qualify for special tax treatment. REMICs were established by the Tax Reform Act of 1986.

Residential Mortgage-Backed Security (RMBS) is a reference to the general package of financial agreements that typically represents cash yields that are paid to investors and it is a funding instrument that pools the cash flow and pays these cash receipts out with waterfall priorities that enable investors to become comfortable with the certainty of receipt of cash at any point in time.  The performance of these securities has generally been considered more predictable than commercial mortgage-backed securities, because of the large number of individual and geographically diversified financing that exist within any individual RMBS pool. There are many different types of RMBS, including collateralized mortgage obligations (CMOs), and collateralized debt obligations (CDOs).