30
Dec
Posted by
Mohit Sewak Category:
Finance,
Securitization
.
.
.
What is a Bankruptcy Remote Entity (BRE) ?
.
.
A Bankuptcy Remote Entity (BRE), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.
Example 1: – High Risk/ High Leverage Project Financing
.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.
Example 2: – Securitization of Risky Loans/ Mortgage Instruments.
.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)
.
.
Other Posts Related to Securitization:
.
1. What is Securitization?
2. What are CDO/CDS/CLO/ABS ?
3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
.
.
.
.
.
.
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30
Dec
Posted by
Mohit Sewak Category:
Marketing
.
.
.
What is a Special Purpose Trust (SPT) ?
.
.
A Special Purpose Trust (SPT), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.
Example 1: – High Risk/ High Leverage Project Financing
.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.
Example 2: – Securitization of Risky Loans/ Mortgage Instruments.
.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)
.
.
Other Posts Related to Securitization:
.
1. What is Securitization?
2. What are CDO/CDS/CLO/ABS ?
3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
.
.
.
.
.
.
Share this post with your friends and family on:
Please Share this article With Your Friends and Family On:
30
Dec
Posted by
Mohit Sewak Category:
Finance,
Securitization
.
.
.
What is a Special Purpose Company (SPC) ?
.
.
A Special Purpose Comapny (SPC), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.
Example 1: – High Risk/ High Leverage Project Financing
.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.
Example 2: – Securitization of Risky Loans/ Mortgage Instruments.
.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)
.
.
Other Posts Related to Securitization:
.
1. What is Securitization?
2. What are CDO/CDS/CLO/ABS ?
3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
.
.
.
.
.
.
Share this post with your friends and family on:
Please Share this article With Your Friends and Family On:
30
Dec
Posted by
Mohit Sewak Category:
Finance,
Securitization
.
.
.
What is a Special Purpose Entity (SPE) ?
.
.
A Special Purpose Entity (SPE), also called a Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.
Example 1: – High Risk/ High Leverage Project Financing
.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.
Example 2: – Securitization of Risky Loans/ Mortgage Instruments.
.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)
.
.
Other Posts Related to Securitization:
.
1. What is Securitization?
2. What are CDO/CDS/CLO/ABS ?
3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
.
.
.
.
.
.
Share this post with your friends and family on:
Please Share this article With Your Friends and Family On:
30
Dec
Posted by
Mohit Sewak Category:
Finance,
Securitization
.
.
.
What is a Special Purpose Vehicle (SPV) ?
.
.
A Special Purpose Vehicle (SPV), is a financial/ legal entity created to isolate the risk of the parent firm from a risky activity/ project that it wants to undertake.
Although the above definition seems very crude, but technically speaking it captures the essence of all the uses that an SPV can be used for. Based on the specific uses, the name changes a bit, and the path to reach the desired goal (of isolating the parent company from a perceived high risk instrument/ activity) may vary. To describe the same in detail we will some of the examples of SPV’s in use.
.
.
Example 1: – High Risk/ High Leverage Project Financing
.
Suppose you have a highly leveraged international green infrastructure project underway. Obviously it contains many risks ranging from financial, country, and foreign exchange risks. No company would like to see an impact of financing/ guarantying such a project on its share prices. The investors invested in this company anticipating a particular maximum risk, and if the risk of the firm increases due to financing such risky projects (and obviously the present returns are not in proportion to the increased risks of the new project) they will definitely not like this.
Even otherwise also, a successful company would not like to risk its present successfully running business for a new extension. To solve this problem the firm does not takes a loan on its own name, but instead forms a sort of limited company with contracts that ensures that the present/ parent firm will not be obliged to pay the creditors of this daughter/ limited company, if it were not able to fulfill its obligations if it were to declare bankruptcy (and vice-versa: – that is that if under any condition if the parent firm were to go bankrupt, its creditors cannot sue the daughter firm for the claims, and hence the project is also safe from the underlying risks of the parent firm, if any).
Now, with the two firms being isolated from any financial risks/ cross claims, the loan/ debts are taken for the project on the name of this daughter firm, also call a Special Purpose Entity (SPE) (as it is a financial entity created for a special purpose), or a Bankruptcy-Remote Entity (BRE) (As it is keeping remote any bankruptcy claims of the daughter company to the parent company and vice versa), or can simply be called a Special Purpose Vehicle (SPV).
.
.
Example 2: – Securitization of Risky Loans/ Mortgage Instruments.
.
As we discussed in our last post (What is Securitization ?), no bank would like to keep the mortgaged loans in it’s own books. Not only will it lock the bank’s loanable funds, and hence hit its profit margins severely, but also as banks will not like to carry such risky loans (as they contain many sub-prime loans as well : we will discuss about sub prime loans and sub prime crisis in another post) in it’s own book because it wants to maintain a good Capital Adequacy Ratio (CAR) to adhere to the Basel (I and II) norms, while also not missing a chance to earn from these profitable instruments.
To achieve these twin objectives, the Bank creates a Special Purpose Vehicle (SPV), and transfer all these mortgage backed loans into the books of this new entity to relieve itself of any liabilities arising of these instruments.
Obviously making a limited company and having a parent-daughter relation here will not work, and the bank will not be able to shirk off all its obligations completely. So, in this case, instead of a limited company, a Special Purpose Trust (SPT) is made in this case (whose status is mostly of an orphan trust, with its shares held by a charitable trust), that have an independent professional Director who is not attached with the Bank.
Thus now both the entities (Bank and the SPT/ SPV) are isolated from each other for all regulatory, accounting, and bankruptcy purposes.
.
.
Technically speaking, the term SPV is the general term for any such entity, and all other terms are used as specific instances to clarify the need for its formation, but now a days it can be used interchangeably with the below mentioned names: -
.
.
1. Special Purpose Vehicle (SPV)
2. Special Purpose Entity (SPE)
3. Special Purpose Trust (SPT) (as called in US)
4. Variable Interest Entity (VIE) (as used by the United States Financial Accounting Standards Board)
5. Bankruptcy Remote Entity (BRE)
6. Special Purpose Company (SPC) (or SPT as called in Japan).
7. Special Purpose Acquisition Company (SPAC)
.
.
Other Posts Related to Securitization:
.
1. What is Securitization?
2. What are CDO/CDS/CLO/ABS ?
3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares), and CDO3 (CDO Cubes) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
.
.
.
.
.
.
Share this post with your friends and family on:
Please Share this article With Your Friends and Family On:
