Hi Team,
As my main professional interest is in the specific field of Project Financing, I have decided to give you all a brief insight on the main mechanics of such a structured financing venture. In Project Finance, Special Purpose Vehicles are essential as it merges different companies and investors together with the sole objective of the construction, operation, and transfer of a large-scale infrastructure project.
Parenthetical Definition
A Special Purpose Vehicle (financial legal entity) in project finance is a company designed specifically to fulfill the purposes of a specific infrastructure project.
Sentence Definition
Special Purpose Vehicles (SPV) are entities that are independent from the parent organisation or financial institution. It is often used in project finance ventures which are usually high-risk, as it’s individual legal personality isolates financial risk to the parent company or investors.
Expanded Definition
Project Finance is a long-term funding venture for large-scale infrastructure projects that is very complicated with multiple loaners, investors, contractors, and subcontractors involved. It’s complicated nature calls for a Specific Purpose Vehicle (SPV) to be created as a joint venture, it’s main objective is to isolate risk, removing the liabilities and obligations for the parent company to invest in the specific venture. SPVs are legally independent, and also financially independent with it’s own operating cash flow.
What are the benefits of a SPV?
An SPV involves a lower initial equity injection, hedging the risk of the core business. Usually in project finance, risk is high in:
Interest rate – due to the long life-span and the multi-currency nature of a project.
Exchange rate – the cost/revenue is computed in different currencies.
Inflation – most contracts between SPV and commercial counterparts are based on revision mechanisms for rates, and thus both industrial and financial cost/revenue is impacted by inflation.
What is the structure of a SPV?
SPVs are usually created as a limited partnership, or a limited liability corporation.
It has it’s own balance sheet, indicating the cash flow, assets, liabilities, and equity which is independent from the parent corporations.
SPVs are structured as non-recourse or limited-recourse, meaning that the cash flow of the SPV is considered as a major source of loan reimbursement for lenders.
Works Cited
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