Special Purpose Entities
Single Asset Entities Used In Project Finance
Special Purpose Entities Overview
Our Project Finance services provide clients with advantages that aren’t possible with other financings. We are able to raise tremendous amounts of long-term equity and non-recourse or limited recourse debt, enabling us to fund large projects while at the same time protecting our client’s balance sheet.
The key to shielding project sponsors from recourse liability are well developed Project Finance Documents. To protect our clients we negotiate Project Finance Documents on their behalf to ensure they are well conceived and well written. We use the Project Finance Documents to allocate risk among the participants, thus enabling project sponsors to undertake larger, higher-risk projects than would otherwise be possible.
Project Finance Documents apply strong discipline to the contracting and operations phases of Project Finance. The documents also mandate the participation of several key private sector participants in the deal which enables us to further allocate risk. The Project Finance Documents can also be used to require host country participation which has the effect of limiting a great deal of the political risk typical of projects in emerging markets.
One disadvantage of Project Finance Documents is that they typically require supervision of the project management and operations that are considered intrusive. However, on balance, well-conceived Project Finance Documents are one of the keys to successfully delivering project funding and should be embraced by the project sponsors and project participants alike.
Special Purpose Entities Description
A special-purpose entity (SPE) or sometimes special-purpose vehicle (SPV) is a single-asset legal entity that is created for the sole purpose of acting as the project owner in a project financing. SPE are usually limited liability companies of some type or, sometimes, limited partnerships. Special-Purpose Entities are created by the project sponsor to shield the parent companies from financial risk.
When an SPE is created to serve as the ownership company of a project, the parent company transfers only those assets to the SPE which are necessary to capitalize the project and comply with the requirements of the project financing documents. This is the extent of the parent company’s investment in the project and thus the extent of their assets at risk.
Because the loans which provide the project financing are non-recourse or limited recourse loans, the parent company has capped their risk exposure and the risk exposure of other project investors at the amount which is invested in capitalizing the project. Thus, none of the owners, sponsors or investors in the project or the SPE have exposure, which puts the parent organizations at risk.
Special Purpose Entities are also frequently used in complex project financings to separate different layers of equity invested in the project, especially if there are different classes of ownership or preferred returns in the waterfall. SPEs are commonly structured as tax avoidance mechanisms especially if they are created in tax haven jurisdictions.
In that Special Purpose Entities only have one asset, which is the subject project itself, SPEs are frequently used to facilitate the sale of the underlying asset because a sale of the entity is often easier and less complex than would be the sale of the underlying assets. This is especially common in public-private partnerships throughout Europe where they rely on the project finance structure.
Special Purpose Entities are also off balance sheet vessels so they are also often used to hide debt (thus inflating the profits of the parent company), hide ownership, and obscure relationships between different entities which are in fact related to each other.
Special Purpose Entities are an important part of project financings and are critically important to all of the project participants. Therefore it is vitally important to the success of the project that the documents which establish the SPE, like all project finance documents, be prepared by professionals who are expert in project finance.
Global Trade Funding typically prepares all of the project finance documents for a project to ensure the quality of the documents and to ensure the documents accurately conform to the project structure the sponsors intended.
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