Special Purpose Entities
Single Asset Entities Used In Project Finance
Special Purpose Entities or Special Purpose Vehicles are stand-alone legal entities created by project sponsors to own and operate projects financed with project financing.
Overview of Special Purpose Entities
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
A special-purpose entity (SPE) or sometimes special-purpose vehicle (SPV) is a single-asset legal entity that is created for the sole and exclusive 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 project company, 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 finance 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.
Project Finance Learning Center
Project finance was first used in 1299 when an Italian merchant bank provided the project financing to finance the development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines. Project financing has been used to finance thousands of projects since those silver mines, including such notable projects as the Panama Canal and North Sea oil platforms. Our Project Finance Learning Center includes information we hope will improve understanding of this type of finance.
Definition of Project Finance
Project finance is not as well understood than it should be due largely to the fact that there is no consensus definition of project finance. Perceptions of what constitutes project financing vary depending on the definition of project finance you first learned. We list three of the most widely accepted definitions below.
A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.1
The raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project.2
The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.3
Project Finance Questions & Answers
Project Finance Lexicon
Accounts Receivable
Accounts Receivable is money owed to a company by a customer for products and /or services sold. Accounts receivable is considered a current asset on a balance sheet once an invoice has been sent to the customer.
Accounts Receivable Factoring
Accounts Receivable Factoring is a method of Trade Financing where a company sells their accounts receivable in exchange for working capital. The purchaser of the receivables relies on the creditworthiness of the customers who owe the invoices, not the subject company.
For details go to Accounts Receivable Factoring »
Advance Against Documents
Advances Against Documents are loans made solely based on the security of the documents covering the shipment.
Asset Based Lending
Asset Based Lending is a method of Trade Financing that allows a business to leverage company assets as collateral for a loan. Asset-based loans are an alternative to more traditional lending which is generally characterized as a higher risk which requires higher interest rates.
Cash Against Documents
Cash Against Documents is the payment for goods in which a commission house or other intermediary transfers title documents to the buyer upon payment in cash.
Cash in Advance
Payment for goods in which the price is paid in full before shipment is made. This method is usually used only for small purchases or when the goods are built to order.
Cash with Order
Cash with Order is the payment for goods whereby the buyer pays when ordering and in which the transaction is binding on both parties.
Commercial Finance
Commercial Finance is defined as the offering of loans to businesses by a bank or other lender. Commercial loans are either secured by business assets, accounts receivable, etc., or unsecured, in which case the lender relies on the borrower’s cash flow to repay the loan.
Confirmed Letter of Credit
A Confirmed Letter of Credit is a Letter of Credit issued by a foreign bank, which has been confirmed as valid by a domestic bank. An exporter whose form of payment is a Confirmed Letter of Credit is assured of payment by the domestic bank who confirmed the Letter of Credit even if the foreign buyer or the foreign bank defaults.
Consignment
Consignment is a delivery of merchandise from an exporter (the consignor) to an agent (the consignee) subject to an agreement by the agent that the agent will sell the merchandise for the benefit of the exporter, subject to certain limitations, like a minimum price. The exporter (consignor) retains ownership of and title to the goods until the agent (consignee) has sold them. Upon the sale of the goods, the agent typically retains a commission and remits the remaining net proceeds to the exporter.
For details go to Consignment Purchase »
Cross-Border Sale
A Cross-Border Sale refers to any sale that is made between a firm in one country and a firm located in a different country.
Factoring
Factoring is the selling of a company’s invoices and accounts receivable at a discount. The lender assumes the credit risk of the debtor and receives the cash when the debtor settles the account.
For details go to Accounts Receivable Factoring »
Invoice Discounting
Invoice Discounting is a type of loan that is drawn against a company’s outstanding invoices but does not require that the company give up administrative control of those invoices.
factoring invoices
factoring invoices is one of the most common methods of trade financing. Your company sells their invoices to a factor in exchange for immediate liquidity. The factor who purchases the invoices relies on the creditworthiness of the customers who owe the invoices, not the subject company.
For details go to factoring invoices »
Irrevocable Letter of Credit
Irrevocable Letter of Credit is a Letter of Credit in which the specified payment is guaranteed by the bank if all terms and conditions are met by the drawee.
Letter of Credit
Letter of Credit or LC is the most common trade finance solution in the world. A Letter of Credit is a document issued by a bank for the benefit of a seller or exporter, which authorizes the seller to draw a specified amount of money, under specified terms, usually the receipt by the issuing bank of certain documents within a given time.
For details go to Letters of Credit For Imports »
Open Account
Open Account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. The obvious risk this method poses to the supplier makes it essential that the buyer’s integrity be unquestionable.
For details go to Open Accounts »
Pro forma Invoice
Pro forma Invoice is an invoice provided by a supplier prior to the shipment of merchandise, which informs the buyer of the kinds, nature and quantities of goods to be shipped along with their value, and other important specifications such as weight and size.
Receivable Management
Receivable Management involves processing activities related to managing a company’s accounts receivable including collections, credit policies and minimizing any risk that threatens a firm from collecting receivables.
Revocable Letter of Credit
Revocable Letter of Credit is a Letter of Credit that can be canceled or altered by a buyer after it has been issued by the buyer’s bank.
Structured Trade Finance
Structured Trade Finance is cross-border trade finance in emerging markets where the intention is that the loan gets repaid by the liquidation of a flow of commodities.
Trade Credit Insurance
Trade Credit Insurance is a risk management product offered to business entities wishing to protect their balance sheet assets from loss due to credit risks such as protracted default, insolvency, and bankruptcy. Trade Credit Insurance often includes a component of political risk insurance, which ensures the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc.
Project Finance Documents
› EPC Contract
› O&M Agreement
› Loan Agreement
› Offtake Agreement
› Supply Agreement
› Intercreditor Agreement
› Tripartite Deed
› Common Terms Agreement
› Concession Deeds
› Shareholder Agreement
Project Finance Participants & Stakeholders
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