Special Purpose Vehicles
Summer Internship Program 2008
This Summer Project has been done as part of the MBA program at SCMHRD, Pune
Project Guide : Mr. Sujit Sinha, Senior Consultant, PwC
Project done by : Mohamed Ahmed Mapara, MBA Batch of 2009, SCMHRD, Pune
New business ventures – operational and financial risk transfer
•Operational and financial risk transfer
•Better financial arrangements
Mainly financial off-balance sheet activities – CDO, CBO, RMBS and Mortgage Financing
The United States
Argentina
Morocco India
Advantage Company :
The originator holds the option to transfer its financial risk to a separate entity, and at the same time, recognize future gains as present.
Few more advantages are that the parent company avoids rehaul in its ownership positions as well as prevents its debt commitments from rising too high.
Advantage Investors :
Assets are free from the charge of the Originator’s creditors.
It is a limited gamble as investors' money is used for specified purpose only and all cash flows go to them only.
(Source : Fannie Mae Annual Report 2007)
Synthetic Lease
Finance acquisition of larger capital goods___________________________________________________________________________
Securitization
Issues of ABS and MBS, underlying of which are the assets of the originator___________________________________________________________________________
Risk sharing and Competition
Transfer of risk and Incentive for independent research___________________________________________________________________________
Property Investments and Regulatory Purposes
Tax Benefits and Country entry mechanism
A CDO is an Asset or Mortgage Backed Security and Structured credit instrument
Tranches in a typical CDO
Features
Principle of Higher the risk, higher the return applies
Mark to Market is an important feature
Source : Celent Research Corporation
In the pdf
Geographical spread
Different angles to look at the CDO
Rating a pool of debts makes it readily marketable to investors
Where does it go wrong ?
In the pdf
Comparative chart for ratings by the Big 3
Case on wrong rating
Feature Netherlands IrelandWithholding Tax Not on interest payments Not on interest payments
on Eurobonds and other treaty exempted instruments
Corporate Tax @ 34.5% on a negligible base
@ 25% on a negligible base
Value-added Tax Not Applicable Not Applicable
Other duties and taxes Not Applicable Not Applicable (updated)
Double-tax treaties Around 80 Double-tax treaties
44 Double-tax treaties
Other reasons for preference
Membership of EU and OECD
Membership of EU and OECD
Use of SPVs to flout accounting principles
RAPTORS transactionBRAVEHEART transaction
CDOs were primarily to be blamed
Mindless Hiving-off by FIs
2006 : 70% of USD 200bn issues were sub-prime
Credit ratings were not updated
Why prepare Accounts ?
Need for a systematic reporting of transactions in order to be rated
Conformity with IFRS and AS of the country
Managing Director’s report
Financial Starements
Declarations and Notes
What is reported ?*
Assurance that ‘true and fair’ picture of transactions has been reported
Coverage, Impairment and Quality tests*
Challenes in Auditing
Complexity of multiple contracts
Complex Derivative transactions
Non-uniformity in application of GAAP / GAAS
Estimation and Impairment of Fixed Assets
Non-compliance review
Revenue recognition and cost allocation
It’s the power of a Bankruptcy Court
When used ?
Implications
Acknowledgements
Mr. Prakash Kamath, Associate Director, PwC
Mr. Sujit Sinha, Senior Consultant, PwC
PwC Netherlands CDO Team
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