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Reasons & Advantages of using an SPV

   

Added on  2020-05-16

13 Pages4217 Words125 Views
Table of ContentsIntroduction....................................................................................................................................2Reasons & Advantages of using an SPV......................................................................................2Project financing process & key pit falls.....................................................................................3Sustainability aspects in such projects.........................................................................................6Indirect aspects..........................................................................................................................7Direct Aspects.............................................................................................................................8Conclusions...................................................................................................................................11References.....................................................................................................................................11

IntroductionA special purpose vehicle/entity (SPV/SPE) is a subsidiary of a parent company which is createdto secure obligations of parent company even when the parent company goes bankrupt(Annamalai et al., 2012).The objective of a SPV would be to permit the parent company tocreate highly leveraged or speculative investments without endangering the whole company.When the SPV may go bankrupt, it won't modify the parent company.The issue, as happened within the 2007-2008 crisis is the fact that frequently parents companiesmight have guaranteed liquidity lines for their SPV so when the SPV's began to get rid of moneyand lose use of credit, they'd use the funds of the parent company at any given time once theparent had been have less capital, therefore exacerbating the problems.Reasons & Advantages of using an SPVSharing the risk : Companies could use SPVs to legally separate a bad risk asset in the companyand also to shares risk among other investors.Securitization: SPVs are generally accustomed to raise the loans. For instance, a financialinstitution may decide to issue a home loan-backed security whose payments originate from acollection of loans. However, these financing options have to be separated in the otherobligations from the financial institution. This is accomplished by creating an SPV, after whichtransferring the loans in the bank towards the SPV(Barysch et al., 2014).Financial engineering: SPVs can be used to complex the financial instruments or to manipulatethe financial statements. Regulations: A SPV can be designed to change the ownership of an asset or project due to someregulatory reasons. Tax Reason: In many countries tax rates are different for gains from property and gains fromcapital. Hence to convert the properties into companies (SPVs), parent companies can converttheir property gain tax into capital gain tax (Beckers et al.2013).

Project financing process & key pit fallsRaising project finance for any project starts in the project development phase. Project sponsorswho don't possess the in-house expertise for raising project finance take the help of exteriorfinancial advisors. However, the work sponsor that has in-house expertise on developing projectson project finance route handles lenders directly. The function of monetary advisors would be tostructure the entire project to meet up with the work finance needs. They ought to also make surethat problems that might arise throughout the research by lenders ought to be addressed withinthe project contracts. Additionally for this, financial advisors offer assistance in preparing thebusiness model and knowledge memorandum, which is distributed to the possibility lenders. Thefinancial advisors' scope of works includes counseling around the optimal financial structure, andcounseling on potential banks, which is prepared to extend debt as well as their likely conditionsand terms of lending(Bhattacharya, Romani, and Stern ,2012).The financial advisors with respect to the work sponsors make a preliminary informationmemorandum, including financial and technical details about the work, to be able to invite banksto get charge manager for that projects. It's most generally adopted method for organizing projectfinance deals to first appoint a number of banks because the lead manager. Charge manager afterundertaking the interior loan approval process may ultimately underwrite the borrowed funds andput it on the market. Among the primary reasons besides earning revenue through underwritingcharges, because the sizes from the project finance loans develop, lenders choose to limit theirexposure to particular project by inviting other banks to create a syndicate that will cash advancewith each other towards the projects(Brunn,2011).The preliminary information memorandum supplied by the financial advisors includes the wordsheet, which offer inside a summarized make up the basis which project finance is going to besupplied by the mark lead managers. The financial advisors can invite numerous banks tounderwrite the borrowed funds and obtain the advantages of maximum competition betweenbanks on financial the lending(Credit Suisse ,2015). The fundamental terms inside a typical termsheet include:• Debt-equity proportion• duration of debt and it is repayment schedule• Drawdown agenda for debt and equity• Interest and charges

• Control of the lenders of the work organization's income• PrepaymentProvisions• Security of lenders• Covenants or projects through the project companyIn line with the information supplied by the financial consultant, lead manager perform internalloan approval procedure to be able to proceed using the loan. The different steps involved withthis internal credit approval procedure are:1.Internal credit proposal is ready in line with the preliminary information memorandum.2.The interior credit proposal is reviewed through the bank credit review team.3.Credit proposal will be authorized by the formal committee for approval.4.Lead manager underwrites your debt by filling out the agreed term sheet and specifies thatdocumentation is going to be signed with a final date.5.Research of project documentation and agreement, and security documentation is transportedout.6.The mark lead manager negotiates using the project sponsor around the conditions and termsfrom the financing documentation.7.Signing from the financing documentation marks the financing for that project continues to becommitted. The preliminary information memorandum supplied by the financial advisorsincludes the word sheet, which offer inside a summarized make up the basis which projectfinancing is going to be supplied by the mark lead managers. In line with the informationsupplied by the financial consultant, lead manager perform internal loan approval procedure tobe able to proceed using the loan(IFC,2012). The interior credit proposal is ready through the project finance team after evaluation from theproject. Throughout the evaluation, the characteristics from the project associated withmanagement and sponsor's financial strength were first evaluated as well as an evaluationmemorandum is generated. Then, the danger matrix from the project is produced by identifyingthe potential risks connected using the projects, how these risks could be mitigated, and do youknow the residual risks using the project company. The viability from the project from debtfinancing perspective is assessed in line with the evaluation memorandum and risk matrix(Ecofys-IDFC , 2012).

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