Special Purpose Vehicle In Asset Securitization

Asset securitization first appeared in the United States in the 1970s, and spread over the world in the 1990s. Now, the Untied States and Europe have already formed an asset securitization market with considerable scale. Asset securitization, as a structured finance method, is one of the most influential finance innovations in the world in the latest 30 years, and is playing a more and more important role in the international finance market. As a way to allocate market resources, Asset securitization, in one hand, provides a new method of financing and risk management, in the other hand, supplies a more attractive investment vehicle for the public investors.The most important character of assets securitization is the special purpose vehicle (SPV). SPV is the transferee of assets and also the issuer of asset-backed securities. SPV, as the core of asset securitization, can divide investors from other risks effectively. As an instrument of asset securitization, the core value of SPV is risk-remote. SPV is a bankruptcy-remote entity.There are three parts in the article.The first part summarized the general status of securitization, introduced the concept of assets and securitization. In a typical transaction, the originator transfers rights to payment from income-producing assets to SPV. The SPV, in turn, issues securities to capital market investors and uses the proceeds of the issuance to pay for the receivables. The investors, who are repaid from collections of the receivables, buy the securities based on their assessments of the value of the receivables. Summed up the assets of the securities laws characteristics: Asset securitization makes the securities financing entity's credit ratings be independent. Asset securitization is a non-debt financing structure. The future cash flow is a guarantee of asset-backed securities. Asset securitization improves the credit ratings. Asset securitization is a complicated process. Although developing rapidly in the world, asset securitization has still not officially implemented in China. It is one of the major reasons that SPV encounters series of legal obstacles in Chinese current situation. Asset securitization practice appeared in China in the 1990s. But strictly speaking, none of these is of real sense of the asset securitization practice. On March 21, 2005, The People's Bank of China announced the credit-backed securitization started, the China Development Bank and the China Construction Bank will carry on credit-backed securitization and mortgage-backed securitization separately as the experimental units. This indicates asset securitization of our country has already moved officially toward practice. Because of the characteristic of trust and according to the reality of our country, our country has adopted SPT in experiment, but SPT have its own defects.The second part introduced the assets the concept of SPV, the functions of SPV and the legal nature. As an instrument of asset securitization, the core value of SPV is risk-remote. SPV is a bankruptcy-remote entity. Firstly, SPV should be kept away from the bankruptcy risk of itself. Secondly, SPV should be kept away from the bankruptcy risk of originators. Thirdly, SPV should be kept away from other bankruptcy risks.According to the international practice and experience, there are three main established modes: Company, Trust and partnership. Adopt Special Purpose Trust (SPT), the trust property is not only independent from the client's property, but also from the trustee's. So SPT can realize risk-remote effectively. SPT also can avoid double tax. Special Purpose Company (SPC) can issue different grades or other sources of payment of asset-backed securities. Diversified companies can also provide a variety of choices for originators. But SPC is difficult to avoid double tax. Special Purpose limited partnership mostly appeared in asset securitization in the United States, but rarely adopted this form in other countries and regions.In the last part, some advices on how to construct SPV in China are given from the law aspects. Considering the legal system in China, SPC has not adopted in asset securitization practice. However, SPC has its unique advantage. To enrich and flourish the market of asset securitization of our country, the law should provide more choices for parties and should establish SPC. At the beginning, to set up SPV in the form of companies solely invested by the state is a more realistic and practical option. When conditions are mature, other forms such as limited company or stock corporations are optional. But this needs legal protection. According to the international experience, all SPV are built up through separate legislation. Our country should learn from the experience of other countries and regions to enact the special asset securitization law, which promulgates both SPT and SPC system.The key to implement asset securitization is the establishment of the law of SPV. Regarding to SPC, its establishment and operation is quite different from common companies, so special legislation is needed. An intact legal system of SPC is to be constructed in such aspects as conditions of SPC establishment, organizations of SPC, business rules and protection of investors.