A separate legal entity created for a precise, isolated purpose, ring-fencing assets and risks, the cornerstone of securitization transactions and cat bonds.
A special purpose vehicle is a separate legal entity created to accomplish a precise and delimited purpose, by isolating the assets and risks attached to it from the balance sheet of its originator. This separation pursues an essential aim, ring-fencing, which protects the operations housed in the vehicle from the hazards affecting the originator, and vice versa, a property often described as bankruptcy remoteness. The special purpose vehicle is the cornerstone of securitization transactions and of the transfer of risk to the capital markets. In the case of a catastrophe bond, for example, it is a special purpose vehicle that issues the bond to investors, collects their funds, places them in secure collateral, pays the coupons and, where applicable, draws down the principal to indemnify the sponsor if the trigger event occurs. This architecture ensures that the protection bought by the cedant is fully collateralized and independent of the financial health of the sponsor as of the investors. While special purpose vehicles are legitimate financial tools that are indispensable to the modern pooling of risk, their potential opacity has also fed, in other contexts, questionable uses, which makes them an object of vigilance for regulators.
To issue a catastrophe bond, a reinsurer sets up a special purpose vehicle that gathers investors' funds, holds them as collateral and will release them to the reinsurer only if the defined event occurs, isolating the transaction from any default risk.
véhicule ad hoc, special purpose vehicle, SPV, entité ad hoc, véhicule de titrisation