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Key factors in domiciling complex SPVs

The ideal jurisdiction for a complexly structured SPV should incorporate a mature financial industry, a flexible time zone, and a well-defined and comprehensible legal and regulatory system.

A special-purpose vehicle (SPV) is an entity created to fulfil a defined objective, and may provide benefits such as ring-fencing risk, tax planning, and off-balance-sheet financing. Types of SPV can include blocker structures, feeders, orphan entities, and bankruptcy-remote entities, that all vary in complexity.

When seeking a suitable domiciliation for a complex SPV in consultation with your professional advisor, you may want to consider certain qualities in a jurisdiction that could provide specific advantages. These include:

  • Mature, well-developed financial services industry
  • Well-defined legal system
  • Favorable tax regime
  • Location in a time zone that allows interaction with clients globally
  • Stable political and regulatory framework

Depending on the complexity of the SPV’s structure, some jurisdictions may be more favorable than others.

Most SPV structures attempt to capitalize on a particular tax or reporting efficiency, and usually have a simple equity structure in that they’re bankruptcy remote. These are commonly used for structured financial transactions such as asset securitization. More complex SPVs, which tend to be structured to allow further benefits or efficiencies, are typically more debt and financing focused.

Rising interest rates are altering the SPV landscape globally, and improved local compliance with global regulatory norms is driving the growth of more complex structures.

These include:

  • Insurance-linked SPVs established by insurers and reinsurers to issue linked securities.
  • Orphan SPVs that allow a more off-balance-sheet approach and are often used to enhance leverage and protection from bankruptcy or restructuring events. They’re particularly useful with covered bond structures.
  • Multi-issuance structures allowing a manager to repack multiple asset types and make multiple issuances.

Orphan SPVs: more popular as rates rise

These structures have been designed to be bankruptcy remote. In other words, if a bankruptcy event arises involving transaction parties contributing assets to the structure, the SPV is established as an unaffiliated independent entity in its own right. This gives investors additional comfort.

Although rising global interest rates are beginning to cause stresses in the financial system, there are growing opportunities on both sides of the coin. Put simply, SPVs by their nature have a role to play in both facilitating alternative lending and financing structures as well as ring-fencing of assets that may have adverse tax or economic effects on larger structures and ultimately investors.

Special opportunities and project financing typically use SPVs in their lending structures that create large-scale opportunities for funds to invest in financing opportunities whether that be for infrastructure projects, real-estate portfolio financing, or tranche lending opportunities. SPVs are utilized to maximize tax efficiency as well as segregation from lenders on a large scale that would not be as practical or cost-efficient for smaller-scale financing.

Illiquid and blocker SPVs on the other hand focus on the concept of segregating defaulted or illiquid assets that may have adverse economic consequences on a fund and/or its investors. SPVs can offer distinct advantages but there are always risks and nuances that managers and their professional advisors may want to consider if utilizing these structures. For example, as SPVs will typically have their own corporate governance framework, it is vitally important to choose a service provider with the experience and knowledge to help administer them. Understanding issues such as these is important to the successful domiciliation of a vehicle.

To illustrate these considerations, we look at two jurisdictions that are attracting increased interest in 2023—the Cayman Islands and Singapore.

Cayman Islands: a positive direction of travel

As a jurisdiction, the Cayman Islands has driven multiple initiatives locally to emphasize its compliance with global standards and further underline its reputation as one of the world’s leading financial jurisdictions. Most recently on October 27, 2023, the Financial Action Task Force (FATF) removed the Cayman Islands from the anti-money laundering “grey list” after two years of work and inspections.

This demonstrates a positive direction for the jurisdiction’s reputation. But it also highlights the increasing requirements for know-your-customer (KYC) and anti-money laundering (AML) regulations and reporting.

As the Cayman Islands reforms its approach and becomes more regulated, the result is better transparency and more assurances for market participants, as well as an increase in the administrative burden.

Singapore: access to global capital markets

This jurisdiction has a highly regulated and mature financial services industry, including complex SPVs. There are a range of debt-structured SPVs prevalent in the territory. For example, orphan structures are highly popular now. In CSC’s experience, off-balance sheet, covered bond, and repackaging vehicles are generally experiencing good levels of growth.

The cost to establish and administer your SPV here may be higher—but the access to global capital markets and lower reputational risk may be worth the expense. The higher regulatory and reporting burden is an area in which CSC’s services are particularly valuable.

Why CSC?

  • CSC can establish, maintain, and provide directors for structured SPVs and offers best-in-class onboarding and client due diligence.

  • We are experienced with multiple asset classes and lending structures, as well as a wide range of typical domiciles for SPVs. We are a solution-oriented group offering both flexibility for your developing needs and the ability to act as a one-stop shop for your business in this field. We strive for a 360-degree delivery approach.

  • We are familiar with the most common strategies and pitfalls in this asset class and are well-positioned to advise you on how to maximize returns and minimize management strain.

  • Choosing a jurisdiction for your complex SPV requires careful consideration. Our guide to SPV domiciliation tells you everything you need to know about the world’s most favorable destinations. Download it here.