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Orphan structure or Orphan SPV or orphaning are terms used in structured finance closely associated with creating SPVs ("
Special Purpose Vehicles A special-purpose entity (SPE; or, in Europe and India, special-purpose vehicle/SPV; or, in some cases in each EU jurisdiction, FVC, financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limited ...
") for
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transactions where the notional
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diff ...
of the SPV is deliberately handed over to an unconnected 3rd party who themselves have no control over the SPV; thus the SPV becomes an "orphan" whose equity is controlled by no one.


Description

In an orphaned SPV, the
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diff ...
is held by a 3rd party with no legal relationship to the two main parties engaging in the
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
(the asset user(s), and the lender(s) financing the assets). While this 3rd party legally "owns" the equity of the SPV, the way in which their ownership is structured gives them no control over the SPV. The driver for orphaning is to enable the
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transaction to be held
off-balance sheet Off balance sheet (OBS), or incognito leverage, usually means an asset or debt or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance-sheet item. Some companies may have significant amounts o ...
. If the asset users, or the asset lenders, owned (or legally controlled) the SPV equity, then the SPV would be consolidated into their group accounts. This is something that the lenders to the SPV have to avoid as they are mostly banks and only want to give in loans. Users of the asset may want to avoid if their borrowing limits may have been reached (or they want a regulatory/liability firewall between themselves and the asset(s)). Orphaned SPV structures allow lenders to separate the asset finance, from the asset user(s), thus enabling them to move the asset to other users(s) should the situation arise (e.g. bankruptcy of a user), without having to recreate a new SPV and/or reraise new loans. Orphaning is at the heart of global
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transactions, and without orphaning, most
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
SPVs would cease to be useful or effective to their creators. An orphaned SPV is, by definition, an artificial creation as everybody knows who "controls" the SPV. There are instances outside of
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
s where orphaned SPVs, and the ability to separate "true" owners from "legal" owners, can be used for
tax avoidance Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdi ...
. For example, restructuring equity into debt, and then relocating this debt to a
tax haven A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
via orphaned SPVs, is a classic abuse of orphaning. This is why orphaning is not available in all jurisdictions, and where it is offered in non-
tax havens A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
(i.e. where there are domestic taxes), it is strictly controlled and monitored by taxing authorities.


Owners

The SPV is generally a limited liability company issued in either an offshore location (i.e. the Cayman Islands SPV) or an onshore location (i.e. Irish Section 110 SPV). The key considerations in deciding what 3rd party entities are used to "own" the orphaned SPV equity are driven by: Given the above, the orphaned SPV equity is usually held by a nominee share trustee company on trust pursuant to a Declaration of Trust (and never via an individual). Specialist law firms provide such trust services (can often be a subsidiary of the law firm advising on the main SPV and/or securitisation transaction). Often only a small number of shares are created for a nominal sum (the exact specific amounts depending on the specifics of the jurisdiction) as the "equity" of the SPV. These shares are then independently purchased by the 3rd party entity in question using their own funds to complete the purchase (cannot be paid for directly by the main parties). Some jurisdictions have used Charitable Trusts due to their particular robustness to avoiding bankruptcy (not legally possible for it to enter a bankruptcy process), however, this had led to some public concerns over the integrity of the overall orphaned SPV structure (e.g. Matheson in Ireland), and has now been stopped in Ireland. The Non-Charitable Purpose Trust is emerging as a preferred option in some jurisdictions.


Abuses

The global
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
market is large (circa US$10 trillion in assets) and involves multinationals getting assets financed by global banks structured in SPVs created by global law and accounting firms. The orphaned SPV structures they use are understood and accepted in many jurisdictions, by regulators and taxing authorities as vehicles in which to conduct global
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transactions. Unfortunately, the global acceptance of the main orphaned SPV structures has attracted the attention of users who are not seeking to conduct standard tax-transparent
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transactions, but who have other aims and objectives which regulators and tax authorities did not envisage orphaned SPVs being used for. * In 2016, it was discovered that US
distressed debt Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding s ...
funds used orphaned SPVs, known as Section 110 SPVs, to buy Irish distressed assets during the Irish financial crisis to avoid Irish taxes. By the time the
loopholes A loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system. Originally, the word meant an arrowslit, a narrow verti ...
were closed by the Irish Government, material amounts of tax revenues were lost to the Irish exchequer. * In 2017–2018, academic research by Professor Jim Stewart in
Trinity College Dublin , name_Latin = Collegium Sanctae et Individuae Trinitatis Reginae Elizabethae juxta Dublin , motto = ''Perpetuis futuris temporibus duraturam'' (Latin) , motto_lang = la , motto_English = It will last i ...
, showed Russian financial entities were using the anonymity of orphaning, as well as the inherent complexity of
securitisation Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transactions, to circumvent various international sanctions in moving money globally. Ireland is the largest EU location for orphaned SPVs, and the above abuses have drawn warnings from the former Deputy Governor of the
Central Bank of Ireland The Central Bank of Ireland ( ga, Banc Ceannais na hÉireann) is Ireland's central bank, and as such part of the European System of Central Banks (ESCB). It is the country's financial services regulator for most categories of financial firms ...


See also

* Irish Section 110 SPVs * Purpose Trusts * Bankruptcy Remoteness


References

{{structured finance Offshore finance Legal entities Types of business entity