Special Purpose Vehicle/Entity - SPV/SPE

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DEFINITION of 'Special Purpose Vehicle/Entity - SPV/SPE'

1. Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.

2. A subsidiary corporation designed to serve as a counterparty for swaps and other credit sensitive derivative instruments. Also called a "derivatives product company."

BREAKING DOWN 'Special Purpose Vehicle/Entity - SPV/SPE'

Thanks to Enron, SPVs/SPEs are household words. These entities aren't all bad though. They were originally (and still are) used to isolate financial risk.

A corporation can use such a vehicle to finance a large project without putting the entire firm at risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide debt. Essentially, it looks like the company doesn't have a liability when they really do. As we saw with the Enron bankruptcy, if things go wrong, the results can be devastating.

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RELATED FAQS
  1. How did Enron use off-balance-sheet items to hide huge debts and toxic assets?

    Prior to its infamous accounting scandals and collapse, Enron used off-balance-sheet special purpose vehicles (SPVs) to hide ... Read Full Answer >>
  2. What are some historical examples of debt securitization?

    The first debt securities were probably sovereign debt assets that were transferred from the British government to mercantilist ... Read Full Answer >>
  3. After Enron, are SPVs / SPEs considered good business practice?

    A special purpose vehicle (SPV), also known as a special purpose entity (SPE), is a separate entity created by a company ... Read Full Answer >>
  4. Is there a limit to the number of SPVs / SPEs a company can create?

    There are no fixed, definable legal limits on the number of affiliate companies that a corporation can create. Special purpose ... Read Full Answer >>
  5. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  6. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
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