Special Purpose Vehicles

Summer Internship Program 2008

This Summer Project has been done as part of the MBA program at SCMHRD, Pune

Project Guide : Mr. Sujit Sinha, Senior Consultant, PwC

Project done by : Mohamed Ahmed Mapara, MBA Batch of 2009, SCMHRD, Pune

New business ventures – operational and financial risk transfer

•Operational and financial risk transfer

•Better financial arrangements

Mainly financial off-balance sheet activities – CDO, CBO, RMBS and Mortgage Financing

The United States

Argentina

Morocco India

Advantage Company :

The originator holds the option to transfer its financial risk to a separate entity, and at the same time, recognize future gains as present.

Few more advantages are that the parent company avoids rehaul in its ownership positions as well as prevents its debt commitments from rising too high.

Advantage Investors :

Assets are free from the charge of the Originator’s creditors.

It is a limited gamble as investors' money is used for specified purpose only and all cash flows go to them only.

(Source : Fannie Mae Annual Report 2007)

Synthetic Lease

Finance acquisition of larger capital goods___________________________________________________________________________

Securitization

Issues of ABS and MBS, underlying of which are the assets of the originator___________________________________________________________________________

Risk sharing and Competition

Transfer of risk and Incentive for independent research___________________________________________________________________________

Property Investments and Regulatory Purposes

Tax Benefits and Country entry mechanism

A CDO is an Asset or Mortgage Backed Security and Structured credit instrument

Tranches in a typical CDO

Features

Principle of Higher the risk, higher the return applies

Mark to Market is an important feature

Source : Celent Research Corporation

In the pdf

Geographical spread

Different angles to look at the CDO

Rating a pool of debts makes it readily marketable to investors

Where does it go wrong ?

In the pdf

Comparative chart for ratings by the Big 3

Case on wrong rating

Feature Netherlands IrelandWithholding Tax Not on interest payments Not on interest payments

on Eurobonds and other treaty exempted instruments

Corporate Tax @ 34.5% on a negligible base

@ 25% on a negligible base

Value-added Tax Not Applicable Not Applicable

Other duties and taxes Not Applicable Not Applicable (updated)

Double-tax treaties Around 80 Double-tax treaties

44 Double-tax treaties

Other reasons for preference

Membership of EU and OECD

Membership of EU and OECD

Use of SPVs to flout accounting principles

RAPTORS transactionBRAVEHEART transaction

CDOs were primarily to be blamed

Mindless Hiving-off by FIs

2006 : 70% of USD 200bn issues were sub-prime

Credit ratings were not updated

Why prepare Accounts ?

Need for a systematic reporting of transactions in order to be rated

Conformity with IFRS and AS of the country

Managing Director’s report

Financial Starements

Declarations and Notes

What is reported ?*

Assurance that ‘true and fair’ picture of transactions has been reported

Coverage, Impairment and Quality tests*

Challenes in Auditing

Complexity of multiple contracts

Complex Derivative transactions

Non-uniformity in application of GAAP / GAAS

Estimation and Impairment of Fixed Assets

Non-compliance review

Revenue recognition and cost allocation

It’s the power of a Bankruptcy Court

When used ?

Implications

Acknowledgements

Mr. Prakash Kamath, Associate Director, PwC

Mr. Sujit Sinha, Senior Consultant, PwC

PwC Netherlands CDO Team