- 08 Jul 2020
- Jessica Pownell
What is a Special Purpose Vehicle, how can it minimize financial risk for a corporation or High-Net-Worth Individual who is financing a jet, and how should they be properly structured? René Armas Maes explores…Back to Articles
Business jets can be purchased by myriad financing mechanisms including cash, export credit agency-backed financing, and debt instruments, among others. Likewise, and based on the aircraft owner’s business goals, different corporate structures can be set up to minimize certain risks...
A Special Purpose Vehicle (SPV) is a corporate structure that allows a parent company to isolate financial risk. In order to help mitigate risk, it is advisable to legally separate assets or entities. SPVs (also known as Special Purpose Entities) are separate legal entities created by a parent company for a business transaction, such as lending scenarios (for example, operating leases), or asset acquisition.
SPVs have their own legal structure, assets, liabilities and balance sheet and allow a corporation or a High-Net-Worth Individual to carry out specific activities, such as to buy and operate a business jet. In addition – and in the case the parent company is liquidated – SVPs will not be affected and will keep its obligations. Thus, they are referred to as ‘bankruptcy remote’ entities.
A corporation/High-Net-Worth Individual whose goal is to limit liabilities and protect itself in case of incidents, accidents, and claims may prefer to set up an SPV company that owns its business jet.
Therefore, it may decide to create a separate legal entity from the parent company (in this case a flight department) that owns one or multiple aircraft.
It's important to note, however, that they may take different forms such as Limited Liability Corporations (LLCs), limited partnerships, purpose trusts and joint ventures.
What are the Benefits of SPVs?
The benefits of SPVs are many. We’ve listed a number of benefits as follows:
Primarily Risk Insulation: SPVs allow owners/operators to reassign the risk of an asset such a business aircraft from the parent firm to a separate company (the SPV) and insulate it from the financial risk in the event of default. By creating SPVs, businesses can carve out protection for specific entities or assets that are held separately from their primary business.
Limited Liability Recourse: An SPV allows protection against claims in case of an aircraft accident, while limiting legal liability for the parent company (in other words, the recourse of the SPV will be limited to the aircraft itself).
Asset Transfer: SPVs allow corporations to transfer assets easily without delays to a new organization in the case of a merger, acquisition or any other commercial transaction. By having a SPV own an asset, the SPV can be sold as a self-contained unit, eliminating the need to transfer permits.
Asset Confidentiality: SPVs allow off-balance sheet treatment as the asset and debt can be held separately from the balance sheet of the parent organization.
Financing Flexibility: An SPV can be used to secure financing for a new asset without increasing the debt burden on a parent company. In addition, a parent company may benefit from a lower cost of capital because of the off-balance sheet asset treatment opportunity.
Therefore, SPVs allow the removal of debt from the parent company’s balance sheet, translating into a potentially lower financial leverage position and a preferred interest rate. Likewise, the parent company may benefit too, since such vehicles can be used to raise additional capital at more favorable borrowing rates.
Offshore Jurisdiction Tax-Saving Opportunity: As SPVs can be set up in a tax-free location, the asset can be exempted from taxation. Favorable offshore tax systems in the British Virgin Island, Bermuda and the Cayman Islands have made these locations (and others) ideal jurisdictions for aircraft financing transactions.
Setting up an SPV Entity is Straightforward: The SPV is a widely used corporate structure when one tries to meet critical business needs, such as isolating and managing financial risk, among other corporate goals.
SPVs in Summary…
Overall, it is important to note that SPVs continue to play a vital role in Business Aviation. However, negative public perception is one potential risk when executing an SPV – especially, as it becomes a challenge for potential investors and financial analysts to conduct a thorough company valuation as they try to price a business and understand its upcoming commitments, obligations, cash flows and total financial leverage.
Moreover, SPVs have been associated with manipulation of financial statements due to the fact that they are off-balance sheet vehicles, and in the past a number of companies have hidden large amounts of debt from investors and creditors.
Nevertheless, when effectively managed an SPV can be highly beneficial.
When buying a business jet from a manufacturer, for example, the separate SVP legal entity created by a parent company will need to execute a number of documents and packages, including the aircraft purchase agreement and its respective financing instrument (unless it is 100% cash purchased), the bill of sale, guarantees, insurance and loan security package, among others.
Finally, it is important to seek legal advice and tax counsel to understand separate legal entities’ registration requirements, especially for tax-free offshore locations, as well as to evaluate the pros and cons of different SPV corporate structures.
Furthermore, and when a free tax holiday is allowed, exempted corporations or High-Net-Worth Individuals should receive from the tax heaven jurisdiction a ‘Tax Exemption Undertaking’ that exempts them from any possible future tax recourse (either corporate/wealth tax or any other tax applicable to a company or an individual conducting offshore business) for a period of twenty years or more.
In conclusion, it is essential that you understand the best SPV structure for your business and personal goals, depending on what you are trying to achieve through the vehicle.