Off Balance Sheet SPVs and Warehouses

For varying reasons, a goal of many originators is to remove assets from their balance sheet. Often it’s because a company is hoping to maintain the ability to communicate to the equity market that they are a balance sheet light tech company and not a balance sheet heavy asset financing company, thus commanding a higher multiple when valuing the company. Other times it may be simply part of a strategy to finance specific assets off balance sheet while maintaining others on balance sheet.  

Regardless of the reason, it’s important to understand that utilizing off balance sheet facilities should be done with a purpose. Perhaps the most famous example of off-BS SPVs being used in nefarious ways was with Enron in the early 2000s. Enron’s accounting scandal centered around their CFO using thousands of individual SPVs to hide debt from investors and creditors¹. Following this scandal, the Sarbanes-Oxley Act of 2002 was enacted alongside other new federal account standards to clarify and strengthen reporting requirements for public and private companies. 

Off balance sheet bankruptcy remote SPVs are entities created in an effort to separate asset risk from entity risk. The legal separation is typically achieved by using two structuring techniques: 

1. True sale contributions of assets - assets are sold from one entity to the other where there is a clear and complete transfer of the asset risk. In simple terms, no features enabling the buyer to put any risk back to the seller can be present.
2. The creation of a single purpose bankruptcy remote vehicle - this vehicle must be structured so that if the seller ever enters a bankruptcy proceeding, the SPV and it’s assets are not considered part of the seller’s estate. If the SPV is used for multiple purposes, and one of those purposes carries some connection back to the seller then all transactions could be at risk. 

For more detailed information see Strafford’s overview on “Structuring Special Purpose Entities: Separateness, Bankruptcy Remoteness and True Sales”

It is important to understand that each situation is different and professional accounting and legal services should be retained before engaging in any activities. 

Warehouses

A warehouse is a term used to describe a financing arrangement where assets are financed (often sitting inside an SPV) that will eventually be taken out by a securitization. This term is used because the assets are not all going to mature or amortize while they’re in the SPV, rather they are being warehoused for a short period of time before being moved somewhere else. 

Banks have historically dominated both the warehouse and the securitization markets because of their interconnectedness. A warehouse is typically used as a way to store assets until enough assets have been collected to fill up a securitization. Then the process can be repeated again and again. 

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Overview of advantages and disadvantages to both Off Balance Sheet SPVs and Warehouse Facilities: 

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