Uses Of Special Purpose Vehicles (SPVs) In Structuring Financing .

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Uses of Special Purpose Vehicles(SPVs) in structuring financingtransactionsPresentations by Geoffrey Wynne, Partner andSam Fowler-Holmes, Senior AssociateSullivan & Worcester UK LLP21 June 2018New Broad Street House, 35 New Broad Street,London, EC2M 1NH

What we will cover What is a special purpose vehicle (SPV)? Why is an SPV used? Issues surrounding control of an SPV Factors relevant to choosing where to incorporate an SPV How can an SPV be used in trade finance transactions? Example trade finance structures using SPVs242082

What is a special purpose vehicle An SPV is a legal entity created for a specific, limited purpose› Transaction specific› Specific form of financing or transaction There are a number of different legal forms depending on therelevant jurisdiction› Limited liability company› Limited liability partnership› Others Legal, commercial, tax and accounting issues underpin everything242083

Why use an SPV?There are many reasons why an SPV structure may be used. Theseinclude:› Ring-fencing of assets› Insolvency remote vehicle› Better financing terms› Off balance sheet treatment› “on-shore” issues Burdensome regulation Tax issues such as withholding tax on interest payments Foreign exchange controls or repatriation of funds› Challenges to taking security› Inability of proposed party to perform its intended role (e.g. restriction on “real”borrower borrowing or granting security)› Allowing financing to multiple ‘borrowers’ via the SPV242084

Ownership and control of SPVs There are a number of different ways in which SPVs can be ownedand controlled Financer owned – full control for the financer and particularlycontrol over cash flows But potential difficulties with lending to subsidiaries? Obligor owned – likely to be preferred position for the obligor butmuch less control for the financer unless this is provided forcontractually Financer is one step removed from day-to-day running of the SPVand likely to be reliant on prompt reporting by the obligor to beaware of any issues Potential restrictions on granting security by the obligor couldapply to the obligor group and therefore the SPV242085

Ownership and control of SPVs (2) Shared ownership of obligor and financer – not a commonlychosen position and requires much more focus on the decisionmaking of the SPV Dispute resolution mechanism required in the event that obligorand financer cannot agree on appropriate steps to be taken –shareholder agreement sets out the relationship between thefinancer and the obligor Third party owned – number of corporate services providers thatcan establish and own the SPV – administration of the day-to-dayrunning of the SPV will be set out in the contractualdocumentation No owner – this involves the ownership of the SPV typically beingheld by a charitable trust – this is often referred to as an orphantrust242086

Management of SPVs Involvement of third parties increases costs and likely to requireadditional obligations of the financer and obligor – for example,indemnities to third party owner Management and administration of the SPV carried out inaccordance with the instructions of the financer or the obligordepending on what has been contractually agreed Whichever option is chosen, consideration needs to be given to:› the ability of the relevant interested party to direct the activities of the SPVwhere it is not the owner› Shadow directors?› Ability of directors of SPV to comply with local law director’s duties› What happens if things go wrong or substantive decisions need to be made242087

Factors relating to incorporating SPVs There are a number of jurisdictions that are commonly used forSPVs, including British Virgin Islands, Cayman Islands, Jersey,Luxembourg and Ireland A range of factors will underpin any decision to incorporate an SPVin a particular jurisdiction including:› Speed of incorporation› Costs Cost of incorporation Cost of administration of the SPV› Tax neutrality or advantages› Sophistication of legal system (and relationship with English law) Knowledge and familiarity with English law concepts Recognition and enforcement of English law and English lawjudgments/arbitral awards242088

Factors relating to incorporating SPVs (2) Relevant factors (cont.):› Regulatory environment› Options for legal nature of the SPV› (Lack of) Corporate administration burdens – e.g. requirements for annualgeneral meetings, reporting requirements and filings, nature of directors› Winding up / dissolution of the SPV› Infrastructure, telecommunications and transport242089

Potential issues with using SPVs AML, KYC, beneficial ownership and transparency Misuse of SPV structures – Enron “Piercing the corporate veil”2420810

SPVs in trade finance structures SPVs can be used in a range of transactional matters, particularly inthe oil and gas industry, real estate, project finance, asset financeand securitisations SPVs can and have played an increasing role in trade financetransactions This does not necessarily involve creating new structures butadapting existing and well-known structures to benefit from theuse of the SPV2420811

Securitisation background Historically covered asset backed loans› eg residential mortgages, car loans, credit card receivables etc Trade receivables?› More recent Main benefits› Alternative to traditional bank lending/unsecured corporate bonds› Lower cost of funds (linked to pool of assets not general credit rating oforiginator)› Off balance sheet so possibly better leverage and returns Typical fundamentals› Involves sale of assets to SPV at a discount by originator(s)› Traditionally funded in the capital markets and rated› Credit insurance (common)2420812

What about trade receivables? Characteristics› Short-term “business” assets› Not income-generating assets› Not usually secured› More complex jurisdictional issues (cross border) Typical structure› Receivables can be pooled and sold to the SPV at a discount› Purchase can be by way of a specified pool of receivables on a revolving basis› Options for funding Note/bond issuance etc. (capital markets) Bank/alternative funder debt› Watch out for specific considerations Funding mismatch Servicing issues2420813

How does it work (at its simplest)?DebtorSales 814

Additional securitisation structures More complex structures can be created, for example, involvingboth an offshore SPV and an onshore SPV This is likely to be driven by a combination of tax, accounting andlegal issues Requires additional due diligence and increased focus on cashflows and funding of reserve accounts to meet instalmentpayments to investors2420815

Receivables purchase using SPV5. Repaymentof loanLenderCollectionAccount3. Loan3. Security4. Paymentof receivableSPV2. PurchasePrice2. Sale ofReceivables1. Sale of goodsSellerBuyer1. Debt owed (receivable)2420816

Receivables purchase using SPV (2)5. Transfer ofpaymentsLenderCollectionAccount3. Purchaseprice3. Sale ofreceivables4. Paymentof receivableSPV2. PurchasePrice2. Sale ofReceivables1. Sale of goodsSellerBuyer1. Debt owed (receivable)2420817

SPVs in Financings5. Repayment of loanFinancerCollectionaccount1. Loan1. Security oversale contracts andCollection AccountSPV2. Prepayment ofpurchase price for goods(could be on-loan)Producer/Exporter/Seller242084. Payment of saleproceeds2. Back-toback salecontractBuyers3. Delivery of goods direct toend buyers18

Pre-export financing Although the structure is very similar to a normal PXF structurewithout an SPV, there are additional issues to be dealt with Additional sale contract required as goods sold first to SPV andthen to end-buyers – the relevant sale terms should be back-toback Performance risk still with the producer/exporter (the “real”borrower) If SPV has been established solely for this transaction, the financermay decide not to take security over the SPV’s assets2420819

Commodity ownership – the “repo”1. Sale of commodity (title and risk)Counterparty2. Repurchase ofcommodity at future date3. If the Counterparty fails torepurchase or chooses not torepurchase, the SPV can (a)sell to exchange and/or (b)deliver to third party buyerExchange /third partybuyer2420820

Regulatory issues with ownership Regulated activities› Purchase and sale of goods› Owning certain goods, e.g. do you need a licence to hold oil stocks?› Reporting obligations, e.g. REACH in the EU Environmental laws and liabilities Oil reserve obligations Restrictions on offshore payments Tax› Tax on profits, withholding tax, stamp taxes› VAT / GST and bonded warehouses Importance of local due diligence to structure properly anddocuments can address any regulatory issues True sale issues2420821

Funding structureBorrowerInvestorBorrower3. On-loan5. Payments onnotes/securities2. LoanInvestor1. PurchasepriceTradebankSPV4. Repayment1.Notes/securities3. On-loanInvestorBorrower24208Borrower22

Summary and conclusions SPVs have had a long history› Well recognised by regulator in project finance Good uses but over used?› Can add complexity when not needed Take care to lock in all the issues› Extra contracts› Trustworthy third parties Will future regulations inhibit use?› Beneficial ownership registers etc. Better rewards for structures using SPVs? Carry on using SPVs?› Even be more inventive?!2420823

Geoffrey L WynnePartnerGeoffrey Wynne is head of Sullivan & Worcester’s London office and also head of its Trade & Export Finance Group.He has extensive experience in banking and finance, specifically trade and structured trade and commodity finance.He also advises on corporate and international finance, asset and project finance, syndicated lending, equipmentleasing and workouts and financing restructuring.Geoff is one of the leading trade finance lawyers and has advised extensively many of the major trade finance banks,multilateral financers and companies around the world on trade and commodity transactions in virtually everyemerging market including CIS, Far East, India, Africa and Latin America. He has worked on many structured tradetransactions covering such diverse commodities as oil, nickel, steel, tobacco, cocoa and coffee. He has worked onwarehouse financings in many jurisdictions and advised on how to structure involving warehouse operators andcollateral managers. He has also advised on ownership structures and repos for commodities and receivablesfinancings.Geoff sits on the editorial boards of a number of publications and is a regular contributor and speaker at conferences.He is also the editor of and contributor to The Practitioner’s Guide to Trade and Commodity Finance published bySweet & Maxwell and A Guide to Receivables Finance, a special report from TFR published by Ark.Sullivan & Worcester UK LLPTower 4225 Old Broad StreetLondon EC2N 1HQT 44 (0)20 7448 1001F 44 (0)20 7900 3472gwynne@sandw.com2420824

Sam Fowler-HolmesSenior AssociateSam Fowler-Holmes is a senior associate in the Trade & Export Finance team. He specialises in structured andunstructured trade finance and has advised financial institutions on a range of products including large-scale preexport financing, supply-chain financing, funded and risk participations, and bank-to-bank lending. Sam's experienceincludes advising in relation to numerous jurisdictions across mainland Europe, CIS, Africa and Asia and for a range ofcommodities including, oil, gas, metals and cocoa.Sullivan & Worcester UK LLPTower 4225 Old Broad StreetLondon EC2N 1HQT 44 (0)20 7448 1006F 44 (0)20 7900 3472sfowlerholmes@sandw.com2420825

Awards & RecognitionTFR “Best Law Firm in Trade Finance”Trade & Forfaiting Review (TFR) named Sullivan & Worcester "BestLaw Firm in Trade Finance" in its 2014, 2015 and 2016 TFR ExcellenceAwardsGTR “Best Law Firm”Sullivan & Worcester UK LLP was top ranked firm in the Global TradeReview (GTR) Best Law Firm 2015 and 2016 pollsThe Legal 500 UK 2016Geoffrey Wynne and Simon Cook are listed asLeading Lawyers and Sullivan & Worcester UK LLP was rankedin the following category in The Legal 500 UK:› Trade Finance (Tier 1)Chambers UK 2017Chambers UK ranked Sullivan & Worcester UK LLP, along withGeoffrey Wynne and Simon Cook, in the following area:› Commodities: Trade Finance (UK-wide)TFR Fellowship Award 2017Trade & Forfaiting Review (TFR) honoured Geoffrey Wynnewith the TFR Fellowship Award in its 2017 TFR ExcellenceAwards2420826

Future breakfast seminars Thursday 19 JulyNo event in August Thursday 20 September Thursday 18 October Thursday 22 November Thursday 13 December2420827

OfficesBostonSullivan & Worcester LLPOne Post Office SquareBoston, MA 02109Tel: 617 338 2800Fax: 617 338 2880LondonSullivan & Worcester UK LLPTower 4225 Old Broad StreetLondonEC2N 1HQTel: 44 (0)20 7448 1000Fax: 44 (0)20 7900 3472New YorkWashington, D.C.Tel: 212 660 3000Fax: 212 660 3001Tel: 202 775 1200Fax: 202 293 2275Sullivan & Worcester LLP1633 BroadwayNew York, NY 10019Sullivan & Worcester LLP1666 K Street, NWWashington, DC 20006www.sandw.com2420828

TFR "Best Law Firm in Trade Finance" Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards . GTR "Best Law Firm" Sullivan & Worcester UK LLP was top ranked firm in the . Global Trade Review (GTR) Best Law Firm 2015 and 2016 polls . The Legal 500 UK . 2016

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