Special Purpose Vehicle (SPV) Definition

A Special-Purpose Vehicle, or SPV is a subsidiary of a company which is bankruptcy remote from the main organisation (i.e. protected even if the parent organisation goes bankrupt). The actions of a SPV are usually very tightly controlled and they are only allowed to finance, buy and sell assets.

The purpose of a Special-Purpose Vehicle is to allow the parent company to make highly leveraged or speculative investments without endangering the entire company. If the SPV goes bankrupt, it will not affect the parent company.

The problem, as occurred in the 2007-2008 crisis is that often the parent companies would have guaranteed liquidity lines to their SPV and when the SPV’s started to lose money and lose access to credit, they would draw on the funds of their parent company at a time when the parent was already low on capital, thereby exacerbating the issues.

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