Special Purpose Vehicle

What is a SPV?
How is a SPV created?
Why is a SPV required?
Main functions of a SPV
 Meaning of SPV
The acronym stands for Special Purpose Vehicle.
The word vehicle can be interchanged with market entity.
In the US, the term used is Special Purpose Entity (SPE).
The name SPV is given to an entity which is formed for a single,
well-defined and narrow purpose.
An SPV can be formed for any lawful purpose. No SPV can be
formed for an unlawful purpose, or for undertaking activities which
are contrary to the provisions of law or public policy.
An SPV is, primarily, a business association of persons or entities
eligible to participate in the association. According to Joy Jain of
Price Waterhouse Coopers, an SPV is mainly formed to raise funds
Is there a difference between a Special Purpose
Vehicle and a Company
SPVs are mostly formed to raise funds from the market. Technically, an SPV
is a company. It has to follow the rules of formation of a company laid
down in the Companies Act.

Like a company, the SPV is an artificial person. It has all the attributes of
a legal person. It is independent of members subscribing to the shares of
the SPV. The SPV has an existence of its own in the eyes of law. It can sue
and be sued in its name.

The SPV has to adhere to all the regulations laid down in the
Companies Act. Members of an SPV are mostly the companies and
individuals sponsoring the entity. An SPV can also be a partnership firm.
This, however, is unusual.

The company, as distinguished from an SPV, may be called a general

purpose vehicle. A company may do many things which are mentioned
in the Memorandum of Association (MoA) or permitted by the
Companies Act. An SPV may also do the same, but its scope of
operation is limited and focused. If it is not so, the SPV had better be
 How is an SPV established
Like a company, an SPV must have promoter(s) or sponsor(s).

Usually, a sponsoring corporation hives off assets or activities from the

rest of the company into an SPV. This isolation of assets is important for
providing comfort to investors.
The assets or activities are distanced from the parent company, hence the
performance of the new entity will not be affected by the ups and downs of
the originating entity.
The SPV will be subject to fewer risks and thus provide greater comfort to
the lenders. What is important here is the distance between the
sponsoring company and the SPV. In the absence of adequate distance
between the sponsor and the new entity, the later will not be an SPV but
only a subsidiary company.
A good SPV should be able to stand on its feet, independent of the
sponsoring company. Unfortunately, this does not happen in practice.
 What are the advantages of setting up an SPV
Separating the risk and freeing up the capital which results in,
the SPV and the sponsoring company are protected against risks like
insolvency, which may arise during the course of operation.
The SPV also allows securitization of assets without disturbing the
managerial relationship. Under the arrangement, any predictable
income stream generated by secure assets can be securitized.
A company can leverage future earnings to raise funds.
Securitization offers higher quality assets to investors by virtue of the
fact that the structures insulate investors from the bankruptcy risk of
the Originator.
 In order to ensure that the assets actually achieve the
bankruptcy remoteness, it is essential to move them out of the
balance sheet of the Originator and park them with another
independent entity.
Typically an SPV is employed to purchase the assets from
the Originator and issue securities against these assets.
Such a structure provides a comfort to the investors that they
are investing in a pool of assets which is held on their behalf
only by the SPV and which is not subject to any subsequent
deterioration in the credit quality of the Originator.
The SPV is usually a thinly capitalized vehicle whose ownership
and management are independent of the Originator. The main
TATA TETLEY CASE
Introduction
One of the most important milestones in the Indian corporate
history.
In the Year 2000, Tata Tea acquired the iconic Tetley Brand in a
450 m. $ deal from Schroeder Ventures and PPM ventures.
Tata Tea managed to fend off bids from Sara Lee and Nestle
At the time of acquisition, Tata Teas net worth was only $ 114
m.
It was also the largest cross-border acquisition by an Indian
company at that time.
This was also the first ever leveraged buy-out by an Indian
Company.
 Tetley
Established by Joseph and Edward Tetley in 1837 in Yorkshire,
England.
An Iconic brand, Tetley is considered to be the inventor of
teabags
At the time of acquisition, Tetley was the Second largest tea
company in the World
In India, Tata and Tetley Tea entered into a joint venture to
produce tea bags in the Year 1992
 The Tale of Tata Tea
Incorporated in 1962, TTL was controlled by the House of Tatas, one of
Indias largest and most respected business groups.
The formal coming together of two large business houses, namely the
Tatas and James Finlay PLC in early 1960 led to the formation of a
fledging company named Tata Finlay Limited.
Tata Finlay, incorporated in 1962, envisaged the setting up of two
business operations- the Packet tea division at Bangalore and the
Instant tea operation at Munnar.
James Finlay had the know how for the manufacture of Instant Tea
powder - the fully soluble solids of Tea - which was the new and fast
growing product in a resurgent American market.
TTL commenced operations in 1964 with the manufacture of packaged
tea. The instant tea plant started in 1965.
 The Tale of Tata Tea
Tata Tea acquired the business of James Finlay, UK, and its seven
associated tea companies operating in India, with effect from 1976. The
technical and financial collaboration with James Finlay expired in 1971.
The Tatas had a 40 per cent stake in Tata Finlay Ltd. Subsequent to the
expiry of the collaboration agreement, the overseas company sold off
its entire stake to Tata Industries in 1982. After the sale of equity
holdings, the name of the company was changed to Tata Tea Ltd during
1983.
Set up a subsidiary Tata Tea Inc in Florida to meet the demands of US
market
In order to meet the needs of Japan market entered into JV with Hitachi
to form Tata Hitachi Sales Limited
In 1984, set up R&D facility in Munnar
Why the deal made sense?
Complementary specializations.
Readymade access to the European and North American
market.
Financial setbacks for Tetley in recent years.
Acquisition enabled Tetley to reduce its debt-equity ratio.
Integration structure.
 Leverage Buy-Out

Acquisition of a company through a combination of

equity and debt

Jerome Kohlberg, Jr. and Henry Kravis coined the term

Formation of SPV

Stock Purchase Format

Asset Purchase Format

Management Buyout

Future Cash Flows or the Assets of the company as

security

Increased Debt Equity ratio

Advantages of LBO:

Heavy Interest & principal forces management to

improve performance & operating efficiencies such
as
Cost improvisation cost reduction
Divesting non-core business
Investing in technological upgrades
Significant reduction in agency cost
Tax shield
Disadvantages Of LBO

Financial distress uncertainties

Increased fixed costs associated with debt financing can worn out
the effect in case of downturn in business cycles.

In Leveraged acquisition, banks have a say in what is being done.

Structure of the deal
Special Purpose Vehicle - Tata Tea(Great Britain)
To acquire all the assets of Tetley
To ensure that Tata Tea's balance sheet does not suffer
additional funding costs
Will be merged into Tata Tea Ltd, once it has paid its debt
obligations
SPV

100%
TATA TEA TATA TEA INC
subsidiary

(15 mn)
GDR Issue
(45 mn) SPV (10 mn)
TATA TEA
GREAT BRITAIN
(70 mn)
SPV
The SPV leveraged the 70 mn equity 3.36 times to raise a
debt of 235 mn to finance the deal
Entire debt amount of 235 mn comprised 4 tranches A, B, C
and D whose tenure varied from 7 to 9.5 years
Coupon rate of around 9% (LIBOR + 424 bps)
Where did it go?
Tetley Acquisition 271 mn
Legal, Banking and Advisory services 9 mn
Tetleys WC requirements - 25 mn
 Netherland based RABOBANK - 185mn
Intermediate Capital Group - 30 mn
Venture capital funds
Mezzanine - 10 mn
Schroders - 10 mn
Debt raised against Tetleys brands and physical assets
Valuation on the basis of future cash flows
Debt Repayment Structure
A B C D
Amount 110 mn 25 mn 10 mn 20mn
Loan Type Long Term Long Term Long Term Revolving
Purpose Funding Funding CAPEX WC
Acquisition Acquisition
Year of 2007 2007 2008 2007
Maturity
Pay Back Semi Annual 2 2 Cessation of
Method Installments instalments instalments Credit
in 07-08 in 07-08
TATA
TATA MEZZAN SCHROD
TEA ERS
TEA INE
INC
10 10 INTERME
GDR 15 mn mn DIATE
45 mn CAPITAL
mn 30 GROUP
mn
10 TATA
mn TEA GB RADO
185 BANK
mn

DEBT
EQUITY
235
70 MN
MN
271 9 mn 25
mn mn
LEGAL
TETLEY AND TETLEY
ACQUISI BANK WC
TION CHARGES
Merger - the process
In structured finance the word tranche refers to one of
several related securitized bonds that are offered as
part of the same deal. They are called tranches since
each bond is a slice of the deal's risk.
All the tranches together make up what is referred to
as the deal's capital structure or liability structure
 Structured Finance.
Tailored financing solutions
Financing with hybrid securities
Asset-backed securitization
Leveraged and acquisition finance
Uses of structured finance:
aligning securities to investor needs - term,
credit risk, prepayment risk, interest rate risk,
etc
Concept of SPV - explained

Tata Tea (GB) and SPV was created as a part of

securitization process.
Securitization is the process of pooling and
repackaging of homogenous illiquid financial assets
into marketable securities, that can be sold to
investors.
Tata Tea (GB) took over all the properties of Tetley
 Concept of SPV - explained

Tata Tea originated Assets of Tetley through receivables, leases,

any other form of debts and funded the same on its BS.
( Originator)
Portfolio of Tetley assets were then sold to Tata Tea (GB) SPV
for funding the assets.
 Concept of SPV - explained

Tata Tea (GB) issues debts and purchased the assets from Tata Tea.

Tata Tea (GB) was owned by Tata Tea

Debts issued by Tata Tea are secured by assets acquired from Tetley ( Obligor).

Tata Tea (GB) subcontracts the administration of assets back to Tata Tea.
Concept of SPV - explained

Tata Tea (GB) issued tradable securities tranches to fund the

purchase of assets.
The performances of these tranches were directly linked to the
performance of the assets
RaboBank, Prudential Mezzanine Capital, Schroder Ventures and
Intermediate Capital Group purchased the securities offered by
Tata Tea (GB).
 Concept of SPV - explained

They all invested because they were confident that the securities
would be paid in full and on time from the cash flows that is made
available from the asset pool.
Money collected by Tata Tea (GB) was paid to Tata Tea.
As cash flow arises on the assets, Tata Tea (GB) used for repaying
funds to the investors in the securities.
Securitization the process
Advisor of the program
- Financial Advisor Receivables
- Legal Advisor Originator Obligors
- Tax/Accounting Advisor
Sales of pool Third
Third parties
parties
of assets
Transaction
Transaction Servicer
Servicer
Transaction
Transaction Administrator
Administrator
Corporate
Corporate Administrator
Administrator
Credit Enhancement SPV
SPV Bondholders
Bondholders Representative
Representative
Credit Enhancer
Paying
Paying Agent
Agent
Liquidity Provider
ABS Credit
Credit Rating
Rating Agency
Agency
etc. Issuance Underwriter(s)
Underwriter(s)

Investors
Securitization the process

Tetley Ancillary Service

Obligor Provider
Sale of Assets Issue of Securities

Tata Tea Tata Tea ( GB )

Investors
Originator Special Purpose Vehicle

Consideration Subscription of securities

for Assets purchased
 Securitization the process

Originator Tata Tea

Sell/transfer the right to receive future cash flows (receivables)
due under certain contracts to SPV (I)
Special Purpose Vehicle (SPV) Tata Tea (GB)
Purchase the right to receive future cash flow (I)
Enter into contracts with originator, third parties and others
relating to the transaction (I)
Issue ABS to investors, ABS repayment relies on future cash
flow due under contracts (I)
Securitization the process
In traditional methods of corporate finance, a
corporation raises equity/obligations to own assets.
In securitization, a corporation creates and
securitizes assets - that is, transfers assets in form
of securities.
The claim is on assets, and not on the entity, hence,
asset-based funding
Asset backed funding lies in reducing the equity,
and increasing the leverage
 Securitization the process

SPV are used in securitization transactions as devices of hiving off

assets and converting assets into securities.
SPV are not companies in substantive operations; they do not
have any business except acting as a legal instrumentality. This is
necessary to ensure asset-backed securities
synergies
Tetley
Access to Tata Teas gardens and production base
Access to Indian market
Tata Tea
Tetleys premium brands and global distribution network
2nd largest in India to 2nd largest in the world
Tetleys technical expertise
Upgrade product portfolio and increase competitive
position
Post Merger
Tetley was expected to bring TTL volumes in the short
term and greater opportunities in the long term
Tata and Tetley formed several groups tea
procurement group, geographic expansion group, R&D
sharing
Legal merger took time as Tetley D/E ratio was too
high and it needed to come down to 1:1
Initial Cultural differences
Acquisition contributed to significant increase in sales
volume Rs. 6870 mn before acquisition to Rs. 67256
mn in FY12 (CAGR of 18% approx.)

As of FY12, Tetley brand contributes to 40% of Tata

Global Beverages revenue

As of FY12, Tetley is the only brand under Tata Global

Beverages stable with presence across the globe