Hilary Muza 
IN various investment transactions, parties often decide to use companies created for the specific purpose of facilitating implementation of the agreed terms. These companies are referred to as special purpose vehicles (SPVs).
They offer dexterity to the parties and come with numerous advantages, for instance, they can be used in financing and off-balance sheet transactions. Mainly used to ring fence certain investments, permitting finance without having directly exposed debts and assets of the parent company.
Why SPVs are used to facilitate transactions
SPVs are useful for risk-sharing where a separate entity is tasked with the duty of doing the job and the management of the project. This means there is little to no impact on the parent company if it goes bankrupt, and vice versa. As such, they are designed to protect both companies from insolvency.
Ordinarily, SPVs purchase the risky assets from its parent company, groups the assets into tranches and sells them to meet the specific credit risk preferences of different types of investors. Mortgages and other risk-laden assets are the most commonly purchased by SPVs. The logic behind SPVs is, therefore, to mitigate risk by protecting the parent company against bankruptcy and insolvency.
Conversely, SPVs provide an easier way to raise capital. They also have more operational freedom as they are not bound by the same regulatory restrictions that bind the parent company.
In recent years, it has been a trend for new business owners to create an SPV to assist the parent company with financing. In other words, the SPV is used as a separate tool that allows potential investors to pool their money, instead of them investing directly into the parent company.
For example, if a company wishes for whatever reason to categorise its investors, it can elect to have an SPV for each category of investors.
One category may be private individuals that want to invest in the parent company but cannot do so directly. Another category could be grouping trusts into one category for tax purposes. The options of how to use SPVs are limitless.
SPVs and extensions of government/parastatals
The ability to create SPVs is not limited to private business interests. The position taken in other jurisdictions such as India is that even local municipalities can create SPVs to plan, appraise, approve, release funds, and implement, manage, operate, monitor, and evaluate projects.
Even locally, we have examples of SPVs affiliated to parastatals that have implemented work effectively. An example is Infralink (Pvt) Ltd in which the Zimbabwe National Roads Administration (Zinara) holds significant shares.
SPVs and the Zimbabwe banking sector
The Banking Act [Chapter 24:20] was updated in May of 2016 to deal specifically with the question of how SPVs are treated in the banking sector. Section 32A of the Act now reads, “Except with the written approval of the Reserve Bank and subject to such terms and conditions as the Reserve Bank may specify, no banking institution or controlling company shall form or maintain a special purpose vehicle.”
The Act goes on to say that the formation of any SPV in violation of the Act shall be void. The message clearly conveyed here is that banks should deal directly with any and all external parties in all their transactions.
This position differs from other jurisdictions such as America where banks can sell mortgage assets to SPVs, lowering the leverage on their own balance sheets.
An SPV, according to the Banking Act [Chapter 24:20], is a company or entity created by a banking institution or controlling company solely or primarily for the purposes of owning or securitising of a particular set of loans, assets or other investments, and distributing the risk to investors, marketing of financially engineered products, avoiding tax, creating a vehicle for structuring financial transactions, which do not appear on the parent company’s balance sheet. A controlling company is defined as a company that controls a banking institution. In short, the law precludes banks from forming SPVs for the avoidance of financial obligations. This, however, is not the case for most other business entities.
The efficacy of SPVs
SPVs are not only useful when it comes to de-risking. They are also an appropriate mechanism for delineating obligations between parties, as well as creating the most ideal circumstances for the performance of those obligations in order to achieve a common goal.
A good example being the Group Five and Zinara teaming up to create Infralink (Pvt) Ltd. Infralink’s purpose was to implement the agreement between the parent companies and to receive and remit funds for repayment of a certain loan. Simply put, SPVs are beneficial for the unbundling and simplification of contractual obligations.
Flexibility
A major reason that investors prefer SPVs over other investment strategies is because of the flexibility they provide. Special purpose vehicles are not a one-size-fits-all investment model and can be specific and modified needs.
Further, while start-ups appreciate the capital model they provide, SPV investing is not for start-ups only, and can be structured to accommodate a range of different investment strategies from real estate to private funds to other assets entirely.
Companies can use SPVs in a myriad ways that are not only beneficial to the parent company from a financial standpoint, but can facilitate a more efficient way of implementing projects. The use and scope of SPVs is only limited by the imagination (and needs) of the parent company.
Muza is a duly admitted lawyer with expertise in business law, labour law and commercial litigation. He writes in his personal capacity. For feedback, email him at hilarykmuza@gmail.com or call on +263719042628.
