Core Elements of an Orphan SPV Framework

Independence

Orphan SPVs are structured to maintain their independence, ensuring that the issuer (the SPV) is free from any improper influence by the company that created it, known as the arranger. This independence is crucial, especially in the event of insolvency, to prevent the financial accounts of the SPV from being mixed with those of the arranger. To reinforce this independence, several steps are typically taken:

• Independent Directors: The SPV appoints independent directors based in who have no connections to the arranger, are not employees, and do not receive any payments from the arranger.

• Board Resolutions: Any transactions the SPV plans to enter into must be approved by its independent directors through a formal board resolution.

• Separate Assets: The SPV’s assets are kept completely separate from those of any other company, ensuring there is no mixing or pooling of assets.

• Independent Legal Counsel: The SPV appoints its own legal counsel to advise on all dealings, including interactions with other parties involved in the securitization.

• No External Security: The SPV does not provide any guarantees or security for the obligations of any other company.

• Separate Financial Accounts: The SPV produces its own financial accounts, which are not consolidated with those of any other entity.

• Distinct Identity: The SPV presents itself as an independent entity, capable of acquiring and holding assets, and conducting business in its own name, separate from other parties.

• Arm’s-Length Transactions: The SPV maintains arm’s-length relationships with other parties involved in the securitization. This means that all dealings are conducted as if they were between unrelated parties, ensuring fairness.

Bankruptcy Remoteness

In securitization, one of the most important features of an Orphan SPV is its bankruptcy remoteness. This means that the SPV is designed to be protected from the bankruptcy or financial troubles of any other party involved in the securitization process, like the company that originally created the SPV (the arranger) or the company that provided the assets (the originator). Here’s how:

• Off-Balance Sheet Treatment: The assets that the SPV manages are kept off the balance sheet of the originator or arranger. This keeps the SPV’s assets separate, so they are not affected if the originator or arranger goes bankrupt.

• Limited Recourse Provisions: These provisions mean that creditors (those who are owed money) can only claim against specific assets tied to a particular set of notes (tranches) that were issued by the SPV. They can't go after the SPV’s other assets or the assets supporting other tranches of notes. This ensures that each set of notes is backed only by its own specific assets, protecting the SPV’s other assets.

• Non-Petition Provisions: These provisions prevent creditors from forcing the SPV into bankruptcy if something goes wrong with one tranche of notes. This further protects the SPV from being dragged down by issues in other parts of its operations.