Special Purpose Vehicles and Securitization

64 Pages Posted: 12 Jul 2021 Last revised: 11 Jul 2021

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Nicholas S. Souleles

affiliation not provided to SSRN

Multiple version iconThere are 3 versions of this paper

Date Written: 2005

Abstract

This paper analyzes securitization and more generally ?special purpose vehicles? (SPVs), which are now pervasive in corporate finance. The first part of the paper provides an overview of the institutional features of SPVs and securitization. The second part provides a model to analyze the motivations for using SPVs and the conditions under which SPVs are sustainable. The authors argue that a key source of value to using SPVs is that they help reduce bankruptcy costs. Off-balance sheet financing involves transferring assets to SPVs, which reduces the amount of assets that are subject to bankruptcy costs, since SPVs are carefully designed to avoid bankruptcy. Off-balance sheet financing is most advantageous for sponsoring firms that are risky or face large bankruptcy costs. SPVs become sustainable in a repeated SPV game, because firms can implicitly ?commit? to subsidize or ?bail out? their SPVs when the SPV would otherwise not honor its debt commitments, despite legal and accounting restrictions to the contrary. The third part of the paper tests two key implications of the model using unique data on credit card securitizations. First, riskier firms should securitize more, ceteris paribus. Second, since investors know that SPV sponsors can bail out their SPVs if there is a need, in pricing the debt of the SPV investors will care about the risk of the sponsor defaulting, above and beyond the risk of the SPVs assets. The authors find evidence consistent with these implications. ; Also issued as Payment Cards Center Discussion Paper No. 05-13

Suggested Citation

Gorton, Gary B. and Souleles, Nicholas S., Special Purpose Vehicles and Securitization (2005). FRB of Philadelphia Working Paper No. 05-21, Available at SSRN: https://ssrn.com/abstract=3884260

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Nicholas S. Souleles

affiliation not provided to SSRN

No Address Available

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