Bankruptcy Remoteness

In order to isolate assets and protect them from the risk of other creditors claiming rights to the associated cash flows, special purpose vehicles ("SPV") are set up in a bankruptcy-remote fashion, assets are contributed via a true sale and security in the distinct pool of assets is perfected. As such, the only creditors that have a right to the SPV's cash flows from its distinct asset pools are the investors who have purchased the debt instrument from the SPV. This way, even if the originator, or any other associated company, were to become insolvent, creditors of that company would be unable to seek any recovery from the SPV that holds the distinct asset pool.

Special Purpose Vehicles

The singular legal entities holding the distinct asset pool supporting a securitization is generally referred to as a special purpose vehicle (SPV). These SPVs are set up as legal companies, typically limited liability companies (LLC) or trust entities designed to both to have contractual rights to the cash flows received from the distinct asset pools, as well as the contractual obligation to service the debt instrument purchased by investors. These legal entity types are specific to the United States, but equivalent company structures exist in most countries. The SPV itself is typically wholly owned by the originator, has independent directors responsible for legal, regulatory and/or tax filings and are considered bankruptcy-remote.

True Sale

When the assets are contributed into the SPV from the originator, the transfer is considered a true sale. In a true sale, the economic and beneficial ownership of the underlying assets is transferred to the SPV. This is critical because in the event the assets were not sold into the SPV, they may be considered available collateral to the creditors of the seller. True sales can be affected in a number of ways, the most common being sale agreements, assignments and participation interests.

Security Interest

Once the assets are contributed into the SPV via a true sale, an additional measure is generally taken to ensure that no other future creditor into the SPV itself may lay claim to the distinct asset pool. The investor purchasing the debt instrument (or the issuing entity selling notes to investors and participating in the underlying assets) perfects a security interest in the underlying distinct pool of assets by filing a UCC-1 financing statement in the United States per the laws set forth in the Uniform Commercial Code (UCC).