Orphan structure


Orphan structure or Orphan SPV or orphaning are terms used in structured finance closely associated with creating SPVs for securitisation transactions where the notional equity of the SPV is deliberately handed over to an unconnected 3rd party who themselves have no control over the SPV; thus the SPV becomes an "orphan" whose equity is controlled by no one.

Description

In an orphaned SPV, the equity is held by a 3rd party with no legal relationship to the two main parties engaging in the securitisation, and the lender. While this 3rd party legally "owns" the equity of the SPV, the way in which their ownership is structured gives them no control over the SPV.
The driver for orphaning is to enable the securitisation transaction to be held off-balance sheet. If the asset users, or the asset lenders, owned the SPV equity, then the SPV would be consolidated into their group accounts. This is something that the lenders to the SPV have to avoid as they are mostly banks and only want to give in loans. Users of the asset may want to avoid if their borrowing limits may have been reached.
Orphaned SPV structures allow lenders to separate the asset finance, from the asset user, thus enabling them to move the asset to other users should the situation arise, without having to recreate a new SPV and/or reraise new loans.
Orphaning is at the heart of global securitisation transactions, and without orphaning, most securitisation SPVs would cease to be useful or effective to their creators.
An orphaned SPV is, by definition, an artificial creation as everybody knows who "controls" the SPV. There are instances outside of securitisations where orphaned SPVs, and the ability to separate "true" owners from "legal" owners, can be used for tax avoidance. For example, restructuring equity into debt, and then relocating this debt to a tax haven via orphaned SPVs, is a classic abuse of orphaning. This is why orphaning is not available in all jurisdictions, and where it is offered in non-tax havens, it is strictly controlled and monitored by taxing authorities.

Owners

The SPV is generally a limited liability company issued in either an offshore location or an onshore location.
The key considerations in deciding what 3rd party entities are used to "own" the orphaned SPV equity are driven by:
Given the above, the orphaned SPV equity is usually held by a nominee share trustee company on trust pursuant to a Declaration of Trust.
Specialist law firms provide such trust services.
Often only a small number of shares are created for a nominal sum as the "equity" of the SPV. These shares are then independently purchased by the 3rd party entity in question using their own funds to complete the purchase.
Some jurisdictions have used Charitable Trusts due to their particular robustness to avoiding bankruptcy, however, this had led to some public concerns over the integrity of the overall orphaned SPV structure, and has now been stopped in Ireland.
The Non-Charitable Purpose Trust is emerging as a preferred option in some jurisdictions.

Abuses

The global securitisation market is large and involves multinationals getting assets financed by global banks structured in SPVs created by global law and accounting firms. The orphaned SPV structures they use are understood and accepted in many jurisdictions, by regulators and taxing authorities as vehicles in which to conduct global securitisation transactions.
Unfortunately, the global acceptance of the main orphaned SPV structures has attracted the attention of users who are not seeking to conduct standard tax-transparent securitisation transactions, but who have other aims and objectives which regulators and tax authorities did not envisage orphaned SPVs being used for.
Ireland is the largest EU location for orphaned SPVs, and the above abuses have drawn warnings from the former Deputy Governor of the Central Bank of Ireland