Though special purpose entities were originally formed to lower the cost of funds and remove assets from balance sheets, in response to a more demanding asset-backed securities market, the role has grown substantially in recent years, said industry specialists.
For a large portion of transactions, companies like New York-based Lord Securities Corp., the industry's largest provider of SPE-related services, not only provide independent members or even corporate management for the SPE, but provide complete debt-side administration, with services such as full commercial paper administration. Other services include managing financial records, maintaining bank accounts and relationships with transfer parties, issuing paying agents, and/or providing swap counter parties.
Of the shifts in the market of late - which include an evolving regulatory environment and a tightening labor market - globalization has had the most impact on the special purpose entity administration, said Peter Sorensen, president of Lord Securities.
Specifically, the formation multi-jurisdictional, multi-currency or multi-debt issuance conduits has placed new demands on the industry, he explained.
For example, Lord and sponsor ABN AMRO Australia are currently working together through Australia-based Abel Funding Pty Ltd. and U.S. based Tasman Funding Inc. Through Abel and Tasman, ABN AMRO and Lord are issuing asset-backed commercial paper into the U.S. and Australia simultaneously.
"ABN AMRO Australia communicated to Lord the U.S. dollar level of assets they're willing to source into the program," said Rick Taiano, vice president at Lord. "Lord and the managers in Australia then make a decision on where it's cheaper to fund, whether it is in the U.S. or Australia.
"The Time Zone Agreement is one of the mechanisms that helps us get U.S. commercial paper proceeds into Australia," he said.
"I would say that prior to the globalization of this industry, it was more like a cottage industry, and it was nationally based, and a company might have done business in New York or North Carolina and that's all that they did," said Frank Bilotta, senior vice president at Lord. "And now it requires a firm like ours, with a affiliates in London, Tokyo, and Sydney who can take an international financial services firm, like most of today's large banks, and service them around the globe."
Though globalization is a recent factor changing the industry, the requirements placed upon financial institutions to substantiate the role and validity of an SPE have been ongoing.
One example is the implementation of FAS125 - where U.S. GAAP and the IASC are requiring the SPE to maintain effective control of program assets and be controlled by non-affiliated third parties, said Dwight Jenkins, another Lord vice president.
"This issue of control is going to force these very large financial institutions to give a business like Lord Securities more and more control over their conduits to make the SPEs have real substance," said Jenkins.
Ratings agencies are demanding that an SPE have more corporation-like characteristics, such as company history, board meetings, annual elections and so on.
"Instead of just having the bare minimum legal requirement of setting up a separate legal company, they are making it so that the qualifications of the people who serve as the independent governance people really do have minimum qualifications standards," said Jenkins.
"For example, typically now a ratings agency will require that that outside director has a minimum of three years experience in this particular business, and that's a very small universe," he said.