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Special Purpose Vehicles and Securitization


Gary B. Gorton


Yale School of Management; National Bureau of Economic Research (NBER)

Nicholas S. Souleles


University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

September 1, 2005

FRB Philadelphia Working Paper No. 05-21

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. We 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. We find evidence consistent with these implications.

Number of Pages in PDF File: 63

Keywords: Securitization, Special Purpose Vehicles, Bankruptcy, Consumer Credit, Credit Cards

JEL Classification: G3, G2, E42, K2

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Date posted: May 4, 2005 ; Last revised: December 13, 2011

Suggested Citation

Gorton, Gary B. and Souleles, Nicholas S., Special Purpose Vehicles and Securitization (September 1, 2005). FRB Philadelphia Working Paper No. 05-21. Available at SSRN: http://ssrn.com/abstract=713782 or http://dx.doi.org/10.2139/ssrn.713782

Contact Information

Gary B. Gorton (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203 432-8931 (Fax)
HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Nicholas S. Souleles
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)
HOME PAGE: http://finance.wharton.upenn.edu/~souleles

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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