#05-03
Special Purpose Vehicles and Securitization
Gary Gorton and Nicholas S. Souleles
Abstract: This paper analyzes securitization and “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.
Keywords: securitization, special purpose vehicles, bankruptcy; consumer credit, credit cards.
JEL classifications : G3, G2, E51, K2
