In South Africa, special purpose vehicles (SPVs) play a significant role in equity and debt finance transactions.
A commonly used security structure involves creating a structure with the interposition of a Security SPV held by a trust.
This entails establishing an SPV and a trust, with the trust holding all of the shares in the SPV. The SPV then guarantees debts owed by the Borrower to the Financiers, backed by an indemnity from the Borrower and sometimes its shareholders as well. Additionally, the trust typically pledges its shares in the Security SPV to the Facility Agent (acting for the Financiers).
Security SPVs serve two primary purposes: safeguarding Financiers in the event of Borrower default and ensuring fair distribution of security proceeds among Financiers.
In these structures, Security SPVs are legally restricted from engaging in activities beyond their specific purpose, and are owned by independent trusts to maintain separation from other transaction parties.
Their ability to settle obligations is usually limited to proceeds from secured assets. In the case of default, Security SPVs are obliged to demand indemnities, enforce security, and manage proceeds independently to fulfill lender obligations.
Importantly, they are structured to be both bankruptcy immune (being one step removed from the Borrower) and tax-neutral entities, enhancing their resilience and efficiency in financial transactions.