What were special purpose entities (SPEs) and what were their advantages?

Question

What will be an ideal response?

Answer 1

ANSWER:
SPEs were entities created solely to carry out an activity or series of transactions directly related to specific purpose. Because SPEs were designed to conduct just one well-defined activity, it was relatively easy to attract a group of investors to invest in an SPE because the cash flows and the risks involved were well understood. SPEs were used for decades as a preferred form of financing arrangements, leasing arrangements, and sales/transfers of illiquid or poor performing assets. SPEs were generally recognized as legitimate financial tools because of the vital role they played in helping many companies raise capital at reasonable cost by creating liquidity in assets that were otherwise illiquid.

Since the structure of an SPE was such that the sponsoring company presumably did not have control, because control rested with the outside equity investors, the sponsoring company did not have to consolidate the SPE on its books. Other advantages of using SPEs included the ability to moderate risk by transferring the economic risk and rewards of assets to a non-consolidated third party while retaining use of the assets, as well as tax advantages. In many SPE transactions, the tax benefits alone were likely to outweigh any maintenance costs associated with the SPE.