SPVs Boost Market Share on Bank Risk Concerns

Special purpose vehicles, the off-balance- sheet entities at the center of the financial crisis, account for the largest share of structured note sales in five years as investors seek alternatives to bank credit risk.

SPVs have sold $5.83 billion of notes outside the U.S. this year, or 12.2 percent of the $47.8 billion market, compared with 8.4 percent over the year-earlier period, according to data compiled by Bloomberg that excludes securities where the amount of principal returned can vary. That’s the biggest share of issuance since 19.1 percent over the same period of 2007, even as the overall market has shrunk, Bloomberg data show.

Investors in SPV-issued notes benefit by being largely protected from a bank default because they would typically escape bankruptcy proceedings and collateral backs the securities, unlike with ordinary notes, which are unsecured debt. Risk has risen on banks in the past five years, with five-year credit default swaps for Bank of America Corp., the second-biggest underwriter for SPV-led issuance this year, surging by almost five times, to 233.4 basis points.

Some investors, who are now more aware of the credit risk of lenders, prefer to buy notes from a special purpose entity to be “exposed to the underlying assets rather than a bank,” said Thomas Imhasly, head of structured products at Credit Suisse AG’s private banking division in Zurich.

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