OFF-BALANCE-SHEETFI

NANCING
Off-balance-sheet financing refers to the nonrecording of certain financing
obligations.
We have already examined transactions that fit this mold (operating leases). In
addition to leases, there are other off-balance-sheet financing arrangements
ranging from
the simple to the highly complex.
 Off-Balance-Sheet Examples
• One way to finance property, plant, and equipment is
to have an outside party acquire
• them while a company agrees to use the assets and
provide funds sufficient to service
• the debt. Examples of these arrangements are
purchase agreements and through-put
• agreements, where a company agrees to purchase
output from or run a specified
• amount of goods through a processing facility, and
take-or-pay arrangements, where a
• company guarantees to pay for a specified quantity of
goods whether needed or not.
 Special Purpose Entities
The concept is straightforward:
• An SPE is formed by the sponsoring company and is capitalized with
equity investment, some of which must be from independent third
parties.
• The SPE leverages this equity investment with borrowings from the
credit markets and purchases earning assets from or for the
sponsoring company.
• The cash flow from the earning assets is used to repay the debt and
provide a return to the equity investors.