03-30-2008, 07:13 PM
4th element...ur questions are somewhat ambiguous. Anyway,I'll give you a brief explanation.
"can u tell me if a company sets up a SPE than it can do financing through SPE but wat wud be the benefit for the company obtaining finance throug the SPE but it cant show that on its own balance sheet ".
The benefit as I mentioned earlier is to keep ur financing ratios low, so as to give a better picture to the stakeholders.
The sponsor (or entity on whose behalf the SPE is created) usually transfers assets to the SPE, obtains the right to use assets held by the SPE ( e.g through an operating lease arrangement) or performs services for the SPE, while other parties (âcapital providersâ) may provide the funding to the SPE. For example an SPE may trasnfer an asset to the sponsor through an operating lease arrangement, implying that neither this asset nor its associated liability will be recorded in the balance sheet of sponsor, yet the sponsor is able to use the asset.
"if it obtains loan from SPE than it has to show that on its balance sheet that the company has acquired financing from related party or associated so how can its leverage or D/E ratio improve".
This is not the direct financing or funding you are thinking about..that's why it is called off balance sheet financing. Further, I mentioned in my last post that the purpose is to keep the leverage. Debt equity ratios low, not about the improvement in these ratios. Obviously, if a financing is not recorded/recognized in the balance sheet, the above ratios will be low.
During the growth phase of Enron, it used borrowing through SPEs' to finance its growing operations rather than direct equity/debt issue. The said SPEs used to borrow money from Lenders, which (the debt) was guaranteed by Enron, thus creating a contingent liability for Enron. Therefore, when these contingent liabilities crsytallized, the only result was Bankruptcy of Enron.
wud love to see contribution from other members on this...
"can u tell me if a company sets up a SPE than it can do financing through SPE but wat wud be the benefit for the company obtaining finance throug the SPE but it cant show that on its own balance sheet ".
The benefit as I mentioned earlier is to keep ur financing ratios low, so as to give a better picture to the stakeholders.
The sponsor (or entity on whose behalf the SPE is created) usually transfers assets to the SPE, obtains the right to use assets held by the SPE ( e.g through an operating lease arrangement) or performs services for the SPE, while other parties (âcapital providersâ) may provide the funding to the SPE. For example an SPE may trasnfer an asset to the sponsor through an operating lease arrangement, implying that neither this asset nor its associated liability will be recorded in the balance sheet of sponsor, yet the sponsor is able to use the asset.
"if it obtains loan from SPE than it has to show that on its balance sheet that the company has acquired financing from related party or associated so how can its leverage or D/E ratio improve".
This is not the direct financing or funding you are thinking about..that's why it is called off balance sheet financing. Further, I mentioned in my last post that the purpose is to keep the leverage. Debt equity ratios low, not about the improvement in these ratios. Obviously, if a financing is not recorded/recognized in the balance sheet, the above ratios will be low.
During the growth phase of Enron, it used borrowing through SPEs' to finance its growing operations rather than direct equity/debt issue. The said SPEs used to borrow money from Lenders, which (the debt) was guaranteed by Enron, thus creating a contingent liability for Enron. Therefore, when these contingent liabilities crsytallized, the only result was Bankruptcy of Enron.
wud love to see contribution from other members on this...
