Company's entity bough by sponsored SPV with bank loan

CFA Level II
#1

Hi Guys,

I am a bit low on SPVs and related accounting, if someone has a good understanding of it here is a case and some questions on it.

  • A company is sponsoring an SPV to buy one of his entities with a bank loan.

  • The bank loan is LESS than the price paid for the entity.

  • The company is making a gain while selling to the SPV

The questions:

  • What is the B/S of the SPV after having acquired the entity?

  • How can the SPV acquire the entity having borrowed less than the price of it?

  • Why, while consolidating the B/S of the entity, the company has to write of the gains made out of the sell to the SPV?

The answers are surely linked… Thanks for your time!

Good luck for the exam :slight_smile:

#2

Where did you get the question from?

My guess on your Qs:

The SPV will have after the acquisition either:

  1. Less cash and investment in subsidiary (assets) and long-term debt to the company equal to the bank loan amount (liability)

  2. investment in subsidiary and long-term debt equal to the whole amount of the purchase.

Most likely if the bank loan is less than the price of the entity on standalone basis the company will recognize an asset (receivable from the SPV).

Under current standards the company will have to consolidate the SPV. The sale of the entity is an example of downstream sale with unrealized gains so when consolidating it has to remove it.

#3

Thanks Gebura!

  1. Got you on the consolidation.

1- 2) Yes aparently it is common practice for an SPV to issue debt to buy the assets from the sponsor. I guess the difference of the fair price to the debt would be some kind of paid in capital to structure the SPV.

FAIRvalueOfENTITY = DEBTtoBANK + PAIDinCAP

For the case I made it up from stuff I had saw around, can’t recall where exactly.

If anyone has some interesting side stories on similar problems, please feel free to contribute :wink:

Good luck all,