This is an answer explanation from a question I came across: ‘SPEs are often created to securitize assets, usually receivables of the sponsor. Typically, the SPE issues debt to purchase the receivables from the sponsor and the debt is repaid as the receivables are collected.’
I was wondering if someone could provide me with a SUPER simple example of what could/would be considered ‘receivables of the sponsor’ above? For example- let’s say there is some company that used to use another company to handle its distribution of its sales products, and said company decides to create a SPE to handle the distribution part of its business, what assets are getting securitized? what are the receivables of the sponsor? and who would be the sponsor- some outside entity that helps to fund the operation?
So confused on SPEs…thanks!
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Acme Widgets sells . . . wait for it . . . widgets, mostly on credit. They need cash to expand (the widget market is going nuts, as you no doubt read in the Wall Street Journal), but their receivables average between 60 and 90 days.
Acme creates an SPE: Nadir Financing. Nadir issues $10,000,000 in bonds and uses that money to buy Acme’s Accounts Receivable. Acme gets their cash today, and expands like there’s no tomorrow. Nadir collects Acme’s receivables and uses the cash to make the coupon payments on the bonds that they issued, and to buy the next round of Accounts Receivable from Acme.
And so it goes.
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Under IFRS nowadays, companies are not able to hide SPEs anymore (also named SPVs) from consolidating them into their financial statements. I wonder if the quantity of SPEs created worldwide, since inception of this rule, has decreased dramatically.
mrb,
SPEs are legal vehicles very simple in structure, commonly created by companies of considerable size. Those firms want to separate operations or debt lines.
The magician has explained how the receivables work using a SPE. About the operations / distribution story, you must imply the same. For example, you have a company that sells lamps for the living room and it has the both lines of operations: manufacturing and distributing the lamps to retailers. This company can create a SPE and sell to it all the trucks it has for distribution. The parent company can lease the trucks or can ask for cash to the SPE (depending of the strategy, the second one would imply expansion and the first one would imply separation of operating lines). After the transaction, the parent company only produces lamps and the SPE only distributes the lamps of the parent.
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both- super helpful examples…I put those examples in my notes and I think they make this clear now…
thanks to both of you!
