Understanding SPE

CFA Level II
#1

Please help me understand the below statement:

" When the receivables are securitized, the sponsor removes the receivables from the balance sheet and reports the cash inflow as an operating activity in the cash flow statement. If the sponsor still has recourse, the transaction is nothing more than collateralised borrowing."

Firstly, I did not understand the last statement “If the sponsor still has recourse, the transaction is nothing more than a collateralised borrowing.” Please elaborate

Secondly, help me understand why that cash inflow should be categorised as “cash from operating activity” for the sponsor( why we are seeing from the sponsor perspective only ignoring SPE?).
I am confused because when the statements are consolidated; for SPE it is CFF because it might have taken a bank loan, while for the sponsor it would be CFO because the sponsor is getting money from selling its account receivables. But how this consolidation happens? why different views within the same entity. Don’t you think it should have a more conservative approach?

Blockquote

#2

Recourse means that if the customers don’t pay their bills, the sponsor has the legal right to make the original company pay. As the original company is therefore liable for the entire amount of the receivables, they have essentially borrowed money and pledged the receivables as collateral for the loan.

If they’d waited for their customers to pay their bills, it would be CFO. Selling the receivables doesn’t change the nature of the cash flow.

That’s a separate transaction.

The SPE has two transactions:

  • a CFF inflow when they borrow money
  • a CFO outflow when they purchase the receivables

Later, they’ll have CFO inflows when they collect on the receivables, and a CFF outflow when they repay the loan.

2 Likes
#3

Thank you so much for detailed explanation.