Off-balance-sheet financing---securitization of receivables and impact on leverage

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BambooBanker

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For the life of me, I cannot make sense of this.
The study books say that if a company is selling their A/R to an SPV, that would reduce assets and liabilities. The opposite is also true, if we include off-balance sheet financing, an asset and a liability should be created, results in increased leverage ratios.
This is what I can’t understand—if we’re selling A/R into an SPV and we’re receiving cash, assets would remain the same right? Our A/R line item would decrease, but cash would increase by the same amount. So why are the books telling me assets would decrease if we sold A/R or increase if we brought A/R back onto the balance sheet?
 
Where does it say that assets decrease?
Pretty sure they increase when you consolidate, because you bring the A/R back onto balance sheet, and also keep the cash you got from forming the SPV (and add a liability to your balance sheet to make things balance)
So instead of just having A/R, like you would if you hadn’t securitized anything, you have A/R plus cash plus a liability.
This confused me because I thought consolidating would just be ‘reversing’ the transaction ie pretending it never happened. But it actually seems to result in something different. Can someone confirm this is right?
Thanks
 
Kikaha, I think you have it right. As I understand it, the transaction is treated as a secured borrowing wich is why you end up with cash,AR AND the debt/liability
 
Ok I got it now—-I just got confused. It seems like if you’re bringing the A/R back on the balance sheet you would be counting assets twice (cash we received from the original sale of the receivables and then the receivables themselves).
 
Ok still confused:
Let’s assume we have company A:
Balance sheet looks like this:
Cash $50
A/R $100
The company decides to securitize $50 of A/R into a SPV. So the company would sell $50 in A/R and receive $50 in cash.
Our new balance sheet looks like this: (no change in assets)
Cash $100
A/R $50
However if we bring the off-balance-sheet securitization back onto the balance sheet, won’t we create $50 in “phantom assets”:
Cash $100 (still)
A/R is now $100 after bringing the A/R we previously sold back on the balance sheet.
Assets now total $200 versus $150 when we first started the transaction.
 
right but the 50 addition to cash is viewed as a borrowing. so you now have also a 50 liability. i have not reviwed the material since jan so i culd be wrong
 
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