"Off Balance Sheet Financing"
Harold Walker is CEO and Owner of Walker Enterprises (WE), acompany that has shown strong and consistent growth over the years.However, WE is struggling with cash flow issues and Harold islooking for a loan and/or line of credit to bolster his company.The problem is that the company’s debt to equity ratio is alreadyhigh and he knows it will be challenging to find a bank willing tolend him additional funds. Fred, his CFO, has come up with an idea.A large portion of the company’s debt is tied up in the mortgage oftheir five-story office building. Fred has suggested moving thisdebt to “off balance sheet” by creating an SPV (Special PurposeVehicle) that owns the building on behalf of the company and thenleases it back. This results in WE entering into an operating leaseoff the balance sheet and recording only the relatively smallmonthly “rent” as an operating expense. Fred says this willsignificantly increase the company’s liquidity and present abalance sheet that will be much more attractive to any potentiallenders.
Fred has assured Harold this is legal and common. Thisarrangement does not feel right to Harold.
- What additional information should Harold request?
- What additional reservations or concerns would you have?
