deconsolidation and outsourcing

Companies regularly announce securitisation transactions (e.g. Chargeurs with its inventories, Odeon with its box office revenues) or real-estate leasebacks (e.g. Fiat, Capio, the Swedish leading hospitals operator). These are merely the logical extension of the discounted bills and leasing deals of an earlier generation. Companies have always sought to reduce the size of their balance sheets and to back financing with specific assets in order, theoretically, to reduce their cost. This trend is becoming more pronounced. Some companies go so far as to outsource all their manufacturing (see Alcatel/Flextronics deal).
Here is how the evolution of asset deconsolidation might look:

1 The principle

Transactions at each end of the spectrum above are relatively straightforward, while securitisation and leasebacks often use more complex formulas.

2 Accounting treatment

The arrangement is simple in its principle, but less so in how contracts are drawn up so that assets are truly taken off the balance sheet. Indeed, accounting rules have quickly caught up and now demand a restatement of transactions that are mere window-dressing, with the assets having to be reinstated on the balance sheet and debt booked accordingly. Discounted bills and leasing deals have long been restated in consolidated accounts. So a game of cat and mouse has arisen between companies, who attempt deconsolidating financing, and the guardians of accounting standards, who try to separate the wheat from the chaff. As regulations currently stand, the principles are as follows:

IFRS rules are quite strict and offer very little latitude. US GAAP is significantly more flexible in terms of asset deconsolidation.

3 Financial analysis

Such deals often have complicated effects on the accounts, the most obvious ones being as follows:

Hence, a company that wants to immediately realise a capital gain and significant liquidity must pledge to pay rents significantly higher than the market average over a long period.
Financial analysts are increasingly familiar with this type of transaction, and while they only rarely restate them, they do take them into account in their overall assessment of the company's risk profile. Ratings agencies, for example, systematically reinstate onto the balance sheet those assets that have been securitised or are involved in a sale-leaseback. The also consider that if a group's financing is provided by a significant portion (20%) of securitisation, leasebacks or structural subordinated financing, that is reason enough to give the company a negative outlook (an example is US airlines practice of securitising their spare parts), as the quality of the accounts has been lessened.

4 Why do it?

To see how worthwhile such transactions are, let's take the simple example of factoring, which actually covers four types of services to companies, sold either individually or in a package:
1. Financing with a competitive cost;
2. Outsourcing of bill collection;
3. Insurance against unpaid bills;
4. Having debt off balance sheet (used by some companies to dress up their balance sheet).

These services perfectly illustrate the objectives of securitisation, outsourcing and sale-leasebacks: