Use of receivables purchase structure to raise funds in relation to equipment assets
The raising of finance of an asset by way of the outright purchase of receivables linked to that asset has typically been reserved for assets in the energy or mining sectors. However, we have recently seen a number of instances of this structure being used in jurisdictions such as Kenya for other assets, such as large-scale items of hospital equipment with revenue streams guaranteed by government entities.
Whilst the quality of those revenue streams no doubt enhances the bankability of such structures, the characterisation of the receivables purchase as a “true sale” or an outright sale of the receivables, rather than an assignment by way of security, is key to obtaining off balance sheet accounting treatment for the seller of the receivables. This should mean that those receivables will no longer be included on the seller’s balance sheet and the purchase from received from the buyer will appear as cash.
That is not to say that the purchase of the receivables has no further recourse to the seller at all. It does have recourse in certain key instances, for example where the receivables or their assignment become invalid or are repudiated. But those instances will be carefully crafted to help ensure that the correct accounting treatment is obtained.
With the right receivables and the right paying entity in place (which in turn are dependent on the quality of the physical asset in question), a receivables purchase structure can be an effective way for the owner of large-scale equipment to raise funds, with benefits in terms of accounting treatment when compared to more traditional lending secured on the receivables and with no costs in relation to the creation of security.