Enterprise Value calculation business

adehbone

I am calculating the enterprise value of a company, which monetized its notes receivable from prior asset sales though a Qualified Special Purpose Vehicle (QSPE). The QSPE borrowed funds, which are recorded as notes payable.
Should I offset the notes payable and receivable in order to calculate the total debt, or just use the notes payable? Any thoughts?

justin88

If its classified as a QSPE I don't think you would consolidate its assets/liabs with the parent company, since the parent doesn't retain the majority of the costs and benefits of ownership. QSPE's are 'Qualified' because they specifically don't have to be consolidated on the parent's balance sheet; they are separate legal entities. There was a list of rules in the SPV section in Level II to determine whether you should consolidate, I'd look there. This was in 2009 when I took LII, I would think the 2010 version would also have it.

strikethree

Don't know about Qualified SPE, so I am speaking about SPE in general from IFRS perspective.

SPE is ALWAYS a separate legal entity.
IFRS requirement for consolidation is whether the parent has CONTROL which may or may not correlate with economic interest/ownership (esp in SPE structure, the one has control is normally not the one owning majority shares) .

Judging from your info, I would say yes, you need to consolidate from accounting point of view. For more info, you might want to look up SIC 12 and IAS 27.

However, you are doing a firm valuation not a financial report, so the goal is different so you have to judge the situation how the structure is set up: e.g., who owns the risk of the receivables. If the parent still bears the risk then you should consolidate to do firm valuation.

I do not understand your notes payable info, so you need to give me more info. Who does the SPE borrow from? why? where does the money go to?

former

elcfa Wrote:
-------------------------------------------------------
> However, you are doing a firm valuation not a
> financial report, so the goal is different so you
> have to judge the situation how the structure is
> set up: e.g., who owns the risk of the
> receivables. If the parent still bears the risk
> then you should consolidate to do firm valuation.
>

+1

Since the purpose here is Valuation and NOT Financial Reporting, you should consolidate, if parent still owns the risk of those receivables.

For financial reporting purposes, Qualified SPE is a classification under US GAAP, which does not require consolidation with its Parent. (Under IFRS, there is no such classification as QSPE and SPE consolidation for reporting depends as mentioned above by elcfa)

Since you mention it as QSPE, it must be following US GAAP and not require consolidation. Still, for Valuation purpose, you may need to consolidate if parent owns the risk of those receivables.

oneboy

Thanks Folks.

The company's balance sheet shows notes receivable and notes payable seperately, with notes that the QSPE received the notes receivable and used them as collateral to borrow funds, which are non-recourse note payable. Cash flows from the notes receivable are used to repay the debt.

My question is, for the purpose of calculating Enterprise Value, whether I should consider the full amount of notes payable as debt, or offset the notes payable and the receivable. The latter scenario will result in a lower EV due to the lower debt as a result of the netting.

Thanks

wake2000

It is clear. Thanks.

jmh530

Thanks elcfa...

Just picking from your example which seems counter intuitive and that is where analysis of financial statements come to fore:

"1. BS Before setting up SPE

Notes receivable 100 Equity 100
Total assets 100 Total Liabilities and equities 100"

Plain vanilla BS. Simple assumption that the company had equity of 100, cash 100 and thereafter cash was lent / invested in bonds and thus notes receivable

Here, EV of the company (assuming MV of assets / notes receivable is equal to 100) is 100 after discounting all the risks including illiquidity, default, interest rate / price, reinvestment risk etc. In future MV will fluctuate so will EV. No brainer here, its all market determined. But if assets are not traded, analysts may have to put a discount for risks stated above. Though as of now EV reflects as 100 is books of accounts should be adjusted on a timely basis

"2. The company now "sells" the Notes receivable for say 90 to an SPE and gets 90 in cash. The BS would look like:

Cash 90 Equity 90
Total assets 90 Total Liabilities and equities 90"

The company gets rid of all associated risks assuming that SPV has no recourse to the company in any case. So 10 is the price company pays to transfer all the risks. So immediate EV at 90. Subsequently value of the company may go up, may be > 100, as there is no risky assets on the company's BS and on the assumption how this cash will be utilised?

"3. Cash 90 Loan payable 100
Notes receivable 100 Equity 90
Total assets 190 Total Liabilities and equities 190"

Another way to look, Equity and notes receivable remains same at 100, and new assets (cash) and new liabilities (Loan payable) created at 90. Assuming loan payable and notes receivable mature together, 90 goes to pay loan payable and 10 remains as cash with the company (assuming no charges, fees etc.)

Even if EV reflects at 190 in books of accounts, analysts may discount it. From analysis point of view, loan payable and Notes receivable gets netted off. So Equity 100, Cash 90 and notes receivable 10. Unlike case 2 above, immediate EV may be 100 from analysis point of view but the risk of default still remains with the company and value of the company may subsequently go down below.

I believe above makes sense (value case 2 > case 3) as done by companies practically to pass on the risk and thus show increased value of company.

In examples above, there is no debt so EV = MV of equity

bpdulog

many thanks elcfa.. very helpful