Off-balance-sheet finance

This technique allows a borrower to legally raise finance (so improving its cash position) without showing any associated liability on the balance sheet. Because of that, it can flatter key ratios such as gearing (debt finance as a proportion of total outstanding finance). Usually a separate ‘special purpose vehicle’ (SPV – another company) is set up first to facilitate this type of deal.

So for example a bank may sell a package of outstanding mortgage receivables to an SPV in return for cash. The SPV raises the money needed to buy the mortgages from the bank by issuing its own ‘mortgage backed securities’ to investors. If the bank can persuade regulators that any subsequent claims by the SPV’s creditors should be met from the pool of assets (mortgage-backed securities) held by the SPV, the associated liability remains in the books of the SPV and not the bank. As such the obligation to repay the debt issued by the SPV remains off the bank’s balance sheet.

• See Tim Bennett’s video tutorial: What is a balance sheet?

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.