Off Balance Sheet Financing Matt Ryan Corporation is

intereste
(Off-Balance-Sheet Financing) Matt Ryan Corporation is interested in building its own soda can
manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be
to ensure a steady supply of cans at a stable price and to minimize transportation costs.
However, the company has been experiencing some financial problems and has been reluctant
to borrow any additional cash to fund the project. The company is not concerned with the cash
flow problems of making payments, but rather with the impact of adding additional long-term
debt to its balance sheet.The president of Ryan, Andy Newline, approached the president of the
Aluminum Can Company (ACC), their major supplier, to see if some agreement could be
reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan
would begin their own can production. The Aluminum Can Company could not afford to lose the
account. After some discussion a two-part plan was worked out. First, ACC was to construct the
plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year
purchase agreement. Under the purchase agreement, Ryan would express its intention to buy
all of its cans from ACC, paying a unit price which at normal capacity would cover labor and
material, an operating management fee, and the debt service requirements on the plant. The
expected unit price, if transportation costs are taken into consideration, is lower than current
market. If Ryan did not take enough production in any one year and if the excess cans could not
be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall
so that ACC could make the payments on its debt. The bank will be willing to make a 20-year
loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20
years the plant is to become the property of Ryan.(a) What are project financing arrangements
using special purpose entities?(b) What are take-or-pay contracts?(c) Should Ryan record the
plant as an asset together with the related obligation?(d) If not, should Ryan record an asset
relating to the future commitment?(e) What is meant by off-balance-sheet financing?View
Solution:
Off Balance Sheet Financing Matt Ryan Corporation is intereste
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