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What financial options are available to my enterprise to support the transaction?

Typical outsourcing transactions involve a degree of asset transfer and/or transformation and result in a situation whereby earlier months’ cash-flows are negative because most outsourcing clients want to minimise the financial and accounting impact of the transaction.

In several cases the asymmetrical credit rating of buyer and seller also provides an opportunity to arbitrage and reduce the total cost of the transaction.

Changing market, accounting and tax regulation can alternatively limit or fuel the value in various structured finance strategies in order to allow for the sale (or acquisition) of assets and a related set of operational services which may allow for the operational transformation to be accompanied by a switch from balance sheet assets to a range of operational services which, subject to the future Lease Project of the IFRS may or may not be accounted for as a long term asset/liability by the parties to the outsourcing contract.

Understanding the Financing Requirements

The first step in analysing options open to financing an outsourcing transaction is an analysis of the cash-flows pertaining to each component of the underlying transaction and the related risks (operational risks, payment risks) and governance around the services on one side and the client’s obligation to pay on the other:

  • Nature of the “necessary to finance” flows (real estate, IT asset, HR Capital, etc.)
  • Specific details for each asset (legal, commercial, regulatory, etc.)
  • Degrees of freedom and actual control the vendor and the client (and lender) have about the assets (in the case of property and obligations – property, contractual obligations, human resources obligations)
  • Legal, tax and regulatory obligations
  • Step in rights (if any)

Structured Finance aspects

We can provide innovative transaction financing – structuring and placement – which can positively impact the case for change in most scenarios in looking at an outsourcing transaction as a typical structured finance transaction.  In that context Burnt Oak Partners will be looking first inter alia to the project as the source of financing.  The obligation to perform (by the vendor) and the obligation to pay (by the client) plus any further source of transaction support will jointly and (generally) severally be the basis for the financing decisions by the lending community.

Various types and structures

In line with traditional structured finance transactions outsourcing contracts provide the opportunity to adapt the solution to unique characteristics of transactions, especially in the case of a client with a greater credit quality than the vendor.  As an illustration:

  • Tranching (by maturity, by degree of risk etc.)
  • Securitisation
  • Credit enhancements (in case one of the parties is less known or performance is an issue)
  • Credit rating (large transactions may benefit from a credit rating to facilitate on-selling by investors)