Gold also suggests that once FASB's new rules eliminate some advantages of off-balance-sheet financing, CFOs may need to squeeze more working capital out of their balance sheet before resorting to securitization.

Ready for Their Close-Up?
Companies that abandon off-balance-sheet financing will also be giving up what's widely regarded as a "cosmetic" treatment that removes assets from the balance sheet to make ratios look better.

A healthy debt-to-equity ratio helps attract inexpensive sources of capital, contends Bob Shepard, an attorney with Ballon, Stoll, Bader & Nadler and a former investment banker. Off-balance-sheet financing, adds Shepard, also diversifies funding and invites a different group of investors — with a greater appetite for risk — into the corporate fold.

Many CFOs say the effect is much more than cosmetic. They claim that banks and ratings agencies, which penalize companies that carry too much debt, force them to use off-balance-sheet financing. Specifically, a company with a high debt-to-equity ratio may find that lenders restrict capital, increase rates, or add conditions to loan covenants, and that credit agencies lower their ratings, raising the cost of capital. Other CFOs add that banks require them to isolate risky projects or assets in an VIE to segregate bankruptcy risk.

The SEC rules are eliciting the same type of ire from financial executives. Michael Coke, CFO of AMB Property in San Francisco, explains that the commission will require a comprehensive explanation of an issuer's off-balance-sheet arrangements, as well as an overview of its aggregate contractual obligations, contingent liabilities, commitments in the management's discussion and analysis.

"Overkill," says Coke. Perhaps "overdisclosure" would be the word, if companies begin to pack the MD&A with every shred of material (and immaterial) information available. Says Coke, "It will turn into a big CYA exercise."

And the result? "The cost of capital is going up for smaller companies," charges Coke, who maintains that those companies won't be able to handle the extra costs associated with extensive reporting and certification requirements. Already Coke has witnessed a doubling of premiums for AMB's director's and officer's insurance, an increase of between 10 percent and 30 percent in audit fees, and increases in legal fees, audit committee fees, and internal accounting costs.

Bob Shepard adds that it's impossible to put everything on the balance sheet, and that off-balance-sheet financing can simply reflect a decision to appropriately account for a transaction that is immaterial to investors. He also asserts that the SEC doesn't need different rules to stop off-balance-sheet abuse — by his lights, "Enron accountants deliberately complicated the footnotes" and ignored the spirit of the existing rules. However, Shepard predicts that at least the near term, CFOs will err on the side of conservative accounting.

"Off-balance-sheet financing is not dead," reckons Bruce Bolander, an attorney in the New York office of Gibson, Dunn & Crutcher, "it's just getting a healthy dose of scrutiny." Bolander, formerly counsel to the Treasury Department and secretary of the Chrysler Corporation Loan Guarantee Board, insists that 90 percent of off-balance-sheet vehicles are plain vanilla securitizations, associated with mortgages, auto loans, credit-card and trade receivables, and energy and health-care plants.

"They're routine and operate efficiently without controversy," maintains Bolander, "but the fraud cases are giving routine transactions a black eye."

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