Interpreting notes on off-balance-sheet financing. Louisiana-Pacific Corporation (LP) sold certain timber assets and received cash and notes receivable from the purchaser. LP then engaged in a transaction to turn the notes receivable into cash without recognizing a liability on the balance sheet. Exhibit 11.17 presents the notes from LP’s financial statements describing this transaction.

Based on the disclosures in Exhibit 11.17, discuss the likely reasons why this transaction qualified as a sale and not as a collateralized loan.

EXHIBIT 11.17 Louisiana-Pacific Corporation

Note on Sale of Notes Receivable

12. Off-Balance-Sheet Arrangement

In connection with the sale of LP’s southern timber and timberlands in 2003, LP received cash of $26.4 million and notes receivable of $410.0 million from the purchasers of such timber and timberlands. In order to borrow funds in a cost-effective manner, (i) LP contributed the notes receivable to a Qualified Special Purpose Entity (QSPE) as defined under SFAS No. 140, (ii) the QSPE issued to unrelated third parties bonds supported by a bank letter of credit, which are secured by the notes receivable, and (Iii) the QSPE distributed to LP, as a return of capital, substantially all of the proceeds realized by the QSPE from the issuance of its bonds. The OSPE has no sources of Liquidity other than the notes receivable, the cash flow generated by the notes receivable generally will be dedicated to the payment of the bonds issued by the QSPE, and the QSPEs creditors generally will have no recourse to LP for the QSPE’s obligations (subject to the limited exception described below).

Pursuant to the arrangement described above, during 2003, LP contributed the $410.0 million of notes receivable to the QSPE, the QSPE issued $368.7 million of Its bonds to unrelated third parties and distributed $365.8 million to LP as a return ad capital.

The principal amount of the QSPE’s borrowings is approximately 90% of the principal amount of the notes receivable contributed by LP to the QSPE. LP’s retained interest in the excess of the notes receivable contributed to the unconsolidated subsidiary over the amount of capital distributed by the unconsolidated subsidiary, in the form of an investment in the QSPE, represented $44.5 million of the Investments in and advances to affiliates on the Consolidated Balance Sheets as of December 31, 2006. Management believes the book value of this investment approximates market value, as the interest rates on the notes receivable are variable.

In accordance with SFAS No. 140, the QSPE is not included in LP’s consolidated financial statements and the assets and liabilities ad the QSPE are not reflected on the Consolidated Balance Sheets. The QSPEs assets have been removed from LP’s control and are not available to satisfy claims of QSPE’s creditors except to the extent of LP’s retained interest, if any, remaining after the claims of QSPE’s creditors are satisfied. In general, the creditors of the QSPE have no recourse to LP’s assets, other than LP’s retained interest. However, under certain circumstances, LP may be liable for certain liabilities of the QSPE (including liabilities associated with the marketing or remarketing of its bonds and reimbursement obligations associated with the letter of credit supporting the bonds) in an amount not to exceed l0%, of the aggregate principal amount of the notes receivable pledged by the QSPE. LP’s maximum exposure in this regard was approximately $41 million as of December 31, 2006. The estimated fair value of this guarantee is not material.