Lewis Corporation sold certain timber assets and received cash and notes receivable from the purchaser. Lewis then engaged in a transaction to convert the notes receivable into cash without recognizing a liability on the balance sheet. Exhibit 12.17 presents the notes from Lewis’ financial statements describing this transaction. Based on the disclosures in Exhibit 12.17, discuss the likely reasons why this transaction qualified as a sale and not as a collateralized loan.

EXHIBIT 12.17 Lewis Corporation
Note on Sale of Notes Receivable

12. Off-Balance-Sheet Arrangement
In connection with the sale of Lewis’s southern timber and timberlands in 2013, Lewis received cash of $26.4 million and notes receivable of $410.0 million. In order to borrow funds in a cost-effective manner, (i) Lewis contributed the $410.0 million of notes receivable to a special purpose entity (SPE), (ii) the SPE issued to unrelated third parties $368.7 million of bonds supported by a bank letter of credit, which are secured by the notes receivable, and (iii) the SPE distributed to Lewis, as a return of capital, $365.8 million of the proceeds realized by the SPE from the issuance of its bonds. The SPE has no sources of liquidity other than the notes receivable, the cash flow generated by the notes receivable will be dedicated to the payment of the bonds issued by the SPE, and the SPE’s creditors will have no recourse to Lewis for the SPE’s obligations. The principal amount of the SPE’s borrowings is approximately 90% (= $368.7/$410.0) of the principal amount of the notes receivable contributed by Lewis to the SPE. The SPE’s assets (the notes receivable equal to $410 million) have been removed from Lewis’ control and are not available to satisfy claims of Lewis’ creditors. The creditors of the SPE have no recourse to Lewis’s assets.