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Sale and contribution agreement

The Sale Agreement (also called Purchase and Sale Agreement, Receivables Purchase Agreement, or Contribution Agreement) transfers assets from you (the originator/seller) to the SPV. It is the foundation of true sale treatment and bankruptcy remoteness. Get this wrong and you lose the structural protection that makes ABF work.

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Purpose and structure

The document serves two essential functions:

Effectuate the sale: Transfer ownership of receivables from originator to SPV with characteristics that support true sale treatment
Establish repurchase obligations: Define when you must buy assets back due to breach of representations

For true sale treatment, the transaction must be structured so that if the originator goes bankrupt, the assets are not pulled back into the originator’s estate. The sale agreement language is the primary evidence of intent.

Why true sale matters

If True Sale	If Not True Sale
Assets belong to SPV	Assets may be property of originator’s estate
Creditors cannot reach assets	Automatic stay applies; creditors can reach assets
Capital provider has direct security interest in assets	Capital provider has security interest in originator’s rights, which may be impaired
Facility continues through originator bankruptcy	Facility freezes or terminates

Your true sale counsel will scrutinize every word of this agreement. Their opinion depends on the transaction exhibiting sale characteristics, not loan characteristics.

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True sale language

The agreement must clearly evidence intent to sell, not pledge.

Required characteristics

Sale Characteristic	Documentation Requirement
Transfer of ownership	”Seller hereby sells, transfers, assigns, and conveys to Purchaser all right, title, and interest in and to the Receivables”
Fair value consideration	Purchase price at or near par value or documented fair value
Transfer of risk	”All risk of loss with respect to the Receivables passes to Purchaser upon sale”
No recourse	Seller has no obligation to repurchase except for breach of rep
Separation of servicing	Servicing is a separate contract; seller services as agent, not as owner
Absence of equity of redemption	Seller cannot redeem sold assets

Language that undermines true sale

Avoid any language suggesting the transfer is a pledge:

Problematic Language	Why It’s Problematic
”Transfer as security for”	Expressly describes security interest, not sale
”Pledge” or “assign as collateral”	Security interest language
”Seller retains beneficial interest”	Suggests no true transfer
”In the event this is recharacterized as a loan…”	Acknowledges sale characterization is uncertain
Repurchase at Seller’s option	Suggests Seller retained economic interest
Nominal purchase price	Not fair value; suggests form over substance

Belt and suspenders

Most agreements include recharacterization language as a backup: “If, notwithstanding the intent of the parties, the transfer is characterized as a loan rather than a sale, Seller hereby grants to Purchaser a first-priority security interest in the Receivables.”

This provides protection if true sale fails, but the primary goal is structuring the transaction so the backup is never needed. Rating agencies and capital providers want clean true sale opinions, not reliance on backup security interests.

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Purchase price mechanics

How you get paid for assets you sell to the SPV affects both economics and true sale analysis.

Common structures

Method	Description	True Sale Support
Par value	100 cents on the dollar	Strong; full fair value transfer
Fair value (DCF)	Present value of expected cash flows	Strong if properly documented
Par minus servicing strip	100% minus PV of retained servicing	Acceptable; common structure
Par minus holdback	100% minus reserve released later	Problematic if holdback is large or discretionary
Par minus excess spread	Purchase price excludes excess spread above funding cost	Acceptable if excess spread is truly residual

Holdback negotiation

If there’s a holdback (purchase price reserve), the release conditions determine whether it supports true sale:

Problematic holdback: “5% holdback released in Purchaser’s sole discretion based on portfolio performance.”

This looks like recourse. The discretionary release suggests the holdback is protection for the buyer, not deferred purchase price.

Better holdback: “5% holdback released ratably over 12 months, provided no unreimbursed repurchase obligations exist.”

This looks like deferred payment with defined release, not retained recourse.

Documentation requirements

Maintain contemporaneous documentation of purchase price calculations:

If using DCF, document discount rate and cash flow assumptions
If using market value, document comparable transactions
If using servicing strip, document the servicing fee market rate

This documentation supports the purchase price is fair value if later challenged.

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Representations and warranties

You make representations about every asset you sell. These are the most negotiated provisions because they create repurchase exposure.

Standard collateral representations

Representation	What It Covers	Typical Qualifier
Originated per guidelines	Underwriting complied with origination policies	Knowledge qualifier; materiality
Documentation complete	Loan file has all required documents	Cure right for missing documents
Obligor not bankrupt	Borrower is solvent	As of sale date only
No material modification	Asset has not been modified since origination	Excludes permitted modifications
Not in default	Asset is current	Beyond applicable grace period
Legally enforceable	Asset is valid, binding obligation	Standard exceptions (bankruptcy, equitable principles)
Complies with law	Origination complied with applicable laws	Material compliance; knowledge
Properly perfected	Security interest is first-priority
Accurate data	Data tape is accurate	Material accuracy; knowledge

Negotiating representations

Materiality qualifiers. “Material breach” rather than “any breach.” A missing signature page on a document that is not required for enforcement should not trigger repurchase.

Knowledge qualifiers. “To Seller’s knowledge” for representations you cannot independently verify. You cannot represent as fact what the obligor told you about their financial condition.

Bringdown vs. sale date only. Does the rep apply only on the sale date, or does it continue? Continuing reps create ongoing exposure. Limit reps to sale date where possible.

Definition of breach. Does a rep breach occur when the rep is untrue, or when the untruth causes a loss? Push for “breach that materially and adversely affects the value of the Receivable or the interests of Purchaser therein.”

Sample negotiation: compliance with law

Original: “Each Receivable was originated in compliance with all applicable federal, state, and local laws.”

Issues: Strict liability for any legal violation, even immaterial. No knowledge qualifier.

Negotiated: “To Seller’s knowledge, each Receivable was originated in material compliance with all applicable federal, state, and local laws, and no violation of such laws has materially and adversely affected the enforceability of such Receivable or the interests of Purchaser therein.”

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Repurchase obligations

When a representation is breached, you typically must repurchase the asset. This is the mechanism that transfers performance risk back to you.

Repurchase price

Standard formulations:

Formulation	Calculation	Risk to Seller
Outstanding principal balance	UPB as of repurchase	Lowest; you get back what you owe
UPB plus accrued interest	Add unpaid interest	Slightly higher
UPB plus accrued plus costs	Add enforcement costs	Higher; costs can be significant
Greater of UPB or original purchase price	Floor at purchase price	Highest for performing assets

Negotiate for UPB only, or UPB plus accrued at the contract rate (not default rate).

Cure rights before repurchase

You should have the opportunity to cure defects before repurchase triggers.

Defect Type	Appropriate Cure Period
Missing documentation	60-90 days (time to locate or recreate)
Clerical errors	30 days
Recording defects	60-90 days (time to re-record)
Representation breach	30-60 days (or demonstrate breach is cured)

Critical language: “Prior to requiring repurchase, Purchaser shall provide written notice specifying the breach, and Seller shall have [X] days to cure such breach. If the breach is cured within such period, no repurchase shall be required.”

Repurchase caps

Unlimited repurchase obligations can become existential. If your portfolio experiences unexpected defaults and the capital provider argues each default constitutes a rep breach (because you represented that loans were underwritten properly), your repurchase exposure can exceed your company’s net worth.

Negotiating caps:

Cap Type	Structure	Achievability
Aggregate cap	Total repurchases capped at X% of cumulative purchases	Rare but achievable
Rolling cap	Repurchases capped at X% of outstanding portfolio	More common
Per-asset cap	Repurchase price capped at original purchase price	Standard for some asset classes
Carve-out from cap	Fraud or willful misconduct excluded from cap	Expected

Even a 10% aggregate cap provides meaningful protection. If you sell $100M in receivables, your maximum repurchase exposure is $10M rather than potentially all $100M.

Substitution rights

As an alternative to repurchase, you may have the right to substitute a conforming asset for the defective one.

Advantages of substitution:

You keep the defective asset and manage it yourself
No cash outlay if you have conforming assets available
Portfolio size remains constant

Typical limitations:

Substitute asset must be Eligible
Substitution available only for certain breach types
Time-limited (30-60 days from notice)

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Seller covenants

Beyond representations, the sale agreement includes ongoing covenants.

Common seller covenants

Covenant	Obligation	Negotiation Point
Maintain records	Keep loan files accessible	Duration; delivery timeline
Notify of breach	Inform Purchaser of known rep breaches	Knowledge standard; materiality
Cooperate in enforcement	Assist with collection actions	Cost allocation
Maintain origination capability	Continue as going concern	Vague; push for specifics
Preserve rights	Take actions to maintain enforceability	Standard
No liens	Not encumber sold assets	Already sold; should be automatic

Change of control

The sale agreement often includes change of control provisions affecting future sales.

Watch out for: Termination of purchase commitment upon change of control, even if existing assets are unaffected.

Better structure: Change of control triggers consent right, not automatic termination. Capital provider can evaluate new ownership before deciding whether to continue.

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Common pitfalls

Unlimited repurchase exposure

The most dangerous provision. Even “standard” repurchase obligations can create existential risk in stress scenarios.

Example: You represented loans were “originated in accordance with underwriting guidelines.” In a downturn, 20% of the portfolio defaults. Capital provider argues defaults prove improper underwriting. Your repurchase exposure is $20M on a $100M portfolio. Your company’s equity is $15M.

Mitigation: Repurchase caps, materiality qualifiers, requirement to show breach caused the loss, dispute resolution procedure before repurchase obligation becomes final.

Overly broad repurchase triggers

Some agreements trigger repurchase for any rep breach, not just breaches that affect value.

Problematic: “Upon any breach of any representation, Seller shall repurchase the affected Receivable.”

Better: “Upon any material breach of any representation that materially and adversely affects the value of the Receivable or the interests of Purchaser therein, and which is not cured within the applicable cure period, Seller shall repurchase the affected Receivable.”

Automatic repurchase

Some agreements make repurchase automatic upon certain triggers (e.g., 90+ days delinquent), whether or not there’s a rep breach.

Issue: This is recourse disguised as credit support. It undermines true sale because you’re bearing credit risk on sold assets.

Negotiation: Resist automatic repurchase triggers. Repurchase should only occur upon demonstrated rep breach.

Inconsistent eligibility criteria

The sale agreement defines what assets are eligible for sale. The credit agreement defines what assets count toward the borrowing base. If these definitions differ, you may sell assets that do not count toward availability.

Fix: Align eligibility criteria across sale agreement and credit agreement. Or, define “Eligibility Criteria” once (in one document) and incorporate by reference everywhere else.

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Review checklist

Before signing, verify: