Leveraged Lease
A Leveraged Lease is a type of finance lease in which the lessor (leasing company) borrows funds to purchase equipment or other assets and then leases those assets to a lessee. In this arrangement, the lessor provides only a portion of the funds, typically 20-40% of the asset's value, while the remaining funds are obtained through borrowing.
Leveraged Leasing
Definition
Leveraged leasing is a type of financing lease where the leasing company (lessor) borrows funds to purchase equipment or other assets and leases these assets to the lessee. In this arrangement, the leasing company provides only a portion of the funds, typically 20-40% of the asset's value, with the remainder raised through borrowing.
Origin
Leveraged leasing originated in the United States in the 1960s, initially used in the aviation and railway industries. Over time, this financing method expanded to other sectors such as energy, manufacturing, and information technology.
Categories and Characteristics
Leveraged leasing can be divided into two main categories: direct leveraged leasing and indirect leveraged leasing. In direct leveraged leasing, the leasing company directly signs a lease contract with the lessee; in indirect leveraged leasing, the leasing company signs the contract with the lessee through an intermediary.
Characteristics include:
- High leverage: The leasing company needs to provide only a small amount of its own funds.
- Tax advantages: The leasing company can benefit from depreciation tax shields, and the lessee can deduct lease payments as operating expenses.
- Flexibility: Lease terms and conditions can be adjusted according to the needs of both parties.
Specific Cases
Case 1: An airline leases an aircraft through leveraged leasing. The leasing company provides 30% of the funds, with the remaining 70% raised through bank loans. The airline pays monthly rent, and the leasing company uses the rent to repay the loan.
Case 2: A manufacturing company needs a large piece of equipment and acquires it through leveraged leasing. The leasing company provides 20% of the funds, with the remaining 80% raised through bond issuance. The manufacturing company pays quarterly rent, and the leasing company uses the rent to pay bond interest.
Common Questions
1. What are the main risks of leveraged leasing?
The main risks include interest rate risk, credit risk, and market risk. Interest rate fluctuations can affect the leasing company's borrowing costs, and lessee default can result in the leasing company being unable to recover its investment.
2. How does leveraged leasing differ from traditional leasing?
Leveraged leasing involves high leverage and complex financing structures, whereas traditional leasing typically involves the leasing company providing full funding, with simpler financing structures.
