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Asset-Based Financing
Lease, Hire Purchase, Project
Financing
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Lease Financing
Lease: a contract between a lessor(asset owner) and a lessee (assetuser)
Lessor gives the lessee the right touse the asset for a seci!ed eriod ofti"e for a seci!ed consideration
called lease rent
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#$es of Lease
%erating Lease: &hort-ter"' cancellable'lessor resonsible for "aintenance,insurance
Financial Lease: Long-ter"' non-cancellable'lessee resonsible for "aintenance,insurance' "a$ er"it renewal or urchaseof asset on lease eir$' Purchase otion
not written in lease agree"ent as it wouldlegall$ beco"e a hire urchase agree"ent
&ale Lease-bac*: +ser sells eisting assetto lessor and leases it bac*
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o""on #er"s
Leveraged lease: lessor ./, lessee,!nancer 0./ (loan)
&ale Lease-bac*: lessee sells re-owned
asset to lessor leases it bac* ross border: 1nternational lease between
arties in two or "ore countries' if
between 2 arties 3 "anufacturer4vendor,lessor, lessee in 2 countries it is calledforeign-to-foreign lease
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o""on #er"s
losed-ended lease: asset transferredto lessor at end of lease' ris* ofobsolescence, residual value, etc5 his
roble"
%en-ended lease: lessee has otionto urchase asset at end of lease
6irect lease: "i of oerating !nancial lease' rovides urchaseotion to lessee at end of lease
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o""on #er"s
7aster lease: for a eriod longer thanasset life' lessor resonsible forroviding asset in good condition
Percentage lease: !ed rent 8 / ofrevious $ear9s gross revenue to beaid b$ lessee to lessor' rotects
against ination ;et 6r$ lease: aircraft industr$'
!nancing 8 servicing 8 fuel
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o""on #er"s
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ash Flow onse=uences ofFinancial Lease
ost of e=ui"ent: >s5 ?@@ la*h
Life: ? $ears
Annual lease rent (eo$): >s5@ la*h Annual "aintenance, insurance,
oerating eenses b$ lessee co"an$
&traight-line dereciation
Loan interest: C/ 5a5
#a rate: 2./
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ash Flow onse=uences
Year(1)
Outfowavoided (P0)
(2)
Depreciation(D)(3)
DTS(4)=(3)x.3
!T"#()
$T"#(%)=()x.%
&'104(*)=(4)+(%)
@ ?@@ -@@ -2. -@ ?@@
-@@ -2. -@ -@C -2D
-@@ -2. -@ -@C -2D
2 -@@ -2. -@ -@C -2D
C -@@ -2. -@ -@C -2D
. -@@ -2. -@ -@C -2D
-@@ -2. -@ -@C -2D
0 -@@ -2. -@ -@C -2D
? -@@ -2. -@ -@C -2D
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ash Flow onse=uences
Avoids: Purchase rice >s5?@@ la*h'does not incur oortunit$ cost(>s5?@@ la*h *e)
Loses: 6ereciation ta bene!t >s52.la*h
After-ta lease rental cost: >s5@Cla*h
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6isadavantages
Leasing does not rovide @@/ !nancing
Leasing does not rovide oE-balance-sheet!nancing: debt caacit$ deends on debt
servicing caacit$, not on its balance sheetratios
Leasing does not i"rove erfor"anceecet if bene!ts fro" lease eceed costs
Leasing does not avoid control of caital:Leasing re=uires caital eenditurescreening
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Advantages
onvenience: short eriod asset needs canbe "et through leasing
Fleibilit$: long-ter" !nancial lease oEers
eibilit$ is less restrictive than ban*loans
&hifts ris* of obsolescence: short-ter"cancellable lease oEers rotection in a fast
changing environ"ent
7aintenance secialised services: full-service lease
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valuating a Financial Lease
ste decision: evaluate viabilit$ ofasset as invest"ent' evaluate lease!nance alternative' co"are the two
alternatives
=uivalent Loan 7ethod
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=uivalent Loan 7ethod
alculate incre"ental cash ow fro"leasing
alculate loan a"ount serviced b$
incre"ental cash ow fro" lease o"are loan and lease !nance
=uivalent loan: the a"ount which givesthe !r" eactl$ sa"e strea" of !edobligations as the lease5 #he loan that canbe serviced b$ the cash ow in &lide D canbe calculated as follows
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=uivalent Loan
%utstanding a"ount at beginning of $r ? G P
1nterest rate G C/' ta rate G 2./
After-ta rate G *d(-#) G @5C(-@52.) G @5@D
or D5/5 #he e=uation will be 5@DP G 2D (a$"ent in $r ?)
P G 2D45@D G >s505Cla*h
>s52D la*h G 05C(rincial)85.D(A#1)
B#1 aidGA#14(-#)G>s55.@[email protected]>s505?Cla*h
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=uivalent Loan
L(beg $r 0)GPrincial rea$"ents in $rs 0? P?G>s505C la*h
A#10G@5@D(P805C)G@[email protected]
#otal a$"ent $r 0G>s52D la*hGP8A#1($r 0) [email protected]
P0G05C45@DG>s550? la*h
A#1(P0)G>s52D->s550?G>s55 la*h
B#1G>[email protected]>s52C5D la*h' etc5 to P@
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=uivalent Loan alculation
Year(1)
&'(2)
!T,(3)
$T,(4)
P repaid()
"oanOut-tandin(%)
@ 05CD
2D @052 D50. D5. D05C
2D D05 25C. 0.5.. 5D
2 2D ?05@C .5.0 ?5C2 .2D5
C 2D 0.5.@ CD5@0 ?D5D2 CCD522
. 2D 5D C@5?D D?5 2.5 2D CD50 25D @05@C CC5D
0 2D 2C5D 5 50? 05C
? 2D 05?C 5.D 05C @
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&hould #he Fir" AccetLease Finance
Lease cash ows can service a loane=uivalent of >s505CD la*h
Lease !nance for sa"e cash owsG>s5?@@
la*h Lease !nance advantageous
=uivalent LoanGPresent Ialue of ash Flows6iscounted at After-#a ost of Borrowing
LGJntG(-#)Lt8 6#&
K 8 *d(-#)t
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6ereciation &hield ashFlows +nder a Lease
Year(1)
$0(2)
"o-tDTS(3)
$T"#(4)
&'()
P/.1(%)
P/(*)
@ 8?@@ ?@@ 5@@@@ 8?@@
-2. -@C -2D @5D -05C
-2. -@C -2D @5?C@ -50?
2 -2. -@C -2D @500@ -@05@C
C -2. -@C -2D @50@.? -D?5
. -2. -@C -2D @5C0@ -?D5D2
-2. -@C -2D @5.D2@ -?5C2
0 -2. -@C -2D @5.C2. -0.5..
? -2. -@C -2D @5CD? -D5.
PI 8?@@ -D25@@ -.025CD -05CD 8225.
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an a Lease Bene!t bothLessor Lessee
PI of Lessor9s ash Flow
ash Flows Present Ialue(la*hs)
Purchase rice -?@@
6#& (2. .5.C2) 8D2 A#L> (@C .5.C2) 8.025CD
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PI of Lessee9s ash Flows
'a5 ow- P/ (a65-)
Purchase rice avoided 8?@@
PI of lease rentals (C52?D @) -0C5
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1f actual lease rental >s50@ la*h instead of>s5@ la*h, both lessor lessee gain
Lessor9s gainG>s50@->s5D52CG>s5@5
la*h a, M2./ ta rate PI of lessor9s gainG(-@52.)@5.5.C2G
>s5520 la*h at a discount rate of D5/
Lessee9s gainG>s505C.->s50@G>s55C.
la*h a M@/ ta rate PI of lessee9s
gainG>s55C.C52?DG>s5520 la*h
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;here 6o Lease Bene!tso"e Fro"
Bene!ts to lessor lessee is loss togovern"ent
P/ o6#& -D2
1#& on dislaced debt -C?5?
#otal -2C5?
PI of
#a on lease rentals 82?5@
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et vantage o a easeincluding %erating osts
&alvage Ialue
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ash Flows +nder a Lease
Year(1)
$PO(2)(P0)
DTSo-t(3)(DTS)
$T"#(4)($T"#)
$TO7()($TO7)
$TS/(%)(S/)
&'(*)(&')
@ ?@@ ?@@
-2. -@C @52D -2?5
-2. -@C @52D -2?5
2 -2. -@C @52D -2?5
C -2. -@C @52D -2?5
. -2. -@C @52D -2?5
-2. -@C @52D -2?5
0 -2. -@C @52D -2?5
? -2. -@C @52D -? -.5
PI -D2N -.025CDN 85?NN -52NN 8D5@
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ash Flows (continued)
6#& A#L> discounted MD5/, the after-tacost of borrowing
A#% &I discounted MC/, thew after-tacost of caital
PI(after-ta o5 cost)GJntG(-@52.)@5@t
(5C)t
G@52D C52?D G5?la*h
PI(A#&I) G ?45C? G ? @52.@ G 52la*h
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1>> Aroach for valuatinga Lease
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6#& &I under 1ndian Laws
Lease valuation: 1ndian #a &$ste" ost: >s5@@@ la*h Annual Lease >ent: >s5C@ la*h 8 cost,
insurance, "aintenance, oerating eenses 7aintenance service contract: >s5@ la*h,
bo$ Bu$ otion: 6ereciation M./ on wdv &alvage value: >s5@@ la*h after 0 $ears %ortunit$ cost of caital: ./ Borrowing cost: @/ 1# >ate: 2./
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6#& &I (continued)
Lease: 1ncre"ental ash Flows Avoid urchase rice >s5@@@ la*h in $ear @ 6#& lost for ever' safe cash ows' discounted
at after-ta rate of borrowing' discounted value
of declining 6#& eretuit$ is # 6 *d(-#) 8 d
After-ta lease rental: >s5. la*h (-@52.)C@'
!ed obligation discounted a-t borrowing5.@/ After-ta o5cost: >s55.@ la*h (-@52.)@ bo$
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6#& &I (continued)
&alvage value lost: >s5@@ la*h' discountedat cost of caital as &I not !ed4ceratin
Loss of &I adjusted for PI of 6#& on &I'
*nown end of 0th$ear' so safe cash ow' PIend of 0th$ear calculated at after-ta rateof borrowing
&I uncertain till end of 0th$ear' also 6#&
on &I' PI of 6#& on &I end of 0th$ear atcost of caital
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6#& &I (continued)
'a-5ow-
Di-count#ate
Pre-ent/aue
PP avoidedP@
Qear @ 8@@@5@@
6#& lost @@@(@52.@5.)(@5.8@5@.)
Qear toin!nit$
@5@. -0050?
After-ta
lease rental
. .5C?C. Qear -0
annuit$
@5@. -?..5.?
After-taoeratingcost
5.@ .5C?C. 5@.
Qear @-annuit$
@5@. -205D0
&alvage
value
@@
45.0
G@@ @520.D
Qear 0 @5. -205.D
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Leveraged Lease
C arties:
asset "anufacturer
lessor (loan ?@/ of asset value 8 e=uit$)
lender (to lessor) to bu$ asset
7anufacturer &ells Lessor Leases Lessee
=uit$ Loan Lien onasset
%wners Lender
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Leveraged Lease(continued)
Loan (non-recourse basis) serviced outof lease roceeds
Asset "ortgaged to lender
Lenders ta*eover asset if lessee unableto a$ lease rentals
