Leasing Deconstructed by IAA-Advisory Limited

Author:IAA-Advisory Limited [Limited, IAA-Advisory]
Language: eng
Format: epub
Publisher: Grosvenor House Publishing Ltd
Published: 2016-11-28T16:00:00+00:00

Transaction Risk – Indirect Collection

The standard lease transaction structure involves the lessor contracting directly with the lessee and the agreed lease payments being made directly by the lessee to the lessor. If there is a payment delay the lessor contacts the lessee to discover the reasons for non-payment and then acts accordingly.

There is an alternative structure, which is most often used in vendor leasing: a third-party, typically the supplier, contracts with the lessee and subsequently refinancing the transaction by transferring its rights in the lease contract to a leasing company. This transfer of rights may be done either with or without notification to the lessee, in which case the lessee will be unaware of the leasing company’s interest in the lease. Suppliers are often keen to be perceived as the lessor as it allows them commercial control of the customer; and leasing companies will try to accommodate their suppliers on competitive grounds.

If the lessee is not aware of the leasing company’s interest, and the supplier wishes to retain commercial control of its customer (who is the lessee), it is not practical for the leasing company to receive payments directly from the lessee nor to be in contact with the lessee in the event of non-payment. So the leasing company will contract with the supplier to collect the lease payments and then pass them on to the leasing company.

This arm’s length arrangement presents two main risks

• the supplier may not pass on the lease payments to the leasing company and

• the supplier does not have a competent collections function.

The former presents an immediate risk of loss. The latter may be less immediate but can ultimately lead to transactions becoming non-collectable.

Leasing companies employ a variety of different structures and techniques to mitigate these risks but can never eliminate them entirely. Suppliers assessed to have an above-average credit risk profile will probably not be acceptable and prudent lessors will require an audit of the suppliers’ collections capability before agreeing to such an arrangement.

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