OPERATING LEASES FROM THE MARKETPLACE POINT OF VIEW THE RESIDUAL VALUE AND THE TECHNICS TO MITIGATE THE RISK

TYPES OF LEASING / DEFINITIONS  FINANCIAL LEASES Financial leasing companies engage in financing the purchase of tangible assets. The leasing company is the legal owner of the goods, but ownership is effectively conveyed to the lessee, who incurs all benefits, costs, and risks associated with ownership of the assets. The term of the leasing contract is equal or greater than 12 months.  OPERATING LEASES Operating lease does not mean the lessor operates the asset - any lease other than a financial lease is operating lease. Operating leases are non-full payout where the lessor has reliance on residual. 2

DIFFERENCES FROM MARKET POINT OF VIEW  The differences between FINANCE LEASE and OPERATING LEASE are about full payout/non-full payout aspects.  OPERATING LEASE – the lessor has reliance on residual / the lessor has an asset risk  FINANCE RISK – the lessor has a credit risk 3

VARIOUS END OF TERM EVENTS 4

LEASE CHARACTERISTICS 5 CHARACTERISTICFINANCE LEASEOPERATING LEASE Credit riskYesYes Asset riskNoYes Lessee intentTo buyTo use StructureFull payoutNon-full payout BundlingNetNet or full service

ADVANTAGES OF OPERATING LEASES 6  Hedge against technology  Technology refresh  Early termination options  Lower rentals  Bundling of services (Full service operating leases)  Approval from operating budgets  Tax benefits  End of term flexibility

SUMMARY 7 Operating leases offers lessees numerous benefits that finance leases do not:  TECHNOLOGY HEDGE AGAINST TECHNOLOGY TECHNOLOGY REFRESH  CASH FLOW LOWER RENTALS  CONVENIENCE EARLY TERMINATION BUNDLING OF SERVICES APPROVAL FROM OPERATING BUDGETS END OF TERM FLEXIBITY

RESIDUAL RISK FACTORS THAT CAN AFFECT THE FUTURE VALUE OF AN ASSET The lessor needs to estimate what the future value of the asset will be at the end of the lease term. The future value is influenced by many factors, most of which are beyond the lessor’s control. 8

RESIDUAL RISK - FACTORS SUPPLIER RELATED  Maintenance requirements  Stocking  Keeping the equipments functioning properly  Refurbishing ECONOMIC AND REGULATORY  If the economy dips, business investments slow down, for regulatory factors,government regulations in aircraft flying LESSEE RELATED  If the lessee does not take appropriate care of leased assets ASSET RELATED  Due to technology reasons, even experts in asset management may not totally predict the value of a used equipment LESSOR RELATED  To have a strong knowledge of secondary market and a strong remarketing department

TECHNICS TO MITIGATE RESIDUAL RISK If the lessor is passing the entire risk to another, the parties that are willing to assume the risk are:  The lessee To negotiate a lower rental by calculating the present value of the rent difference and the present value of the possible exposure on the residual  The supplier Promoting vendor leasing programs  Insurance company They make it business to offer a service in mature markets 10

TECHNICS TO MITIGATE RESIDUAL RISK A lessor can mitigate its residual risk through:  Sound asset management  Focus on an asset type, rather than diversify at the onset  Trying to understand how residual values are arrived 11

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