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LEASING NEWS AND DEVELOPMENTS - INTERNATIONAL
[This page lists news and developments in International leasing - please do visit the Indian leasing news and developments by
clicking here.]Read daily customised news on leasing - click on this button :
Read on for chronological listing of events, most recent on top, or go to a specific section by clicking on the topics below
CIT-Newcourt merger completed:
World's largest publicly-held company comes into being
The merger of Newcourt Credit of Canada with CIT Group of USA that began on August 5, 1999 [ see news reports on this site - here ] was completed on Nov 15 thus creating the second largest finance company in North America and world's largest publicly held company.
The combined Company has over $50 billion in managed assets, revenues in excess of $2.2 billion and approximately 8,000 employees working in 26 countries.
Peter Drucker laments lack of innovation in financial services
The global guru of management principles wrote recently in The Economist that there are only two options for the financial services industry: innovate or die. Drucker, who would be turning 90 this coming November, is respected world over for his incisive and innovative understanding of global business dynamics.
For full text of the report and a link to the Economist website, click on this news item on our securitisation website- click here.
US finance companies show strong fundementals
Duff and Phelps Credit Rating reports on first half 1999
Duff and Phelps Credit Rating (DCR) recently published a report [Financial Services Insights August 1999] on the performance of US financial services companies in the first half of 1999. The report says finance companies show strong fundamentals but for most of them, spreads have come down. "To enhance profitability companies are exiting unprofitable business lines and refocusing on profitable lines to make them more profitable and/or reduce risk. While acquisitions currently are at a slower pace, many com-panies are deep in the integration phase of recent acquisitions", says DCR report.
The DCR report says that in the consumer finance segment, there is a marked shift to better secured real estate loans. Also, the market places stress on ability to retain customers by offering better terms or products to existing customers. For example, an offer by Associates called Freedom loan offers reduced interest to existing well-paying customers on real estate financing. The goal is to keep those consumers on books longer.
ELA survey shows robust growth in US leasing
20% growth in volume in 1998
A survey recently released by Equipment Leasing Association USA shows that American leasing has grown about 20% in volume in 1998.
Perhaps indicating the advantages of consolidation, bank-lessors registered a higher growth rate at 35.8 percent in new business volume. Independent leasing companies reported a 17.7 percent increase, while captive leasing companies showed a 10.5 percent increase in new business volume.
Some of the highlights of the survey are:
Speed of decision-making important in small business lending
A recent article in American Banker Online 13th August 1999 explains how technology is a driving force in small business lending, as automated decision engines come into vogue. These decision engines are able to electronically dive into consumer and business databases, recover the information, score it almost instantly, and then, using statistical analysis and the lender's own tier-based policy, price it according to risk
Several firms have created technology which reflects that trend. Among these: Fair, Isaac and Credit Management Solutions Inc. (CMSI), whose CreditFYI and CreditRevue Maestro products, respectively, provide automated electronic tools financial institutions can offer to their business customers and use themselves.
According to analysts quoted in the article, the new approach is a paradigm shift in lending business. In traditional funding business, the loan pipeline moved data through different steps and lending was heavily segmented, handled by different departments and different executives. Now, financiers are looking at a customer as a prospect and serving him with a credit card, mortgage, car loans at the same time. Thus every opportunity of serving the customer is an opportunity of re-evaluating him.
British SMEs show increased reliance on lease/HP funding
The data published in a recent article in Bank of England Quarterly Bulletin (May 1999) shows a marked shift towards lease/HP funding among British small and medium enterprises.
In the article titled The financing of small firms in the United Kingdom by Melanie Lund and Jane Wright of the Bank’s Domestic Finance Division, data about the sources of external finance by small and medium enterprises in UK has been provided. The percentage share of different sources of finance during 1987-90 and during 1995-97 shows an impressive shift:
Percentage share of different sources of finance by SMEs
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Period 1995-97 |
Period 1987-90 |
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Banks |
47.4% |
60.6% |
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HP/leasing |
27.1% |
16% |
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Factoring |
6% |
5.7% (including customers) |
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Parners/ shareholders |
6.1% |
7.6% |
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Venture capital |
3.3% |
2.9% |
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Trade customers |
1.4% |
clubbed with factoring |
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Others |
8.7% |
7.2% |
As could be evident from the above, the share of leasing/HP has grown from 16% during the 1987-90 period to over 27% during 1995-97. The increase is mainly at the cost of bank funding.
Newcourt Credit -CIT merger finally happening
The merger that would create the world's second largest finance company is finally going to take place. This news, against the earlier doubts over the proposal, follows the publication of record profits for second quarter of 1999 by Newcourt Credit.
Toronto-based Newcourt Credit is the second largest in North America but has fallen from grace for last couple of years due to falling profits. The Jersey-based CIT Group had bit for its shares, but after a dismal performance in first quarter of 1999, the merger was being doubted.
The new terms of merger have reduced the bid value from USD 4.2 billion to USD 2.8 billion. Besides, Steven Hudson, the founder Chairman CEO of Newcourt will resign. Hudson grew the company from a modest base. Financial Post, Canada (4th August, 1999) reported that "Mr. Hudson grew Newcourt by acquisition, creating one of the world's largest asset-backed financiers. With $23-billion under management, Newcourt is one of the most complicated financial services companies in Canada. As a result, its myriad of non-traditional financial businesses -- asset-backed lending and securitization -- has created a balance sheet that has become increasingly difficult to decode."
Albert Gamper is the CEO of CIT. Gamper said: "Steve has worked extremely hard to grow his company to the scale it has achieved today. CIT originally looked forward to Steve's involvement in the new organization, but we respect Steve's decision and know that he will bring the highest level of energy and enthusiasm to any task he undertakes. We wish him well in his future endeavors."
CIT is the 4th largest commercial finance company in the USA. 44% of its capital is owned by Dai-Ichi Kangyo Bank, Japan.
Another Japanese leasing company goes bankrupt
The spate of leasing companies filing for bankruptcies continues in Japan: most of these companies are affiliates of commercial banks who themselves have been declared insolvent even as the Financial Supervisory Agency has inducted thousands of billions into recapitalisation of banks.
Kofuku Sogo Lease was an affiliate of the Kofuku bank, a regional bank that went bankrupt. The leasing company went bankrupt with yet another sister concern investing in real estate.
Earlier, Japan Leasing, the second largest leasing company in Japan went bankrupt - see here for detailed news on this item.
Leasing companies and banks in Japan are saddled with huge amount on non-performing assets basically out of investments in non-yielding investments.
Canadian and Spanish banks join to form finance company in Cuba
National Bank of Canada , Banco Sabadell S.A. of Spain and a Cuban state banking partner are preparing to start a financial services joint venture in Cuba. The new company to be called Financiera Iberoamericana S.A will engage in leasing, factoring and other non-banking financial services.
The Communist-owned Cuban government has decided to open up its state-controlled banking and financial markets. Recently, a number of joint ventures in banking and non-banking segment involving Spanish partners have been licensed. Canada is Cuba's largest trading and investment partner.
Russia to promote leasing; to rope in IFC Washington
This website was voted as the "Site of the day" on http://invest.russiatoday.com/ For more on leasing in Russia, visit our Coutry profile- click http://www.oocities.org/WallStreet/Exchange/8413/russia.htm For text of Russian leasing law, visit our Leasing laws page - click laws.htm Russia may soon promote a national level leasing company. The Russian First Vice-Premier Viktor Khristenko met top-ranking officials of the IFC Washington on July 23 and among other things discussed the proposal to set up a joint fund for leasing operations.
Earlier this week, Director of the Federal Air Transport Service Vladimir Andreyev had stressed the need for a national level leasing company. Russia presently has 11 small leasing company, but the need for one company having national presence is being emphasised. The national leasing company is a priority and a related proposal is being prepared for the cabinet, he said. In the opinion of Andreyev, state and commercial institutions shall take part in the formation of the national leasing company
ELA survey stresses value-added leasing services
A survey the Equipment Leasing Association, USA indicates that the market acceptability of leasing is growing, particularly in the office equipment and computer segment. However, increasing number of lessees expect the lessor to provide services along with the equipment.
More than 70% of the respondents in the survey pointed out that they would like the leasing company to provide maintenance of the equipment leased. Valued added services are the key to differentiating between various providers of leased equipment. Maintenance apart, respondents also identified a leasing company’s knowledge of its clients’ industry and installation as key value-added services
On the reasons as to why lessees chose to lease, convenience and cost were cited as the main reasons. In terms of decisive relevance, these factors contribute to a lessee's decision to lease in the following fashion: convenience of monthly payments (52 percent), availability (48 percent), the overall cost of equipment (39 percent) and balance sheet considerations (32 percent).
European leasing: number of players declines; business grows
In a situation clearing indicating the consolidation process, the number of leasing players in Europe came down from 1212 to 1035 in 1998. However, in the same period, business volume grew from 104.1bn euros in 1997 to 117.3bn euros in 1998, a growth of 12.6%.
United Kingdom leads the European market with a market share of 37.8% of the market. Germany ranks the second with a share of 20%, followed by France 11.2% and Italy 7.8%.
These data were recently published by Leaseurope.
Leasing plan for e-commerce websites
Lead Dog Design, providers of e-Commerce solutions to Fortune-1000 companies, announced their partnership with First American Lending Corp., Santa Ana, CA., to offer a leasing program for companies seeking an internet business strategy and e-Commerce Solution.
With typical web site development along with e-Commerce solutions costing an average of $1,000,000 (one million dollars), this new program offers the opportunity for corporations to have creative financing for their web development. Leasing gives businesses the ability to keep up with advancements in technology without having to utilize valuable operating capital.
E-commerce is increasing becoming an important reality. The WTO meeting forthcoming is likely to evolve global consensus on e-commerce.
Leasing volumes decline in Japan; further decline apprehended
In line with the general economic scenario in Japan, volumes of leasing business fell in Japan. Total lease contracts in 1998 fell 7.3% in value to 7.35 trillion yen, the Japan Leasing Association announced. It was the second consecutive year of decline, and sent the leasing industry down to the level of business market in 1994. Prospects are not so good even for the current year.
Lease contracts declined for most industrial equipment: information technology gear was off 3.6%, industrial, business and construction machinery were down 10.9%. The exceptions were medical devices, which saw increased demand and civil engineering machinery, flat from the previous year.
Leasing volumes grow in Spain
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Leasing in Spain For more on leasing in Spain, click on our country page on Spain - click here |
The Spanish equipment leasing industry an impressive growth, as per industry data. The volume of new investment through leasing rose 36.82 per cent last year in Spain (publication date: 28/6/99) to 6.521bn euros (Pta1,080bn) according to figures released by the Spanish leasing association.
CIT Group's takeover of Newcourt nearing collapse
The CIT Group's USD 4.2 billion takeover of Canadian leasing giant Newcourt Credit is facing problems as both the parties are reportedly reconsidering the terms of the acquisition. Reports indicate that the glitches are primarily due to a poorer-than-expected performance by Newcourt for the first quarter of 1999.
If the proposed acquisition is completed, CIT Group would be one of the world's largest publicly owned non-banking financial company. The proposal to acquire was announced in March 99.
Analysts point out that Newcourt was relying heavily on securitisations for upfront booking of income on deals originated by it. In 1999, the company failed to securitise transactions: hence, the earnings for the first quarter were below expectations.
A news report in Financial Times, London reports that a financial firm from France, Axa, has raised its stake in Newcourt from 10 to 18 per cent over the last two months.
Drive-off on the Net with a car: e-commerce comes enters third phase of development
Westar Financial Services Incorporated, a US leasing company has agreed to fund upto $1
billion per year of prime credit auto loans and leases originated through DriveOff.com, a new
Internet model for automotive commerce opening this summer.
As such, the world enters the 3rd generation of e-commerce: in the first stage of e-commerce, a supplier merely announces his presence on the Net. In the second stage, he provides price information and collects prospects on the Net. In the third stage of development, the Net is used for not for mere referrals of interested consumers to dealers by to actually sell and financing automobiles online.
According to Forrester Research, the Internet played some part in the purchase of 2
million vehicles in 1998. By 2003, they estimate that 1/2 million vehicles will be sold
completely on the Internet. This represents approximately $12.5 billion of the $400 billion annual domestic auto sale market.
DriveOff.com is designed to empower consumers, allowing them to negotiate new car purchases completely online -- selecting the vehicle, arranging the financing and scheduling the appointment to accept delivery. Consumers using DriveOff.com are not only provided with firm prices for the selected vehicle, but they also control the bundled transaction from start to finish, including financing, from their computer. Financing information at DriveOff.com is real-time, providing on-the-spot credit review and approvals, firm prices on market rate loans and leases for the specific vehicle the consumer has chosen.
BIS issues consultative draft of new Capital Adequacy standards
The Bank for International Settlements (BIS) recently issued a consultative draft of a new capital adequacy standard that would replace the Basle Concordat of 1988. It is based on this convergence that bank and financial institution supervisors all over the World frame their own capital adequacy requirements for financial intermediaries. As such, the BIS statement is one of the most crucial instruments in bank regulation World-over.
The new standard sees a change in approach of the BIS from pure capital adequacy based approach to a mix of capital requirement, risk control, effective supervision. "This new capital framework consists of three pillars: minimum capital requirements, a supervisory review process, and effective use of market discipline. With regard to minimum capital requirements, the Committee recognises that a modified version of the existing Accord should remain the "standardised" approach, but that for some sophisticated banks use of internal credit ratings and, at a later stage, portfolio models could contribute to a more accurate assessment of a bank's capital requirement in relation to its particular risk profile. It is also proposed that the Accord's scope of application be extended, so that it fully captures the risks in a banking group."
The Standard also deals with the financial innovation that has occurred in recent years, as shown, for example, by asset securitisation structures. As for the contents of the new Standard dealing with securitisation, visit our Securitisation web site to see a news item there - click here to view the report.
One of the important features of the new capital adequacy proposals is the introduction of more than 100% risk weightage to inferior quality corporate clients. Thus, if a bank is exposed to corporates of less than B- or equivalent rating, the risk weightage will be 150%, implying that the bank would require 50% more capital against such exposures than the usual requirement.
The second pillar of the capital adequacy framework, the supervisory review of capital adequacy, will seek to ensure that a bank's capital position is consistent with its overall risk profile and strategy and, as such, will encourage early supervisory intervention. Supervisors should have the ability to require banks to hold capital in excess of minimum regulatory capital ratios - a point underscored in the course of the Committee's discussions with supervisors from non-G-10 countries. Furthermore, the new framework stresses the importance of bank management developing an internal capital assessment process and setting targets for capital that are commensurate with the bank's particular risk profile and control environment. This internal process would then be subject to supervisory review and intervention, where appropriate.
The third pillar, market discipline, will encourage high disclosure standards and enhance the role of market participants in encouraging banks to hold adequate capital. The Committee proposes to issue later this year guidance on public disclosure that will strengthen the capital framework.
For a full text of the BIS proposals, click here.
Orix buys Japan Leasing's foreign portfolio
ORIX reported on 1st June 1999 that it had bought $228.2 million worth of credit claims from the three overseas subsidiaries of failed Japan Leasing. ORIX is the largest leasing company in Japan. Japan Leasing, failed last year, was the second largest leasing company in Japan. See report below. The Japanese portfolio of Japan Leasing was bought over by GE Capital. See report below.
Japan Leasing's domestic financing, real estate, and overseas sections -- including the three subsidiaries in Singapore, Hong Kong and Panama -- started operations under the new name of Nippon Asset Management Inc on May 25.
Nippon Asset Management said that the three subsidiaries, which are in the process of liquidation, are under the supervision of local administrators and that profits from the sale of credit claims will be divided among creditors.
Fitch IBCA reviews industry, issues rating guidelines
In its recent release, Fitch IBCA reviewed the state of the leasing industry and released rating guidelines. The industry review is largely based on US leasing market.
Quoting ELA, USA, the report comments that inspite of a heightened merger activity, the leasing industry remains a fragmented industry with no market player having more than 10% market share. Lessors’ scope of operations runs the gamut from well diversified providers to highly focused niche companies and includes captive subsidiaries of manufacturing companies, independent commercial finance and leasing companies, and commercial banks.
Most lessors tend to specialise in equipment types based on their affinity with such equipment, but a few large players such as Heller Financial, Newcourt Credit and FINOVA could engage in an array of equipments.
The urge to lease-in is particularly strong in case of medical equipment, aircraft and IT products.
Over the recent past, consolidation was a buzzword in the leasing industry and there were a number of mega mergers. One new trend in the acquisition activity was that it spanned boundaries - some of the notable transactions include: CIT/Newcourt, General Electric Capital Corp./Japan Leasing Corp.; Heller/Dana Commercial Corp.; and Rabobank Nederland/Tokai Financial Inc.
Fitch IBCA comments that as a result of this acquisition activity, size could become an important factor in the industry. Newcourt Credit/CIT alliance, for example, could be reaching 10% market share in USA.
Among other industry trends are strategic alliances and vendor programs.
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The Fitch IBCA website: For details of Fitch IBCA research papers, click http://www.fitchibca.comEvaluation of a leasing company: For an article on Evaluation of Leasing companies by Vinod Kothari, click on the articles section of the website. |
Detailing the factors that drive the rating of a leasing company, Fitch IBCA would distinguish between financial and operating leasing companies. The considerations in financial leases are more credit-driven as there is substantially no asset risk involved. In case of operating lease transactions, the risks are more asset-related. leases, leveraged lease and sale/leaseback transactions
Fitch IBCA evaluates traditional drivers of asset quality — credit policies, underwriting standards, and customer stratification — overlaid against equipment considerations such as type, residual experience, and remarketing expertise. The areas of emphasis between capital and operating lessors will differ, although significant overlap exists.
Measuring Asset Quality:
Asset quality for capital lessors is measured by analyzing the trends in contractual delinquencies and net chargeoffs, on a company basis and compared with peers. Because all equipment on lease is secured, Fitch IBCA places greater emphasis on the trend in net chargeoffs than on delinquencies. While delinquencies can be an early indicator of the trend in asset quality, often the dollar amount of net chargeoffs is significantly less due to recoveries from remarketing. Nevertheless, net chargeoffs can vary significantly between leasing companies, depending on the type of equipment leased and the lease structure. Leasing companies that specialize in small-ticket vendor finance often have net chargeoffs exceeding 1.50% of average receivables, while net chargeoffs for lessors of construction equipment are generally below 0.50% over an entire business cycle. The difference in the level of net chargeoffs is influenced by the quality of the lessee, the collateral type, ease of repossession, and secondary market demand for the equipment.The document also contains the key ratios for evaluation of leasing companies.
Sony initiating leasing joint venture in USA
Sony Corp. is joining hands in a 51:49 joint venture with Heller Financial to finance personal computers and broadcasting equipment in the USA. The new company will be called Sony Financial Services LLC, in which Heller Financial, now an arm of Japanese Fuji Bank, will take 49% equity. The new company is expected to have a capital of several millions of dollars.
The joint venture is aimed to serve needs of small businesses. Research firm International Data Corp. said there were 22.2 million businesses operated from individuals' homes in the United States in 1998 and the number was expected to top 30 million by 2002.
GE Capital - the King of Asian crisis
[This is based on a report in the Far Eastern Economic Review, May 1 1999]
GE Capital expects to earn a return of fifteen percent on the assets of Japan Leasing, Japan's second largest leasing company that went bankrupt last year and was taken over by GE Capital. This sounds near-astronomical, in troubled times in Japan, and that too with the assets of a company that filed for bankruptcy.
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Other reports about GE Capital: GE's first quarter 1999 results |
Call it hubris or call it sheer grit, GE Capital has made it its mission to take on businesses that would have sent others running for cover. Since last year, it has spent an astonishing $15 billion on distressed assets in recession-plagued Asia. That's by far the biggest bet any company has placed on the region since the economic crisis began in mid-1997. Almost overnight, GE Capital has become a major financial-services player in Japan, the world's second-largest economy. It has also snapped up cheap assets from Thailand to the Philippines. In Thailand, GE Capital was the biggest bidder in assets of distressed companies auctioned by the Financial Restructuring Authority. The company says Asia-based businesses will generate 10% of its global earnings by 2001, up from an estimated 1% in 1997.
More than 300 acquisitions made worldwide since 1988 have turned GE Capital, a unit of American conglomerate General Electric, into the world's largest nonbank financial company, with assets of over $300 billion. In 1998, it generated $3.8 billion, or 40%, of General Electric's net earnings.
But can even a company the size of GE Capital successfully absorb $15 billion-worth of new corporate assets in so short a time? For all its prowess, GE Capital has yet to show it can transfer its financial and management expertise to its disparate bunch of purchases--they range from insurers to leasing agents--and turn troubled companies into money spinners. GE Capital has only a brief history in the region, and until recently the scope of its Asian operations was limited.
The company's plunge into Asia recalls its strategy in Europe in the mid-1990s. Taking advantage of recession and industry restructuring, GE Capital snapped up a host of European targets; to date, it has invested more than $23 billion in European operations.
GE Capital is known for its grinding due diligence and an ability to creatively structure acquisitions. Wherever possible, it will "isolate the good part from the part that stinks," says one consultant. One of the most frequently cited examples is the deal GE Capital struck with troubled Japanese insurer Toho Mutual Life. In early 1998, it bought the company's offices and sales-and-marketing functions and turned them into a new company, GE Edison Life. In return, Toho got cash and a 10% stake in the new firm. Toho kept the existing policies and GE Capital acquired access to customers and a 7,000-strong salesforce.
Nor is the company bound by strict formulas: The Toho deal provided operations but no asset base; in Thailand, GE Capital bought two tranches of vehicle and commercial loans from the Financial Sector Restructuring Authority--assets with no operations. It has since hired 1,500 people to administer the loans.
Still, there's a nagging question: What do Thai car loans and Japanese life insurance have in common, aside from the fact they both fall under the broad umbrella of financial services? The company began in 1932 by providing consumer loans for the products made by its parent, General Electric. Since then, it has mushroomed into a financial conglomerate embracing 28 distinct businesses ranging from car and aircraft financing to real estate and mortgage services .
It's maniacal focus on investment returns that promises to bring a breath of fresh air in Japan, the heart of the company's Asia strategy. Its high profile ensures it will be watched closely. Of the 10 largest foreign investments in Japanese companies, GE Capital alone has made four, and since last year it has spent nearly $14 billion there. Its purchase of Japan Leasing in January outdid both Renault's tie-up with Nissan and Citigroup's bite of Nikko Securities.
Even so, it seems to have been acutely conscious of the risks surrounding Japan's recession-bound economy, and in particular its fragile banking and finance industries. Throughout the Japan Leasing negotiations "what GE Capital was most concerned about was Japan risk," says Yoshihiko Okuno, the court-appointed administrator charged with overseeing the company's bankruptcy proceedings. (Japan Leasing was formerly a unit of Long-Term Credit Bank of Japan, also now bust.)
Indeed, GE Capital is likely to introduce call centres, customer databases and automated loan machines. It may also popularize operating leases, which require a more sophisticated level of financial management than most Japanese leasing companies have been accustomed to using. These leases don't require holders to keep equipment for its entire lifespan, instead offering flexible terms.
The world of e-Commerce is on - and obviously leasing industry cannot be away it. An increasing number of companies are reporting encouraging response to electronic processing of applications for lease and asset-backed credits.
E-leasing is particularly helpful in retail transactions where credit decisions are based on mechanical processing. The essence of electronic processing of leasing applications is as follows:
Thus, credit providers are not any more talking about days or hours in processing applications - it is a matter of minutes now.
A recent report [April 15, 1999] from MicroFinancial, a US-based leasing entity indicated the continuance of a dramatic increase in the use of its Internet-based lease and finance application processing product, LeasecommDirect(TM). During the first quarter 1999, it claims to have processed 11,500 lease and finance applications through their fully automated application processing system. This company reported that more than 40% of its business is now being originated through the internet software.
Yet another report [ 15th April, 1999] from Resource America announced that its wholly owned subsidiary, Fidelity Leasing Inc. has processed credit applications from its e-commerce Internet platform in an aggregate amount of $3,000,000.
GE Capital reports spurt in first quarter profits
GE Capital, the financial services arm of global giant GE, revealed its first quarter 1999 results. According to results published on 8th April, GE Capital Services' first-quarter earnings rose to $1,032 million, 17% over last year's $881 million. This is a sizeable part of the total earnings of GE, at $ 2.155 billion.
GE Capital Services continued its global expansion by completing six acquisitions, including $7 billion in equipment and auto leasing assets of Japan Leasing Corporation. Earnings from Japan as a result of several recent acquisitions jumped nearly four-fold for the quarter to more than $40 million. GE Capital Services also announced a global alliance with Sun Microsystems, Inc., which will provide a single source for comprehensive and flexible financing services for Sun's customers. Employers Reinsurance Corporation continued its global expansion by completing the acquisition of Eagle Star Reinsurance in the U.K., further strengthening its distribution and product offerings. During the quarter, GE Financial Assurance, a financial security solutions provider, reported earnings growth greater than 30 percent, and Global Consumer Finance, which provides consumer finance products outside the U.S., doubled its earnings.
Spate of M&As in automotive segment; auto financing
A 1998 Survey of M & A deals in automotive segment by Price Waterhouse Coopers (PWC) concludes that the move towards 6 to 8 global players in the automotive segment is gathering momentum and events of early 1999 underline that a major consolidation is underway.
Currently the automobile industry world wide has an excess capacity of 20 million vehicles, or 45% of current capacity. This overcapacity is a huge cost burden on the industry, which is one reason pushing the current consolidation trends.
1998 was a record year of merger and acquisition activity, with more than 600 deals with a disclosed value in excess of USD 80 billion, reports PWC.
Closer to auto financing segment, consolidation in auto leasing, contract hire and rental sectors has also continued apace as major players reap the benefits of scale in areas such as capital and financing costs, fleet purchasing, maintenance, IT, and infrastructure.
M&A activity in auto financing was the highest in UK, with Standard Chartered, GE Capital and Halifax in the vanguard. In total, 40 deals were reported in auto financing sector, with a total disclosed value of USD 2.1 billion. The introduction of the Euro is likely to pave way for a greater consolidation activity.
To obtain a copy of the Report, write to rebecca.herr@us.pwcglobal.com.
Will GE Capital be the same after Gary Wendt
This interesting report about GE Capital: Which way after Wendt is based on a report by James Rutter and Peter Lee in a recent issue of Euromoney.
Wendt, the tough and visionary executive who drove GE Capital's astonishing growth over a dozen years of hectic deal-making, resigned in December at the age of 56, in what insiders say was a culmination of his conflicts with GE chairman Jack Welch. Gary Wendt was responsible for catapulting GE Capital from a contribution of 39.6% of General Electric's consolidated net income, up from 28.1% in 1990. This is expected to increase to 41% in 1998. In Europe growth has been nothing short of spectacular. Net income was $705 million in 1997 from an asset base of $32.7 billion, both figures up more than 30% on the previous year. In 1992 assets were just $4.2 billion, and income $46 million.
Worldwide, assets of $255 billion put GE Capital on a par with such companies as JP Morgan (assets of $262 billion at the end of 1997). But it is in net earnings that GE Capital wipes the floor with most commercial banks. Last year it earned $3.26 billion, compared with Morgan's $1.46 billion and Deutsche Bank's $550 million.
Though there is a fair bit of continuity in GE Capital's management after Wendt the chairman, Dennis Dammerman, 53, was chief financial officer of GE for 14 years and the new chief executive of GE Capital, Denis Nayden, is another long-standing GE Capital executive who first joined the group in 1977 and had been its chief operating officer since 1994, under Wendt, analysts are curiously examining how GE Capital moves under its new CEO.
Meanwhile other issues loom for GE Capital in Europe, including how it can continue to operate on such a scale in financial services without becoming a direct competitor to the established banks. Comparisons with the performance of banks like JP Morgan and Deutsche Bank are ones that GE Capital openly invites, including them in its own marketing material. But it balks at the suggestion that it runs a conventional banking business, despite the fact that it owns banking licences throughout Europe.
GE Capital has grown into a formidable European financial services company without being seen as a competitor by mainstream commercial and retail banks. Its size alone now dictates that it will be treading on more toes in traditional banking markets, but GE Capital continues to promote its non-banking, non-threatening image. After all, it is an image that may enable it to gain important footholds in new markets.
Although there may inevitably be more crossover between GE Capital's niche banking businesses and the core businesses of commercial and retail banks, there are some things that GE Capital will never do. Securities is one. Banks the world over may be counting the losses from the emerging markets' meltdown for many months to come, but GE Capital is counting the opportunities.
Part of the reason why GE Capital is so well insulated from the securities market turmoil is that it already had its fingers burnt, and learnt its lesson. In 1989 it took a majority stake in Kidder Peabody, the securities brokerage that became embroiled in a fraudulent trading scandal centred on government-bond trader Joe Jett. It cost GE Capital $1.5 billion in losses in 1994 alone, and the remnants of the business were sold to PaineWebber.
One area of investment banking where GE Capital will remain a force for years to come is M&A. According to some, its portfolio approach to acquisition buying undervalued businesses, restructuring, and reaping significant rewards is the model on which Nomura and others based their successful principal finance operations.
After expanding itself in Europe, GE Capital is looking at Japan, South East Asia and Latin America with interest. "Jack Welch is very supportive. In south-east Asia the extent of the opportunities is perhaps limited. But Latin America is very interesting, and senior GE officers are often down there." The company's European expansion was built on the back of a recession that made financial services companies relatively cheap and easy to come by. That situation now looks set to be repeated in Asia and perhaps Latin America. GE Capital has already bought a portfolio of $1.1 billion worth of car hire purchase loans from Thailand's 56 liquidated finance companies, as well as purchasing Philippine Asia Life Assurance Corporation and forming a joint-venture life-assurance company with Toho Mutual Life in Japan.
Another major acquisition by GE Capital was that of Japan Leasing. Click here for an earlier news on GE buying the failed Japanese company. Click here for another report on GE emerging as the Asian tiger.
Securitisation activity picks up in Auto leasing
Duff & Phelps Credit Rating Co. (DCR) saw an increase in the volume of private securitizations backed by leases on automobiles and light trucks during 1998. DCR rated four transactions with a total dollar volume of approximately $713 million.
The automobile finance industry for new vehicles is one of the largest consumer finance markets in the United States. In November 1998, the Federal Reserve Board estimated the value of this market at more than $440 billion in terms of outstanding automobile credit. The U.S. new car leasing market finances well over $100 billion of leases annually. The leasing portion of the market has experienced increases in volume due to the lower initial cost and monthly payments offered by leases and an increasing consumer interest in the option of leasing. Currently, more than two-thirds of luxury car sales are financed via a lease, and recently there has been increased interest in the leasing of late-model used cars.
Thailand amends law to promote leasing
The Finance Ministry of Thailand has approved a Bank of Thailand proposal to ease regulations on car hire purchases in a bid to stimulate the automobile industry where sales fell more than 60 percent last year.
The ministerial approval will allow leasing firms to set minimum downpayment requirement instead of the mandatory minimum downpayment of 25 percent of the vehicle price.
Secondly, leasing firms may fix the installment period, instead of a limit of 48 months.
Thirdly, leasing firms may repossess the vehicles after customers fail to pay installments for three consecutive months. The leasing firms are required to disclose their terms and conditions prior to signing the contracts with customers.
Meanwhile, the Finance Ministry adjusted a regulation for financial institutions to run car leasing businesses. The institutions were previously allowed to provide loans only up to five percent of its capital and it was limited to five percent of its total loan portfolio.
For a detailed report on leasing in Thailand, click here.
GE Capital
to Acquire Japan Leasing in Major DealGE Capital Corp has agreed to acquire bankrupt Japan Leasing Corp. Japan Leasing, Japan's second largest leasing company, went bankrupt last year - click here for an earlier report. The deal will cost GE about USD 7 billion, in what Kyodo News described as "one of the largest takeovers involving a Japanese company."
Industry sources said GE Capital intends to retain about 80 percent of the workforce in the leasing operations at Japan Leasing, or some 800 of the 1,000 employees, and all 500 employees at the auto leasing subsidiary.
Japanese financial institutions, struggling under the weight of soured loans and collapsed real estate holdings, have been seeking mergers and business tie-ups in order to survive as the country continues to be stuck in its worst post-war recession.
Foreign firms hoping to gain entry into the Japanese market have been among their active suitors.
Japan Leasing was expected to repay its loans to financial institutions with the proceeds from the deal, while seeking to rehabilitate its real estate business, industry sources said.
Japan Leasing, which filed for court protection from creditors in September with debts of 2.38 trillion yen, is a nonbank unit of troubled Long-Term Credit Bank of Japan, which was put under state control last October.
Japan Leasing started to get into financial trouble in the late 1980s asset-inflated "bubble economy" era when it invested heavily in real estate projects. The company was saddled with billions of dollars in bad assets and nonperforming loans after the burst of the bubble and a crash in property prices. Click here for an earlier report on Japan Leasing bankruptcy.
GE Capital's plan to take over the leasing business of failed Japan Leasing would further consolidate its foothold in Japan's fast-changing financial industry. Analysts have noted that the Connecticut-based company has rapidly expanded by acquiring sound operations of cash-strapped financial firms at low cost.
GE Capital, the financial services arm of U.S. conglomerate General Electric Co, has been particularly aggressive in its expansion in Japan, which began in 1994 with the purchase of ball-bearing maker Minebea Corp.
Last year it took over Koei Credit KK, a Tokyo-based consumer finance firm, and began a joint venture with Toho Mutual Life Insurance.
In July, GE Capital said it would take over the consumer credit business of Japan's fifth-biggest credit firm, Lake Co, and also said it was in talks to take stakes in Ryoshin Leasing, a small leasing firm in the Mitsubishi group.
Home durables leasing is in; buying is out
A report carried by PR Newswire on 11th January 1999 indicated that in the consumer durables market, rentiers have flourished. Based on a Survey, the Report predicts bullish trends in domestic durables leasing.
One of the surprises of the Asian financial crisis is how few giant multinationals have swooped down to pick up the pieces.
That predator is GE Capital. Since the beginning of the year, America's largest non-bank commercial lender has been on a one-a-month acquisition pace. Its trophies include a big Japanese life-insurance firm, Toho Mutual; Thai auto-and equipment-finance firms and a credit-card business; and, most recently, Philippine Asia Life Assurance. Reprtedly, GE Capital will spend at least $20 billion in Asia over the next three years, more than any other company. In the early 1990s, GE Capital went on a similar acquisition binge in Europe, which now generates nearly $21 billion in annual revenues. In Asia the company will invest twice as much money in half the time.
GE Capital makes no secret of its acquisitive ambitions. A lust for acquisitions is not only in GE Capital's character, it is a necessary part of its strategy.
Asia offers plenty of other advantages these days. Financial markets in much of the region are opening to foreign firms, creating opportunities to get in before the competition heats up. Consumer-finance, leasing and credit-card businesses are still in their infancy in some countries, with many small, inefficient operations that will have trouble standing up to GE Capital's considerable scale economies. GE Capital's low cost of capital, thanks to the triple-A rating of its parent, puts it in stark contrast to most Asian firms, which must now pay a premium for whatever loans they can get. And its strongest business is equipment leasing, which allows companies to take capital costs off their balance sheet-something that debt-laden Asian firms are particularly keen to do just now.
[Based on The Economist, June 6, 1998 ]
The leasing share of the motor vehicle market may have peaked, or will soon do so, according to vehicle registration analysis conducted recently by The Polk Company. Through the first six months of 1998, the leasing share was 25.3%, slightly behind the rate for the whole year in 1997. Has leasing peaked?
The answer could have far-reaching implications for vehicle manufacturers, vehicle lessors, auctions, and new- and used-car retailers. Leasing growth affects the frequency in which consumers return to market for a new vehicle, supporting new-vehicle sales. It also impacts the availability of late-model, low-mileage used vehicles, which have proven to be extremely popular in the used-car market. Finally, these vehicles are viewed as one of the key reasons for the growth in auction volumes.
Polk statitics show leasing increased from 13.8% of all new-vehicle registrations in 1993, to 25.3% through June 1998, an increase of 11.5 share points. Most of the shift to leasing has come from "personal"-- or outright purchase-- registrations. Still, leasing's share of the market has been growing at a slower pace since 1994, and had failed to increase through June 1998.
Registration records show that manufacturer-sponsored leases (MSL) have been substantially more popular than those from other sources and represent the driving force for the growth in leasing. However, MSL share of the retail lease market peaked at 79.8% in 1994. It declined steadily to 67.4% from 1994 to 1997, and rebounded slightly to 70.8% through June 1998. The improvement year-to-date may be evidence of the more aggressive marketing efforts in the Spring.
The growth in leasing the last few years has been driven primarily by the hot-selling truck segment. If these vehicles require less marketing support, it could explain the changing relative share between manufacturer and non-manufacturer leases. Many independent leasing companies pursue leasing business on a product-by-product basis, concentrating on individual models without factory lease incentives. Without these incentives, manufacturer and non-manufacturer leases would look similar in the eyes of the consumer. It would also tend to decrease the bias to leasing (often referred to as "subventing") in the buy/lease choices offered to consumers. Accordingly, given the evidence in the registration records, a case can be made that the rate of growth in leasing has primarily been driven by manufacturers' marketing strategies.
According to the Study, whether leasing will continue to grow at its prior pace depends to a great extent on manufacturers' marketing strategies. By and large, these strategies will be driven by the underlying strength of the market and the continued popularity of truck-like vehicles. With nothing but good news on both fronts, look for leasing share to peak soon.
Has Leasing Peaked?NEW VEHICLEREGISTRATIONS SHARE 1993 1994 1995 1996 1997 JUN98 Personal 64.9% 61.3% 59.1% 56.0% 54.6% 53.0% Lease 13.8% 18.3% 20.6% 24.1% 25.5% 25.3% Rental 11.7% 11.1% 10.6% 10.6% 10.5% 11.9% Other 9.5% 9.3% 9.6% 9.2% 9.5% 9.8%
Largest leasing bankruptcy in the World:
Japan Leasing Corporation, the second largest leasing company in Japan, and among the top Ten in the World, filed bankruptcy protection petition in the last week of September.
The company, saddled with over $16 billion in debt announced today it has filed for protection in Japan's biggest bankruptcy ever, also the biggest bankruptcy in the history of leasing.
Japan Leasing Corp. is an affiliate of the ailing Long-Term Credit Bank of Japan. The failure was the latest in a series of bankruptcies as Japan struggles through its deepest recession in decades. Teikoku Data Bank Ltd., a Tokyo-based credit research firm generally regarded as authoritative on bankruptcies, said it would be the biggest ever in Japan.
At March 31st 1998 Japan Leasing had assets of JPY2.2 trln, of which the main components were: * Lease assets JPY650 bln * Installment credit JPY223 bln * Loans JPY641 bln * Problem loans JPY341 bln.
Fitch rating agency attributed the failure of Japan Leasing to political factors as also the high level of NPAs of the company.
It is not certain whether there is any nexus of the above with this, but another top gun in leasing world, Newcourt Credit, the second largest leasing company in North America, has registered over 15% decline in its share price lately. Newcourt Credit had recently acquird A T & T Capital's asset finance division.
Clearly enough, in a recession, asset management by financial companies becomes crucial. Added to this is the asset-based risks financial companies have taken by extending themselves, sometimes vigorously, into operating leases. It is a big question today whether high financial leverages go handy with substantial asset-side risks in operating leases.
Leasing fraudster found guilty
To spend 20 years behind bars
Patrick Bennett, a US businessman who ran a leasing fraud scheme in the United States that is believed to be one of the biggest financial frauds of recent times has been found guilty of 42 counts of money-laundering and other charges.
Prosecutors allege that Bennett turned a staid equipment-leasing family business into a sham operation that bilked more than 10,000 investors -- most of them retirees -- out of some $700 million. The fraud extended to 46 states, with the majority of victims living in New York, New Jersey and Florida. Many of the elderly victims lost their life savings because of the scheme. Bennett ran a pyramid or ponzi scheme, where collections from successive investors are used to pay off the prior investors, thus expanding the base of investors. Bennett is accused of paying off early purchasers of bogus leases with proceeds from later sales in an ongoing and ever widening fraud in which he also pocketed millions of dollars of illegal gains.The scheme ran between 1990 and 1996. The investors were sold off leases of office equipment that did not exist.
He is also accused of preparing false financial statements to cover up the fraud and inflate his private company's profits as well as lying to the SEC, which began investigating his activities in 1996.
Unilateral Interest rate variation clause struck down
In a recent ruling, the South African Supreme Court of Appeal [NBS Bank Limited v. Badenhorst-Schnectler Bedryfsdienste BK and another (1998) (3) SA 729 (W)] has held that a unilateral interest rate variation clause in loan contracts is not valid.
The ruling is clearly applicable to lease contracts also. The following lines from the ruling make it abundantly clear: "In my judgment ... moneylending contracts, no less than contracts of lease and other contracts in general, must be established by means of provisions relating to the essentials of the contract which are certain in themselves, or which can be ascertained from an outside source not involving any further exercise of will on the part of any party to the contract. In a moneylending contract the rate of interest payable by the borrower from time to time is undoubtedly one of the essentials which must be rendered certain by the parties' agreement. If it is not, the contract would, on common law principles, be void for vagueness."
The Court held that there is nothing wrong if a reference rate or basis is provided for determination of interest, but rates of interest in loans cannot be left to the discretion of a party to the contract.
It may be noted that English court rulings have held an interest rate variation clause valid, if it provides for a notification of the variation to the consumer giving him an option to foreclose the contract.
As variable interest rate loans, leases and mortgages become increasingly common, the ruling is significant, and given the fact that it is founded on common law principles, it is applicable to all jurisdictions.
Time of essence in leases: right to repossess asset and claim termination payment upheld:
Added 8th October, 1998
In Aluma Ltd v Internationale Nederlanden Lease (UK) Ltd, a Queens Bench ruling dated 15/07/98, the UK Court of Appeal held that time is of essence in a lease, if the parties have so specifically stated.
In this case, the original lease had been terminated, but at the request of the lessee, an extension of time in returning the asset was allowed at a fixed rental. The Court held that this extension of time was nothing but a revival of the lease, and the conditions of the lease will be applicable to the extended period too. The right to termination, and claim for termination amount, was therefore upheld.
It is significant that the issue of whether the termination amount representing future rentals was a valid claim or a minimum payment clause was never raised in this case. There have been cases in the past as to the enforceability of the minimum payments clause - in the case of London Tricity Finance.
India mulls new taxation norms for leasing transactions
In a move that is bound to have adverse impact on the trouble torn leasing industry in India, the Central Board of Direct Taxes (CBDT) is currently considering revision of taxation norms for leasing transactions. The reasons that prompted the move are reports of several cases of misuse of depreciation on lease transactions by claiming it with reference to non-existing assets, collusive deals, tax-oriented leases by non-leasing companies, and wide-spread tax litigation on whether leases are true leases or not.
India is believed to be a form country, but tending to be a substance country. Thus, the form of the lease was so long being respected, even though there is a distinctive treatment in case of hire-purchase transactions, largely following the UK system. But then the CBDT had never issued any clear guidelines to distinguish between leases that would qualify for depreciation and those that will not. Result: people thought any thing that is called a lease is a lease.
Obvious impact, in a system that has several assets qualifying for 100% first year allowance, was a frenzied demand for such assets, leading to several cases where unscrupulous lessees went about fabricating papers only to get funding against a presumptive 100% depreciable asset, the existence of the asset not questioned by a lessor singularly looking for an instant tax break.
One particular windmill operator defrauded about 50 companies, including several banks and state-owned corporations, to collect money against non-existing wind generators, a case of 100% depreciable asset. One cinema producer allured people into believing that cinema films are 100% depreciable, and got cheap funding against films that never existed. The story goes on..
..until, of course, the CBDT decided to wake up.
The new proposals include a move to distinguish between financial and operating leases so as to disqualify the lessor from claiming capital allowances on financial leases. For further details on this move, click here. For an article on the issue by Vinod Kothari, click here.
France restricts leasing depreciation
France is known World-over for its favourable tax treatment of lease transactions. However, come Feb. 28, 1998, the French depreciation rules have been amended to provide that the benefit of accelerated depreciation will not be available to a leasing company, so as to create a tax shelter against non-leasing incomes. That is to say, the total amount of depreciation from lease transactions will be limited to income from such transactions.
While enacting this provision, French authorities have retained the scope for permitting, on case by case basis, leases where full benefit of capital allowances will be available. It seems that this benefit will be available only to capital goods produced in France.
It is a common knowledge that France was being used for structuring cross-border finance lease transactions as France is one of the few countries, allowing, as a clear administrative practice, depreciation to the lessor on finance leases. While the current rule will favour capital goods sourced from France, it would put a halt to cross border leases of foreign capital goods domiciled in France.
IRS issues Rule 467 on rental deduction
The US Inland Revenue Service (IRS) recently issued the final text of Rule 467 with regard to claiming tax deduction on rentals under structured leases. The regulations became effective from 18th May, 1999.
The regulations apply to leases with increasing or decreasing rentals. The following are the major features of the new rule:
The IRS document contains detailed guidelines and examples of various situations where the rule is applicable.
For a full text of the new rule, click here. Press back button of your browser to return to this page.
Germany enacts anti-tax-shelter law
In March 1999, Germany enacted a new legislation that affects tax-shelter oriented leasing activity.
The new legislation creates a new head of taxable income called "income from tax shelter and similar transactions" which would tax incomes from such activities where the principal motive of the investment is tax shelters. The effect would be to put all tax shelter dominated incomes into one pool and not to allow any one of them offsetting incomes from other sources.
There are illustrative features based on which a source of income will be taken as a tax-sheltering source. For example, if the post-tax return from any investment is more than double its pre-tax return, it is a tax sheltering activity. Simple though this rule may sound, its actual application may be mired in controversy since there are thousand different ways of computing post-tax returns.
Likewise, if a person marketing an investment proposal has demonstrated to an investor that the investment makes sense because of its inherent tax deductions, the investment may be taken as covered by the new provisions.
Leveraged lease transactions may be captured by the new provisions.
Tax law changes bring cheers and tears to Australian lessors
The Australian leasing industry is trying to adjust itself to a spate of tax law changes that have taken place recently and the many more that are in the offing. Australia is in the process of transition to a new tax system. Recently the Govt released a White Paper on tax reforms that gave details of the Howard Govt.'s plans on replacing the Income-tax law by a new Income-tax Act, as also comprehensive revamp of the indirect tax system by introduction of a value-added tax called Goods and Services Tax (GST).
Some of the salient features of the new initiatives that would have a bearing on the leasing industry are as follows:
1. Present levy of sales-tax on lease and hire-purchase transactions will be abolished. GST on both financial and operating leases is to be applicable, though financial services are generally supposed to be out of GST, but subject to input tax. Ron Hardaker, Federal Director, Australian Equipment Lessors Association, feels that this provision is good for the leasing industry as GST is after all a value-added tax, whereas the overall burden would have been higher in case of input tax.
2. Present stamp duty on both lease and instalment sales will be abolished. At present various duties are imposed on lease and hire-purchase transactions as Stamp duties may also be levied on credit arrangements, instalment purchase arrangements and rental (hiring) agreements. These include:
Ron Hardaker feels that the crucial adverse impact of the proposed changes is that the secondary market prices of cars will drop down drastically (owing to reduced tax burden) and that operating lessors, who would have based the economics of their transactions on an estimated residual value, will thus be put to considerable disadvantage.
UK Inland Revenue toughens stand on cross-border leases
The Tax Bulletin, April 1999 published by UK Inland Revenue has taken a tougher stand on cross-border leases of assets outside the UK. A provision in the Capital Allowances Act has been that for assets leased to a non-resident lessee, the normal rate of writing down allowance of depreciation will be reduced to 10%. This provision has so far been interpreted to mean, in case of a chain of leases and sub-leases, that if the end-lessee is a non-resident entity, the reduced writing down allowance will be applicable.
However, now, the revised interpretation is to apply this provision where any of the lessees in the chain is a non-resident entity. The following extract from the Inland Revenue publication is self-speaking:
Section 42 CAA 1990 restricts the capital allowances available on machinery or plant leased outside the United Kingdom. Subsection (1) provides that the section applies where the asset is leased to a person who is neither resident in the UK nor using the asset exclusively for the purposes of a trade whose profits are chargeable to UK tax, unless the leasing is short-term or the leasing of a ship, aircraft or transport container which is used for a qualifying purpose as defined in Section 39(6) to (9) CAA 1990. Subsection (2) provides that where the Section applies, writing down allowances are given at 10 per cent per annum, rather than at 25 per cent. Where any of the conditions in Subsection (3) applies, no capital allowances are due.
It has previously been the view of the Inland Revenue, as explained in paragraph 2832 of the Capital Allowances Manual, that where there is a chain of leases, the tests in Section 42(1) are applied to the end lessee only.
The Solicitor of Inland Revenue has advised that this interpretation of the legislation is incorrect. The Solicitor has advised that Section 42 should apply where any lessee in the chain, whether an intermediate lessee or the end lessee, meets the conditions in Section 42(1).
We will accept the previous interpretation for leasing arrangements entered into:
In all other cases, we will apply the revised view that Section 42 will apply where any lessee or sub-lessee meets the conditions in Section 42(1).
US Treasury blocks lease-in and leaseback deals
The Treasury Department announced on 11th March, 1999 that it was closing a tax loophole that dozens of big corporations used to unfairly trim their tax bills by entering into lease deals with foreign municipal governments.
Treasury said that under so-called "lease-in, lease-out" agreements, a foreign tax-exempted municipality offers to lease property like railways, power utilities or even municipal buildings to a U.S. firm on the basis that it is immediately leased back to them.
The U.S. firm pays money to the foreign municipality, part of which the municipality keeps as a fee, on the expectation of receiving income sometime in the future that is not taxed until it is received. The U.S. firm gets tax deductions on the amounts it paid the foreign municipality by calling it prepaid rent.
But the ownership and use of the capital assets, whether a railroad or a foreign city hall, never changes so Treasury has decided the deals were not acceptable for U.S. tax deduction purposes.
Measures aimed at curtailing leasing tax shelters
In an otherwise stringent package of measures announced by the Clinton Administration, proposed to be implemented as a part of the current year's tax law changes, there is a proposal to limit the tax shelter out of a leasing of tax-exempt property to the income from the property. That is, no deficit of any sort from such leasing will be allowed to be offset against other incomes.
The measure is a part of a package of provisions designed to curtail corporate tax shelters. To read the complete text of the proposed change relating to lease transactions, click here.
G4+1 countries' joint working group meets on lease accounting
The G4+1 Group of standard setters met in Dublin, Ireland from 14 – 16 September 1999 at the offices of the Institute of Chartered Accountants in Ireland. The G4+1 comprises members of national standard setting bodies from Australia, Canada, New Zealand, the United Kingdom and the United States of America. Representatives of the International Accounting Standards Committee (IASC) attend as observers.
The Group continued its discussions of a number of technical issues that emerge from the proposed new approach to lease accounting set out in the 1996 G4+1 Discussion Paper, "Accounting for Leases: A New Approach," which proposes a single approach to accounting for all lease contracts.
The discussion at the meeting focused on the following issues:
·
The distinction between executory or service contracts and leases in which the leased asset is not made available to the lessee on a continuous, uninterrupted basis, for example, in the lease of a time-share.·
The impact of contingent rentals, price changes, cancellation and renewal options, and residual value guarantees on the measurement of the lessee’s assets and liabilities under the contract.·
Subsequent measurement of lessee guarantees to the lessor. The Group discussed whether changes in the fair value of residual value guarantees should be expensed or reflected in the carrying amount of the lessee’s asset.·
The assets that should be separately identified in the lessor’s balance sheet, including assets arising from future lease payments, residual values, and residual value guarantees. The Group also considered the extent to which contingent rentals, price changes, and cancellation and renewal options should be included in the lessor’s assets arising from the lease contract and three possible methods of accounting for the lessor’s residual interest in the asset at the end of the lease.·
Leases of land or buildings in circumstances in which the land or building is reported at fair value under existing accounting practice.·
Methods for recognition of gain or loss on sale-leaseback transactions.
For a previous news on this topic, click here.
UK ASB preparing lease accounting standard
The accounting standards board (ASB) in UK is presently preparing an accounting standard on lease accounting the replace the present SSAP 21. The draft of the new standard is expected to be released by Autumn 1999.
It is expected that the new accounting standard will follow an earlier discussion paper produced by the accounting bodies of several western economies under the aegis of the Australian accounting authority. If the ASB's recommendations follow the main thrust of that earlier document, there could be some fundamental changes to the accounts of all businesses that rents premises or other assets under a relatively long lease. Profit and loss accounts as well as balance sheets are likely to be affected, and the result could present earnings in a less flattering light than at present.
It seems likely that the ASB will argue for the abolition of the distinction between finance and operating leases in most instances, with operating leases and finance leases being shown as an asset and a corresponding liability on the lessee's balance sheet. Hence tenants of property could see a big increase in their reported liabilities.
BIS issues loan-lease accounting guidelines
The Bank for International Settlements last week (on 27th July '99) issued guidelines for loan accounting by banks. As defined in the BIS statement, direct financial leases are included in "loans". Hence, the guidelines are expected to be adopted by national regulators for lease accounting as well.
While technical issues in lease accounting are within the domain of accounting standard setters, BIS is more concerned with the credit risk disclosures.
The major provisions of the BIS guidelines are as follows (the full text of the BIS document can be downloaded from BIS website - click here )
G4 +1 countries considering lease accounting norms
The G4+1 group standard-setters met in Port Douglas, Australia, on 8-10 June 1999. The G4+1comprises members of national standard-setting bodies from Australia, Canada, New Zealand, the UK and the USA. Representatives of the International Accounting Standards Committee (IASC) attend as observers.
Among other issues, the G4+1 countries are engaged in revising accounting standards for lease transactions.
In its recent meeting, the Group continued its discussions of a number of technical issues that emerge from the proposed new approach to lease accounting set out in the 1996 G4+1 Discussion Paper ‘Accounting for Leases: A New Approach’ which proposes a single form of accounting for all lease contracts.
The issues discussed included:
The Group asked for further study of the issues relating to leases of properties (real estate) from the
perspective of the lessor. These issues are similar to those arising in the IASC project on investment
properties.