Chapter 80. Leveraged Leasing

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: The leveraged form of a true lease of equipment is the ultimate form of lease financing. It allows a company, as lessee, to harness the lessor's capital, leveraged by institutional debt, as a source of funding somewhat like subordinated debt. The most attractive feature of a leveraged lease, from the standpoint of a lessee unable to use tax benefits of MACRS (modified accelerated cost recovery system), is its low cost as compared to that of alternative methods of financing. Leveraged leasing also satisfies a need for lease financing of especially large capital equipment projects with economic lives of up to 25 or more years, although leveraged leases are also used where the life of the equipment is considerably shorter. The leveraged lease can be a most advantageous financing device when used for the right kinds of projects and structured correctly.

Keywords: leveraged lease, equity participants, loan participants, owner trustee, indenture trustee, packager, guarantor, participation agreement, financing agreement, lessee indemnities, facility leases, construction financing

Single-investor nonleveraged leases of equipment are simple two-party transactions involving a lessee and a lessor, In single-investor leases (sometimes called nonleveraged leases or direct leases), the lessor provides all of the funds necessary to purchase the leased asset from its ...

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