The expression ‘structured trade finance’ is used in many different situations and is not generally defined. However, it may connote a prearranged or tailor-made trade financial techniques/structures designed for individual transactions/projects, arranged by, or in cooperation with, specialized financial institutions.
Leasing in its simplest form is a means of delivering finance, broadly defined as ‘a contract between two parties where one party (the lessor) provides an asset (mostly equipment) for usage to another party (the lessee) for a specified period of time, in return for specified payments.
Leasing is a medium-term form of finance for machinery, vehicles and equipment, with the legal right to use the goods for a defined period of time but without owning or having title to them. The lease is normally divided into two categories:
1. This is where the lessee is using the equipment but the risk of ownership with all its corresponding rights and responsibilities is borne by the lessor, who also buys insurance and undertakes responsibility for maintenance. Furthermore, the duration of an operating lease is usually much shorter than the useful life of the equipment. The present value of all lease payments is therefore significantly less than the full equipment value. In most respects, the operating lease is equivalent to rental and, under most jurisdictions, the equipment consequently remains in the books of the lessor.
2. This is where all practical risks of ownership are borne by the lessee who uses the equipment for most of its economic life with or without the ultimate goal of acquiring it at the expiry of the lease, at an agreed and often nominal cost. From the outset, the lessor therefore expects to recover the capital cost of the investment from the lessee alongside interest and profit during the period of the lease (often called a ‘full payout lease’). In most cases under the tax laws of most countries, the equipment has to stay on the books of the lessee.
When the lessor and the lessee are located in separate countries, ‘cross-border leasing’ or ‘structured leasing’ are often used. This type of lease may be structured to take maximum advantage of differences in tax and depreciation rules between countries. This may produce a most competitive solution, often generating an effective total cost for the lessee lower than the best commercial interest rates. To produce such results, the lease agreements are sometimes structured to involve more parties than the original ones. For example, an investor in a third country might legally, and from a tax perspective, also be the formal owner of the equipment, thereby creating depreciation in several countries on the same equipment. Such leases are frequently used in connection with big ticket deals such as aircraft, large computers, ships, railway carriages and other rolling transport vehicles.
1. is predominantly based on a less than full payout. Here, there is no transfer of title at the end of the lease period, together with a value depreciation cover to be borne by the lessor. The insurance may cover both periodic and fluctuating lease payments as well as most political risks after a repossession period due to government actions, including expropriation, confiscation and licence cancellations, with coverage of up to 95 percent (depending on the nature of the transaction and risks covered).
2. is mainly based on a non-existing residual value at the end of the lease period. It is therefore quite similar to a policy covering an ordinary medium-term credit, requiring a 15 percent advance payment from the lessee with equal (plus interest) or annuity-based repayments and with coverage of up to 95 percent of each lease payment as they fall due.
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