Leasing: The Next Generation

With Congress making tax-oriented leasing more and more difficult to undertake, leasing companies must look for additional sources of business in order to continue to grow their portfolios and justify their existences. Although the general leasing market is growing, the rate of increase may not be sufficient to justify the number of companies currently in the market. Leasing companies must look toward the next adjacent markets in order to continue to expand and prosper. This article will focus on a number of potential adjacent markets that, while not specifically equipment financing, may be structurally similar to a lease transaction.

The hallmark of a lease transaction is a hell or high water periodic payment obligation from an obligor to a financier on a periodic basis. The payment obligation is often secured against an asset, upon which the leasing company could realize in the event that the obligor fails to make payments. With the expansion of high technology, and with the need to grow markets generally, leasing companies have been financing transactions with increasing amounts of nontraditional assets, with such assets having little or no liquidation value. A classic example of this is software financing where the finance company's security is intellectual property, which, by its very nature, cannot be resold. Further, in many equipment and software financing transactions, it is not uncommon for services and other soft costs to be financed. Increasingly, the lease transaction is nothing more than a promissory note from an obligor secured by little or no asset value. Leasing companies typically are willing to enter into these transactions owing to the stream of payments that the obligor is willing to make as well as the covenant of the obligor.