Post by Sapphire Capital on Jul 24, 2008 6:34:14 GMT 4
Lets just think these leasing offers over for a moment:
Leasing means you get to use something for a fee and have to return it in a specified condition. The fee is calculated in regards of the capital interest for the term, the cost and expenses of making the item available and sometimes, if the item has a use period and depreciates, it includes either such depreciation or a security deposit.
Now if you would lease a security in the format of a straight payment transferrable investment grade obligation, anyone giving the use to you would be concerned about the time period and possible money for the time period as well as getting the instrument back, which would be diminished in value, because the use period for the actual owner gets cut by the use period of the party leasing it.
SO much for the price, lets say for a AA rated 10 year paper with interest coupon, a lease for one year would be the general interest dicount for a one year period (lets say libor 12 month plus 0.5) plus the amount of credit used up because the instrument is not in a portfolio earning income, meaning the actual cost is probably somewhere about libor 12 month plus 3 to5. Now if the leasing allows using the instrument as collateral, then it is like a third party guaranteeing a loan, which means risk and there has either to be a security for the possible default event or an enhanced risk fee, which brings up the cost even more.
Now what would someone do with a leased security, when used as a collateral the lender will see it is not owned but only used by the borrower, so he will discount the value if such use is not allowing to cash the collateral in case of default. Such discount will be very high indeed, frankly since the security is not part of the balance sheets or assets of the borrower, the value tends to be 0. Now if the security is allowed to serve as collateral the problem comes up how to pay for the default risk and secure the actual owner of the security; his risk would be 100% of the loan when the borrower defaults, so he will want to have enough collateral. If the borrower has enough collateral without cutting into his line, then why all the expenses, if not, almost all of the loan will be towards that risk and the fees and expenses will eat the rest.
Beside certain transfer pricing and financial movements with a corporate network and some serious syndicated lending with third and fourth collateral positions, there is no economic reason to do these transactions. There is a lot of reasons for brokers to do these because they can make a profit in commission without getting to near to the actual "no go decicion" and then referto the fact that their engagement only involved a very small part of the structure and the rest is not their responsibility (which frankly depending on the jurisdiction will do them no good) or we are talking banking fees, or at the end we are talking transactions without economic intend but criminal intend of laundering money.
So no one should be surprised if these structures are getting red flagged when they are entertained by non-institutional/non-banking structures.
There is also the matter that you are pooling commercially and such can be seen as an essential banking structure, which by the way needs a license.
Leasing means you get to use something for a fee and have to return it in a specified condition. The fee is calculated in regards of the capital interest for the term, the cost and expenses of making the item available and sometimes, if the item has a use period and depreciates, it includes either such depreciation or a security deposit.
Now if you would lease a security in the format of a straight payment transferrable investment grade obligation, anyone giving the use to you would be concerned about the time period and possible money for the time period as well as getting the instrument back, which would be diminished in value, because the use period for the actual owner gets cut by the use period of the party leasing it.
SO much for the price, lets say for a AA rated 10 year paper with interest coupon, a lease for one year would be the general interest dicount for a one year period (lets say libor 12 month plus 0.5) plus the amount of credit used up because the instrument is not in a portfolio earning income, meaning the actual cost is probably somewhere about libor 12 month plus 3 to5. Now if the leasing allows using the instrument as collateral, then it is like a third party guaranteeing a loan, which means risk and there has either to be a security for the possible default event or an enhanced risk fee, which brings up the cost even more.
Now what would someone do with a leased security, when used as a collateral the lender will see it is not owned but only used by the borrower, so he will discount the value if such use is not allowing to cash the collateral in case of default. Such discount will be very high indeed, frankly since the security is not part of the balance sheets or assets of the borrower, the value tends to be 0. Now if the security is allowed to serve as collateral the problem comes up how to pay for the default risk and secure the actual owner of the security; his risk would be 100% of the loan when the borrower defaults, so he will want to have enough collateral. If the borrower has enough collateral without cutting into his line, then why all the expenses, if not, almost all of the loan will be towards that risk and the fees and expenses will eat the rest.
Beside certain transfer pricing and financial movements with a corporate network and some serious syndicated lending with third and fourth collateral positions, there is no economic reason to do these transactions. There is a lot of reasons for brokers to do these because they can make a profit in commission without getting to near to the actual "no go decicion" and then referto the fact that their engagement only involved a very small part of the structure and the rest is not their responsibility (which frankly depending on the jurisdiction will do them no good) or we are talking banking fees, or at the end we are talking transactions without economic intend but criminal intend of laundering money.
So no one should be surprised if these structures are getting red flagged when they are entertained by non-institutional/non-banking structures.
There is also the matter that you are pooling commercially and such can be seen as an essential banking structure, which by the way needs a license.