Funding, Customer Service & Operations Flashcards
Common Methods of Funding/ Sources of Capital
Internal Funding
Brokering
Discounting
Recourse Debt
Asset Securitization
Internal Funding
Many banks and other large financial institutions have purchased or started their own leasing companies.
These subsidiaries are often funded entirely by the parent financial institution.
The parent financial institution will typically charge the leasing subsidiary an internal interest rate.
Brokering
Broker acts as intermediary between the lessee and the funding source (Funding Source –> Broker –> Client)
Advantages
~ Little to no economic risk except for reps and warrantied in the broker agreement
No servicing platform required
Disadvantages
~Broker’s profit limited to the upfront commission paid on the transaction
Servicing relationship is transferred to funding source
Discounting
Lessor sells remaining rents of a lease to a funding source
Lessor retains ownership of the equipment
Value of the rents is determined by discounting the future rents to their present value
May be with or without recourse
**(Test nugget - know that the lessor typically retains the title and is therefore responsible (retains ownership, then ultimately responsible for taxes, etc.)
Discounting Advantages
Lower cost of funds
Greater flexibility and more control
Brand identity (ex: to be associated with FAEF)
Increased revenue (residual, interim rent, etc.)
Lessor retains customer relationship
Discounting Disadvantages
Significant reps and warranty clauses
Lessor may retain some or all of the risk
May require working capital
Upfront profit could be less than a brokered deal
**(Discounting) When discounting a stream on a non-recourse basis, the lessor typically represents and warrants:
~ Lease is valid and enforceable
~ Lessor has title to the equipment
~ Equipment has been delivered
~ UCC filing has been made in a timely manner
Test nugget - memorize these; what’s something that doesn’t need to be under reps and warranties? That the lessee will make all of the payments; they have done their due diligence, but can’t guarantee that the lessee will pay (non-recourse)
Who can tell me more about a what a UCC filing is?
UCC filings or liens are legal forms that a creditor files to give notice that it has an interest in the personal or business property of a debtor. Essentially, UCC lien filings allow a lender to formally lay claim to collateral that a debtor pledges to secure their financing.
Recourse Debt
Revolving Lines of Credit–> Permanent or Term Debt–> Subordinated Debt
Two types – Traditional Credit Facility, Warehouse Line
Lender does not usually underwrite, fund, or take a security interest in individual transactions
Lender requires the lessor to stay consistent with their underwriting/credit policy
Typically supplied by a bank and the rate is tied to an index
Lender files a blanket lien against all of lessor’s assets
(Test nugget - this is the method of funding that relies most on the financial strength of the lessor
This is combining the working capital of the funding source with additional credit capabilities
The facility (bank) is committed for a one-year period (typically); so if the lender does not renew the line, the borrower has to pay off any amounts owed
(Recourse Debt)
Traditional Credit Facility
Used to fund leases to be held in the lessor’s portfolio on the lessor’s balance sheet
Terms are typically 1-2 years and typically renew
Terms are not ties to the duration of the underlying leases in the portfolio
Test Nugget- Warehouse Line and Traditional Credit Facility both are lines of credit to give to loan originators
(Recourse Debt)
Term Debt
Provided by a bank and used for long term-basis
The duration of the loan is often ties to the maturity of the underlying leases
The interest rate is typically fixed at commencement
Lender files a lien against the pool of assets securing the loan
(Recourse Debt)
Subordinated Debt
Is junior and ranks behind (gets paid back after others are whole) any senior Traditional Credit Facility, Warehouse Line or Term Debt in case of bankruptcy or liquidation
Higher intertest rate to compensate for risk
(Test Nugget: Subordinated debt (also known as a subordinated debenture) is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings.
Subordinate debt- when will the repayment take place?
Advantages of Recourse Debt
Allows lessor to retain the long-term economic benefits of holding leases (early termination, residuals, renewal income, fees, interim rent)
Control and flexibility over credit, underwriting, and funding of transactions
Disadvantages of Recourse Debt
Greater risk
Limited capital
Increase in back-office expenses (labor, systems, etc.)
How to Qualify for Debt
Track Record
Lenders typically want to see a minimum of 1 year or more of validation of success with the credit model and performance (FAEF requires 3)
Financial Strength/Equity
Lenders look to equity to mitigate risk associated with unforeseen losses between the value of assets and the amount borrowed
High leverage ratios are perceived as higher risk with influences the pricing and availability of debt
May be in the form of paid in capital or retained earnings
**Asset Securitization
Used to describe the aggregation of similar types of assets (equipment leases) into a legal structure
Assets are used as collateral to support a bond or note
(Nuggets- Securitization - allows the owner of the assets to make illiquid assets marketable to investors.
A security is a tradable financial asset. The term commonly refers to any form of financial instrument
Additional information - Asset-backed securities (ABS) are financial securities backed by assets such as credit card receivables, home equity loans, and auto loans.
Pooling securities into an ABS is a process called securitization.
Although similar to mortgage-backed securities, asset-backed securities are not collateralized by mortgage-based assets.
