- Complexity is the degree of sophistication of the asset in terms of engineering design specification, which the lessee must aver to in writing to the lessor that it is operationally appropriate for its business. This reduces the risk of downtimes and the ability to yield revenue targets needed for servicing the lease rentals. In addition, the more technologically complex the asset is, the greater is the need for the lessor to insist on protective mechanism of its interest.
- Currency or foreign exchange risk refers to the risk that currency rate fluctuations may adversely affect rental payments and jeopardise expected returns, especially in lease arrangements that cut across borders. To avert this possibility, lessors try to denominate their lease contracts in stable international currencies like the U. S. Dollar, Euro or the British Pound Sterling.
- Cross-Border risk not only refers to fluctuations in the exchange rate of the local currencies in each country but also the socio-political and economic instability either in the country of the lessor or the country of the lessee. It may also emanate from changes in tax rates in the different countries involved in the leases. These series of risks must be factored into the structuring process with the objective of an early payback period, particularly in an unstable lessee country from where it may become impossible to recover the asset if anything goes awry.
- Competition refers to the extent to which the lessee has a fair share of its markets, leads it or is trying to get a piece of the action. To reduce the risk of asset under-utilisation as a result of keen competition and market erosion, the lessor should ascertain the degree to which the lessee is maintaining its market share, growing or declining before structuring the lease to reflect any inherent risk arising from this source.
- Category refers to the unique characteristics of the asset on lease in terms of its essential immobility or vulnerability to excessive wear and tear. Additional Category risk is thus associated with difficult-to-move assets like lifts and central air-conditioning equipment, which are vulnerable to serious abuse and must be quantified and structured into the lease.
- Cyclical and Counter-Cyclical business risks arising from the vulnerability of the lesssor’s business to recurring business cycles and their impact on cash flow during the lease term, should also be of interest to the lessor in the structuring exercise.
- Co-Partner refers to the reduction of risk through the involvement of another investor in the lease. While this arrangement reduces risk since it is then shared, it also reduces the profitability of the lease.
Depending on your particular need, we can arrange a special session for your staff to comprehensively discuss on the risks in leasing business. Contact us today, 08023176691, 08023179048, info@elannigeria.org, elan_nigeria@yahoo.com