Asset financing is a so-called structured financing solution. It allows companies to finance the purchase of assets such as aircraft, ships, trains and, in some cases, real estate. These are medium- to long-term financing projects.
Let's take the case of an airline that wishes to acquire an aircraft. The first solution would be for the company to go directly into debt for this acquisition, but the debt would be directly on the balance sheet. An alternative would be to create a special purpose vehicle (SPV) to take on the debt for the acquisition of the aircraft. This aircraft is then leased to the airline by the SPV. The lease payments from the airline are used to repay the debt incurred by the SPV. Once the debt is repaid, the airline has an option to purchase the aircraft at its residual value. This is kind of lease arrangement can take different forms:
For the company that uses asset financing, there are multiple advantages:
- the use of the asset without having to go into debt;
- moderate rent;
- redemption of the asset at the residual value at the end of the transaction;
- the debt of the SPV is generally provided by several banks or institutional investors in order to mutualize/share the risks.
Role of the bank
The bank acts as an adviser. It helps to structure the SPV by defining the risks.
The risks are:
- non-payment of lease, which corresponds to a corporate risk;
- cost of refurbishing the asset in order to be able to resell or re-lease it.
The bank provides the debt of the SPV alone in the case of a bilateral financing or with several parties in the case of a syndicated financing. It may also act as an agent, i.e., as an intermediary between the client and the project’s lenders.