is to hold firm until the new year
last 10 to 15 years have seen significant cross-border leasing
activity between Europe and Asia. Much of this activity has been in
the big-ticket sectors of aircraft and ships, with the Japanese
Operating Lease (JOL) succeeding the Japanese Leveraged Lease as a
favoured financing vehicle for many leading European airlines, and
their Chinese counterparts being excellent customers of French
lessors in supporting the growth of their Airbus fleet.
Meanwhile, the 1997 UK long-life asset rules had the effect of
concentrating much of the UK lessor big ticket investment over the
last decade in the shipping sector, with many customers to be found
among the major shipping lines in greater China (including Taiwan)
and Japan. German equity has also been in good supply over the same
period, investing in both the aviation and shipping sectors despite
restrictive law changes.
However, the activity has not been limited to big ticket assets.
The writer has, over the same period, been involved in many
transactions involving smaller ticket assets, although often in
The asset classes in question have included shipping containers,
port cranes, telephone equipment and buses. Equity for such
transactions outbound from Europe has been sourced from the UK,
France, Germany and Italy.
The structures involved have included not just tax depreciation
structures, but also tax sparing structures, taking advantage of
favourable double tax treaties in funding the leasing of assets
into developing countries.
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In addition, there have been a number of transactions which have
been more focused on balance sheet concerns, without the pricing
necessarily being tax-enhanced.
So how are these cross-border deals faring in 2008?
As regards the market for new business, the credit crisis has
severely restricted the availability of finance of all types,
including leasing business.
In some countries, particularly the UK, this has exacerbated the
shrinking of an equity market already hit by tax and accounting
Equally hard-hit are the tax sparing deals. Although some
depreciation-based deals are surviving – lessors in some cases
absorbing cost, to maintain market share, by deferring depreciation
claims – the deemed withholding benefits under tax sparing deals
are lost if not used in the current year. And in 2008 profits are
hardly to be seen.
The picture is little happier for the existing book. Tightening
tax regimes in various countries have seen many lessees exercising
early termination options or seeking to restructure on a basis
which excludes the tax enhancement.
The lucky lessees may have been able to lock in some of the
anticipated benefit and secure replacement medium-term finance
before the credit crisis hit too hard. Equally, Japanese equity
sources are not enjoying the strength of the yen at a time when
they are receiving US dollars for purchase options under maturing
deals, without being in a position to roll their investment into
At least those operating lessors who funded themselves in
Sterling in relation to dollar assets in the late 1990s and the
early part of the millennium will be feeling slightly happier, as
the 30 percent devaluation of the dollar over 2002 to 2007 has
The general message coming from the market in Asia, as well as
in Europe, seems to be to come back in 2009. There will not be many
year-end closings this year, so finance lawyers may unusually find
themselves spending Christmas 2008 at home with their families.
The author is a partner at Norton Rose Gaikokuho Jimu