Off Balance Sheet Corporate Finance with Synthetic Leases : Shortcomings and How to Avoid Them with Synthetic Debt

Topics:
Strategic Leasing
Tags:
Debt,
Debt Finance,
Finance,
Financial Accounting,
Lease
Source:
California State University, Fullerton - College of Business and Economics

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Overview: Synthetic leases provide corporations with off-balance-sheet finance for acquisition of tangible assets. The financings are less efficient for financial planning purposes than conventional on-balance- sheet debt. The inefficiencies can be avoided by replacing synthetic leases with synthetic debt. Synthetic debt finance transforms lease obligations into the investment equivalent of senior corporate debt. The distinguishing features of synthetic debt are: (1) synthetic debt represents a fixed-rate off-balance-sheet fixed-income obligation with the same default risk as on-balance-sheet debt; and (2) in default synthetic debt provides the financier with immediate recourse against the obligor comparable or superior in recovery protection to conventional senior debt. Occasionally a gimmick appears in corporate finance that appears to have significant shortcomings, yet that manages to develop a following among financial executives. An idea of this type currently popular with publicly traded corporations is the synthetic lease; a specialized instrument used primarily for the debt finance of corporate real estate acquisitions.

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Format: PDF | Size: 142KB | Date: Jan 2001 | Pages: 30

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