I recently received a comment regarding one of my posts on early buyouts (EBOs). In this post, I mentioned that EBOs are a technique for achieving off balance sheet financing under FASB 13, as it shortens the lease term for purposes of the 90% test. The comment was really more of a question, specifically, “How does an EBO shorten the term?”
Early buyouts (EBOs) are a structuring technique used to create off balance sheet financing for the lessee and are specifically targeted to passing the 90% test of FASB 13. (Although the lease term is a factor in the 75% of economic life test of FASB 13, shortening the term through an EBO generally is not used in this context.) An EBO structure usually is used on longer term leases or in situations in which the residual is not high enough for the payment stream to present value to less than 90%. So how does the EBO work?
Since the lease term is shortened, there are fewer payments to be included in the 90% calculation – fewer payments, lower present value! The residual also should be higher at the EBO date, thereby lowering any potential termination fee associated with the return option. The EBO dates should be matched up to the residual curve in order to further reduce the early termination fee.
great article
http://www.tridentleasingcorp.com
Posted by: Tim | February 22, 2007 12:13 PM | Permalink to Comment