One of the most common issues that I encounter in my teaching activities is the many definitions that often are used for the same word. Keeping the tax and accounting rules straight, for instance, is always confusing. This phenomenon is not limited to the regulatory arena, however. We in the leasing industry always are using similar terms to describe different products, etc. This is what has occurred in a recent post I made on Early Buyouts (EBOs). Luckily, my friend, Rick Remiker, the Managing Director of Merrill Lynch Capital – EF, has stepped in to help clarify EBO terminology by sharing his experience with us.
The context for Rick’s comments was my description of two types of EBOs. One of them was used to create off balance sheet leases, and the other form was used to meet potential flexibility issues of the lessee. Based on his experience, Rick believes that most industry participants would characterize an EBO as strictly an early buyout option without the ability to return the equipment at the EBO point. (As you may recall, the question that originated this discussion was “How does an EBO help with the FAS13 tests?”).
Rick makes a distinction between products and thinks that most industry participants would consider an ETO (Early Termination Option) separate and distinct from an EBO. In practice he sees deals with EBOs on a regular basis and virtually none of them have return options built in. He also sees deals structured with ETOs (most likely for FAS13 reasons), and, on occasion also sees deals with both an EBO and ETO. The EBO and ETO are rarely if ever at the same option date, however. A fairly common example would be a 72 month full term FMV lease with an EBO at 60 months and an ETO at 36 or 42 months (almost always earlier in the term than an EBO in order to more easily meet FASB13 criteria). He goes on to acknowledge that industry terminology has always been inconsistent, but wanted to share the view that most people would not view an EBO as containing a return provision and would usually decouple an EBO and ETO.
Thanks, Rick. A very valuable two cents worth.
Early buyouts without charges.
Nick
http://www.tridentleasingcorp.com
Posted by: Nick | May 17, 2007 9:35 AM | Permalink to Comment