Leveraged Leases Using the Displaced
Equity Method

Abstract

The recent financial regulations on leveraged financing have focused on the area of risk management, specifically, underwriting standards, timely reporting of work-in-progress transactions, valuation methods, and reporting and analysis. Therefore, now is an opportune time to analyze the structure and the attributes of leveraged lease financing. This article analyzes domestic leveraged leases, or DLLs, using the displaced equity method. Specifically, the article examines the financial and related issues that a lessor needs to evaluate when financing an asset utilizing the DLL. Finally, it illustrates the evaluation of a DLL utilizing a spreadsheet model with an example that derives cash flows, identifies the critical variables, and evaluates their impact on the rate of return to the lessor.

TOPICS: Fixed income and structured finance, legal/regulatory/public policy