EQUIPMENT LEASING ASSOCIATION OF NIGERIA (ELAN)
12TH NATIONAL LEASE CONFERENCE
COMING TO GRIPS WITH
MEDICAL EQUIPMENT LEASING
PRODUCT DEVELOPMENT
RISK ANALYSIS
TRANSACTION DYNAMICS
Collins David-Ikpe
20th November, 2014
Overview
1
• Familiarize ourselves with
leasing fundamentals.
2
• Explore the subject of
Leasing of Medical Equip.
3
• Conclusion
LEASING
FUNDAMENTALS
LEASING FUNDAMENTALS
WHAT IS LEASING?
There are three perspectives from which
LEASING can be defined:
– Industry
– Legal
– Accounting
For our purpose today we are shall limit our scope
to the industry definition.
LEASING FUNDAMENTALS
WHAT IS LEASING?
The Equipment Leasing Association of Nigeria
(ELAN) states that “Leasing is a contract
between a Lessor and a Lessee, giving the
Lessee possession and use of a specific asset
on payment of rentals over a period. The
Lessor retains ownership of the asset so that
it never becomes the property of the Lessee
or any other related third party during the
tenor of the lease”.
LEASING FUNDAMENTALS
WHAT IS LEASING?
• Subject Matter is:
– an Asset
• Essence is:
– the use of the asset
• Principal Parties are:
– the Lessor and the Lessee
• Ownership Rights reside with:
– the Lessor
• Usage Rights belong to:
– the Lessee
LEASING FUNDAMENTALS
WHAT IS LEASING?
• The Lessor, as owner, lends the asset not
money;
and
• The Lessee who pays rentals does so for
the use of the asset not as a repayment of
money borrowed;
therefore
• A lease is essentially a usage agreement.
LEASING FUNDAMENTALS
LEASING AND OTHER FORMS OF FINANCING
• The focus on the use of the asset and the need
to ensure that the asset value does not
depreciate more than the net investment (or
book/residual value) at any time during the
tenor of the lease places considerable burden on
the Lessor to mitigate the risk of loss.
• This risk of loss is commonly referred to as
Ownership risk or Residual risk. It is this risk,
which Lessors face, that differentiates a lease
from other forms of financing.
• Mitigating residual risk compels the Lessor to
wear the cap of an Asset Manager.
LEASING FUNDAMENTALS
LEASING AND OTHER FORMS OF FINANCING
• This statement is fact whether the lease is a
finance lease or an operating lease.
• For example: The Book/residual value of a 24
months lease at the end of month 9 after the
lessee had defaulted for 3 months and the asset
repossessed is N9.2m. Upon selling the assets in
the open market the Lessor realised only N5m.
The Lessor may bear the loss of N4.2m and may
have no recourse to the lessee. If the lease were
a loan the borrower may be held liable for the
loss.
LEASING FUNDAMENTALS
TYPES OF LEASES
• A lease is either a finance lease or an
operating lease.
• Where the Lessee agrees to buy the asset at
the end of the lease tenure and the present
value of the total rentals covers the cost of
the asset, that lease is a FINANCE LEASE.
• Where the Lessee agrees to return the asset
at the end of the lease tenure and the Lessor
is not recovering the asset cost, the Lease is
an OPERATING LEASE.
LEASING FUNDAMENTALS
TYPES OF LEASES
• Basically, two factors distinguish a finance
lease from an operating lease:
– The return provision
– The asset cost recovery
• It is important to note that bundling
maintenance into a lease does not make it an
operating lease.
LEASING FUNDAMENTALS
LEASE TERMINATION
• A lease may come to an end at maturity or
terminated before the expiration of its tenor.
• At maturity:
– The lessee pays purchase option if a finance
lease or negotiates to buy in operating lease.
– The lessee returns the asset applicable to
both types.
– The lessee renews the lease in case of an
operating lease.
LEASING FUNDAMENTALS
LEASE TERMINATION
• Before Expiration:
– A lease may be terminated and the asset
repossessed or recovered from the Lessee
before the end of the lease particularly in the
event of default.
– When this happens, the risk of loss is most
likely to be high if the asset was not well
managed when the lease was active or if the
asset has a limited use.
LEASING FUNDAMENTALS
• Rather than take steps to manage their lease
assets, some Lessors prefer to escape this
responsibility by demanding additional
collateral or rejecting lease requests for any
equipment with limited use.
• Please note that there is nothing wrong with
demanding that lessees provide additional
collateral or rejecting equipment with limited
use.
• Many times it is a policy issue.
LEASING FUNDAMENTALS
• The question is:
– Can a Lessor really avoid playing the Asset
Manager role?
– Has the desire for additional collateral really
reduced the incidence of non-performing leases?
– By rejecting equipment with limited use, are
leasing companies finding sufficient business to
grow their portfolio?
– Can a profitable lease business be developed and
grown from leasing equipment with limited use?
LEASING OF
MEDICAL EQUIPMENT
LEASING OF MEDICAL EQUIP
INTRODUCTION
• Medical Equipment is an example of a lease
asset with limited use.
• In leasing, assets with limited use are classified
as specialised Equipment.
• Leasing of specialised Equipment requires a
great deal of knowledge and skill.
• It also requires clear understanding of the lease
equipment and the relevant industry .
• It requires an appreciation of the key success
factors in both the leasing industry and the
lessee industry.
LEASING OF MEDICAL EQUIP
INTRODUCTION
List of medical equipment that can be leased:
•
•
•
•
•
•
•
Patient monitoring equipment
X-Ray machines
Medical Aesthetic Lasers
MRI equipment
Ultrasound systems
Exam tables
Lab equipment
LEASING OF MEDICAL EQUIP
INTRODUCTION
List of medical equipment that can be leased:
• Patient beds
• Ambulance Vehicles
Others:
• Computer systems
• Waiting room chairs and tables
• Filing systems and reception desks
LEASING OF MEDICAL EQUIP
INTRODUCTION
Benefits of Leasing Medical Equipment
• Leasing saves your working capital and pays for the
equipment as it’s used, and most importantly, it allows for
shorter payment terms so necessary upgrades to new
technologies are more cost effective than purchasing.
• Leasing also retains your bank borrowing capacity, lowers
your monthly payment, and in many cases, equipment lease
payments are a fully tax deductible expense since your
payment becomes a liability on the balance sheet instead of a
business asset.
• With the cost savings from leasing, you can afford to have
more equipment, such as ultrasounds and x-ray machines
available in your office. What does this mean to you? More
procedures that you can bill for, which means more
opportunities to increase your bottom line instead of your
stack of referrals paperwork.
LEASING OF MEDICAL EQUIP
PRODUCT DEVELOPMENT – STRATEGIC ISSUES
– Specialisation
• A leasing business that desires to succeed in
leasing Medical Equipment must consider
specialisation. The Company, a Division, a
Department, a Unit should be dedicated to the
business.
– Asset Management
• An Asset Management or Lease Admin
department should be created. They will be
responsible for managing all aspects of the
lease assets.
LEASING OF MEDICAL EQUIP
PRODUCT DEVELOPMENT – STRATEGIC ISSUES
– Choice of Supplies
• Attention should be paid to the quality of
the equipment, return provisions, buy back
guarantees and terms of credit.
– Funding Strategy
• Consider leveraged leases, back to back
leases, syndicated leases and other sources
such as insurance companies, venture
capital organisations.
LEASING OF MEDICAL EQUIP
PRODUCT DEVELOPMENT – STRATEGIC ISSUES
– Sound credit department
• To filter out potential delinquents and
retain viable prospects.
– IT/application software
• The use of technology promotes efficiency
and satisfactory customer service.
– Organisational structure & highly trained work
force.
• It is important that efficiency permeates
the entire organisation.
LEASING OF MEDICAL EQUIP
PRODUCT DEVELOPMENT – MARKETING ISSUES
1. Gather information - understand and observe
the market, the clients, the technology, and the
risks.
2. Synthesize the information collected and design
customer oriented lease products with potential
risks reduced to the barest minimum .
3. Periodically evaluate and improve the lease
products.
4. Implement design changes.
LEASING OF MEDICAL EQUIP
PRODUCT DEVELOPMENT – DOCUMENTATION ISSUES
The relationship between the lessor and the lessee
are usually defined by the written agreements.
However, the agreements must provide for these
essentials:
– Maintenance provision
– Inspection rights
– Return provisions
– Termination options
LEASING OF MEDICAL EQUIP
RISK ANALYSIS
• There are basically two forms of risks in lease
transactions:
– Credit Risk
– Residual Risk
LEASING OF MEDICAL EQUIP
• Credit Risk
– This is the risk that the Lessee will not meet
financial obligations as they fall due. This
occurrence is commonly referred to as a
default.
– It is not uncommon for lease agreements to
provide for punitive charges to discourage
defaults.
– Where the default continues then
repossession/recovery becomes an option.
LEASING OF MEDICAL EQUIP
• Residual Risk
– It is sometimes called ownership risk because
it derives from ownership of the equipment.
– This is the risk that the residual value (market
value) of the equipment will fall below its
book value (residual value).
– This risk may crystallise as result of excessive
wear and tear or as a result of the specialised
nature of the equipment.
LEASING OF MEDICAL EQUIP
• Risk Analysis
– Both types of risks are applicable to leasing of
Medical Equipment.
– However, the residual risk is most critical due
to the limited use of the equipment.
– This is particularly so in the case of premature termination.
– Almost always the Lessor will not be able to
recover the balance of his investment from
selling the repossessed equipment in the
open market.
LEASING OF MEDICAL EQUIP
• Mitigating the Risks
– Where a finance lease is desired, then greater
emphasis should be placed, by the lessor, on
mitigating credit risk to ensure that the lessee
does not default in rental payments.
– Buy back arrangements entered into with the
supplier can go a long way in reducing the risk
of loss.
– Developing a secondary market for lease of
used equipment is another way to forestall
loss.
LEASING OF MEDICAL EQUIP
• Mitigating the Risks
– A lessor may wish to limit its lease
transactions to operating leases to ensure the
lessor is in firm control of the equipment.
– Lessors may want to consider providing
combined leases to guarantee affordability of
the associated rentals by the lessees.
LEASING OF MEDICAL EQUIP
• Mitigating the Risks
– Lessors may choose to create the environment
and provide the conditions or services that will
increase the chances of business success for the
lessee and indirectly guaranteeing rental
payments.
LEASING OF MEDICAL EQUIP
• Mitigating the Risks
– Lessor
may
ask
for
higher
equity
contribution(?), security deposit, advance
rentals.
– Lessor may demand for additional collateral.
– Lessor may require a personal guarantee
– Lessor may require key man insurance
– Lessor may require local letter of credit.
LEASING OF MEDICAL EQUIP
TRANSACTION DYNAMICS
• Lease proposal
• Lease application
• Credit application
• Commitment letter
• Lease agreement
• Supply contract
• Landlord’s waiver
• Operator recruitment
• Delivery, Installation & Commissioning
• Maintenance Contract
• Inspections
• Rental Collections
• Purchases option payment or return or negotiate sale
• Change of ownership
LEASING OF MEDICAL EQUIP
SUMMARY
• A lease is a usage agreement.
• Residual risk distinguishes leases from other
forms of financing.
• A lessor is an asset manager and must take steps
to act as one.
• Medical Equipment fall into the category of
specialised equipment.
• Major issue with specialised equipment is the
higher probability that the residual risk will
crystallise.
• Residual risk can be mitigated by supplier
guarantees or hedging against credit risk.
QUESTIONS?