Does anyone have good modelsrelating to different lease scenarios?
I'm familiar with the accounting for leases, but am not intimately familiar with the intricate modeling and valuation of leases. I would mostly be interested in internal leasing models (for example what would GE's model look like when they lease a fleet of airplanes?), but valuation models would be helpful as well.
Any information you guys have would really be beneficial.
If you'd prefer not share anything on the board please PM me and I'll provide an email address.
shameless bump
I've never gone through a detailed modeling or valuation exercise just on leases. The simple adjustment so that companies are comparable across industries is to do your own capitalization of the operating leases. Put a multiple or discount rate on the operating lease rents and add that onto the existing capital leases. Then you need to look at EBITDAR instead of EBITDA for valuation and credit ratios.
It's important to know some of the contract details to understand future liquidity and cash flow commitments, but I've never gone through more detail than that. Maybe somebody else has.
You're correct that payments on an operating lease are expensed each year. The comparability issue is that a capital lease looks like debt on the B/S and I/S, and operating lease payments lower a company's EBITDA (capital lease payments do not). This can create a problem if you are in a lease-intensive industry, because multiples of similar companies could differ based on their accounting of leases.
An easy way to account for this difference is to make your own adjustment so that a company's op leases look like capital leases. If you take the current rent expense related to operating leases and "capitalize" it with a multiple (usually 7x-8x is used), this estimates the PV of the debt-like commitment of the operating lease. So when you're doing comps or looking at other multiples, you would add this estimate onto the company's reported debt and capital leases so that all financial liabilities are included. The other side of the adjustment is that you need to use EBITDA before the operating lease expense (EBITDAR) to be consistent on the I/S side.
Let me know if this helps.
That is an excellent answer, thanks very much for this! I would just make one additional point about the correct accounting treatment of finance lease for anyone who is going for an interview and comes across this post in future:
When a company takes on debt, the treatment on various FS is:
B/S - Increase Liability and Increase Assets ("cash") I/S - Interest charge as an expense CFS - Interest is added in CF from operating activitie
When a company takes on a new finance lease, the treatment is: B/S - Increase Liability ("Obligations under finance lease") and Increase Assets ("Property, Plant and Equipment") I/S - My understanding is that it will go in the same line item as the "depreciation charge" which means that it will not impact the EBITDA but will impact the EBIT. Hence without the adjustments, as Downtown mentioned, this will be apples to oranges comparison CFS - Depn added in CF from Ops as this is a "non cash" expense
For those who've done accounting in school/college and understand Debits/Credits, this will be helpful - http://www.accaglobal.com/archive/2888864/30941
Thanks!
Downtown is exactly correct, but keep in mind these adjustments are only so that you're comparing apples to apples when analyzing companies.
I am actually hoping to find a dynamic lease model. For example, a model that would be used internally at a leasing company. Obviously, I can run a PV on a payment stream, but I'm interested more to learn about how they evaluate leases ( metrics they use) and just how complex the models are that allow for a nearly infinite number of possibilities of lease structures.
Hello All,
I am precisely looking for what accountingbyday was asking. I would also mostly be interested in internal leasing models (for example what would GE's model look like when they lease a fleet of airplanes?), but valuation models would be helpful as well.
Thanking you in advance
I don't understand why any of the accounting answers above are relevant. OP is asking how the leasing company's model would look like, not how you would make comparability adjustments for valuation purposes.
Since the leasing company's business is leasing aircraft that it owns, the lessor's balance sheet will reflect full ownership of the aircraft and income statement will reflect the rents, depreciation, and interest expense if any associated with that aircraft. The lessee on the other hand books the transaction as an operating lease with rental payments only showing up on the income statement.
In short, GE's model would look just like any other model (revenue - rents, overhaul. costs - depreciation, sg&a, interest) with a focus on the tax vs book (accelerated tax depreciation vs book depreciation leads to high real tax savings - most aircraft lessors are not cash tax payers even if their book taxes are significant) and maybe market vs book.
If there are many different lease structures and/or timing of aircraft purchases/leases, then the model will likely include an aircraft by aircraft buildup of rents and depreciation (rolled up by time period). Sounds tedious, but if you make the formulas dynamic, shouldn't be a problem.
Operating metrics would be lease rate factor, lease term, age of fleet. Financial metrics would most importantly be debt coverage. Valuation metrics are either p/e or p/b, since EBITDA is irrelevant (interest, taxes, and D&A are vital components of leasing company operations and are true 'cash') and same with free cash flow (same reasons with EBITDA + one-time large capex expenditures).
Not an expert/specialist but I've done a few: 1) basic format and mathematics look like any loan or bond DCF-you have your contractual payments, and you develop a discount rate including default probabilities.
2) The terminal cash flow requires a decent amount of analysis. Depending on the lease, the borrower may have the right to buy outright (either for predetermined or market rates), renew the lease (either at predetermined or market rates), or cancel outright. We built an optionality function in which assumed a "worst for the lender" outcome.
2a) This is where some thought is needed: In order to find the terminal value you will need to make some assumptions about the resale value of the asset and the borrower's behavior. For something like an airplane, the borrower will obviously chose the "best" option allowed under the lease. For other, smaller-ticket items (medical or office equipment, for example) the company may chose to just renew the lease even if, from an analytical standpoint, it'd be cheaper to replace it. A computer fleet leased from Dell would be an example of this.
If the lease has a renewal component, the assumption on borrower behavior can be a big driver of value-for some small-ticket items the initial lease period is break-even or a loss-leader, with the assumption that the borrower will renew after x years and then the future payments are pure gravy to the lender.
3) In summary, the valuation model for a lease should in theory look pretty similar to any fixed income security until the terminal year, at which point you'll need to build some options depending on the specific lease contract.
Do you have a model you're able to share? I'm learning aircraft finance now and would like a representative model if at all possible.
No worries... if you can point me to resources to read, please let me know...
Leasing Model - Interested in internal models (Originally Posted: 07/08/2010)
Hello all,
I would mostly be interested in internal leasing models (for example what would GE's model look like when they lease a fleet of airplanes?), but valuation models would be helpful as well.
Any information you guys have would really be beneficial.
If you'd prefer not share anything on the board please PM me and I'll provide an email address.
Thanking you in advance
Alenconnais
I'm EXTREMELY interested in this as well. If anyone wouldn't mind PMing me, or posting something here, I'd really appreciate it and I'll give you 3 bananas.
I am also interested in this also as I am working on my degree Final Project on same topic.
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