Leasing

About leasing in Romania

Leasing – basic definition

    The word “leasing” comes from English from the noun “leasing” and the verb “to lease”, which could be translated in a first meaning as “to rent”. The development of this product in the past decades confirmed a specific form of financing, whose nametag went away form the initial meaning, better represented today by the verbs “to rent” and “to hire”.

    As in the case of a rent, in the focus of the economic operation lays the use of rented assets (industrial equipment, vehicles, buildings etc.) and not the ownership over them, so that the User (the one who “receives” the leasing financing) receives the usage right over the assets, which remain in the ownership of the Lessor (the one who “offers” the leasing financing).

    In Romania, the leasing operations is defined and treated according to the stipulations of the Ordinance 51/1997, further amended and supplemented by different documents. At the moment when this document was published, the latest piece of legislation was the law 287 / 2006 approving the GO 51 / 1997 with its further modifications.

    According to the law, leasing as an economic operation is defined as follows:

“... leasing operations whereby a party, referred to as the lessor/financer, transmits for a determined period the right of using a good owned by it to the other party, referred to as the User, at the latter’s request, against a periodical payment, referred to as the leasing installment, and at the end of the leasing period the lessor/financer undertakes to comply with the User’s right to choose either to buy the good, to extend the leasing agreement or to end the contract relationship.“ The lessor/ User can chose to buy the respective good before the end of the leasing period, but no sooner than 12 months provided that the parties agree it and whether they pay all the obligations assumed by the contract.

    The main two forms of leasing are: i) financial and ii) operational. The Ordinance 51 /1997 defines financial leasing by establishing that any other form of leasing that is not financial is operational. Besides the definition from the special leasing law, in Romania, the Fiscal Code makes a more clear separation between the two leasing categories (see art. 7 of the Fiscal Code from June/2006).

Financial leasing

A leasing operation could be regarded as financial if:

• the risks and benefits of the ownership right pass to the User at the end of the leasing contract;

• the parties have added a stipulation regarding the transfer of the ownership right to the User at the end of the leasing contract;

• the User may choose buying the asset and the purchasing price will represent at most 50% of the entering (market) value that it has at the moment the option could be expressed;

• the period for using the asset in the leasing system covers at least 75% of the legal usage period of the asset, even if in the end the ownership right is not transferred.

    One must notice, to this extent, that in general a financial leasing operation is aimed at purchasing the asset. Anyway, either because of the large usage period, either because of the large sums paid by the User, one could easily remark that the User, at the end of the contract, could practically consider the ownership of the asset as assumed.

    Last but not least, the low acquisition value of the asset at the date of the completion of the contract makes the use of the option to purchase and transfer the ownership right very likely.

Operational leasing

    Unlike financial leasing, operational leasing entails, in the real sense of the word, the usage of the financed asset over a limited period of time, without taking over the risks and benefits of the owner, in general, for the particular resolve of certain activities.

    Thus, the User is practically decided, even at the signing of the contract, over the return of the financed asset at the end of the leasing period, with the Lessor taking over the risk of realizing the value that remains depreciated at the end of the contract.

Sale and lease-back”

    “Sale and lease-back” is a leasing operation in which the User is also the supplier of the financed asset, with the Lessor purchasing the asset at an agreed value.

    Through such an operation the User is financed by taking out of the balance sheet of an owned asset, following its repurchase at the end of the leasing contract.

    Of course, the evaluation of the asset that is the object of the contract is deciding and it is entirely made by the Lessor.

“Cross-border” leasing

    Cross-border (foreign) leasing is an operational or financial leasing operation between a non-resident financer and a resident User.

    Leasing operations carried out between two residents are named domestic leasing. In January 2007, when Romania became an EU member state, the domestic leasing extends to the EU resident notion.

Glossary of terms

Down-payment – the sum paid by the User at the signing of the leasing contract and that covers in a negotiated proportion the value of the purchase.

Big-ticket – leasing transactions with high values, involving in some occasions less standard assets, vehicle fleets etc which manages the risk by a particular focused analysis.

Buy-back – convention between the Lessor and the supplier of the financed asset, aimed at its buy-back at the end or during the leasing contract, should the asset be returned to the Lessor.

Management commission – the sum paid by the User at the signing of the leasing contract and that covers the expenses of the initiating, analyzing and preparation of leasing contract.

Loss sharing convention – convention between the Lessor and the supplier of the financed asset, for the participation in an established proportion at the coverage of the losses generated by the inadequate execution of the leasing contract by the User.

Pre-financing interests – interests paid by the User to the Financer during the period between the date of the payment of the asset to the supplier and the date of the beginning of the payments for the leasing contract.

Economic life term (of the asset) – the remaining estimate period during which the asset could be economically used by one or several Users, in normal exploitation and repair conditions, for the goal mentioned at the signing of the leasing contract.

Leasing duration – the period during which the leasing contract produces effects over the parties.

Fidejusor / Warrantor – company or individual, not the User, that assumes to take over the financial obligations of the User, should the latter refuse or is unable to insure their payment.

Financer / Lessor – part in the leasing transactions, the owner of the financed asset who turns the asset to a third party for exploitation, in exchange for periodic payments.

Full service – operational leasing transactions to which the services regarding the usage of the financed asset (i.e. maintenance and repair for automobiles) were included.

Supplier – party on a leasing transaction, which supplies (sells) the asset to the Financer.

Hire-purchase – convention through which the financed asset is rented to the User, also granting the right to purchase the asset at the end of the contract in exchange for a final payment.

Financial leasing – a form of financing by which the User could acquire the right to use the financed asset during the majority of the economic life of the asset. The User is responsible for the maintaining, repair, taxes, insurance and for the direct relation with the supplier. The payment of the installments within the contract allows the financer to recover the costs of the acquisition plus a profit.

Operational leasing – a form of financing by which the User acquires the right to use the financed asset for a reduced term, the payment of the installments allowing the Financer to partially recover the acquisition cost.

Master Lease – a leasing convention that allows the User individual payments, on separate payment timetables, without negotiating separate leasing contracts.

Novation – the transfer of the leasing contract to a new User, who therefore takes over the rights and obligations of the initial User.

Leasing installment – the sum periodically paid by the User in exchange for the usage of the financed asset.

Anticipated completion penalty – the sum demanded, according to the contract, by the Lessor from the User, in the event of the anticipated cancellation / completion of the leasing contract.

Installment profile (timetable) – the number and frequency of the leasing installments during a leasing contract.

Program vendor – convention signed with the suppliers of the financed assets, by which the Lessor grants financing to the clients for the acquisition of the manufactured / imported goods by the supplier.

Internal yield rate – the interest rate at which the actual value of all the payments made by the User on the leasing contract is equal with the financed sum. It reveals the yield of the leasing transaction.

Variable installments – describe the situation in which the value of the leasing installments differs during a leasing contract, from one period to another, according to the needs of the User.

Technical risk – refers to the Financer’s risk to generate financial losses should the amount of the loan is not recovered through the sale of financed assets returned by (repossessed from) the User. This is because of the higher depreciation of the market value of the financed assets, in comparison to the depreciation of the loan.

Small-ticket - leasing transactions with reduced values (in general up to €100,000), implicitly relatively standard assets (automobiles, small industrial equipment etc) with a risk generally managed by dispersion.

Leasing structure – describes the range of main parameters (down-payment, profit rate, residual value, duration etc) of a leasing contract.

Sub-lease – transaction in which the asset is sub-rented by the User to a third party, while the initial leasing contract remains standing.

Financed sum – the value equal with the acquisition cost out of which the value of the down-payment paid by the User is subtracted.

Premature completion – the possibility granted to the User to complete the leasing contract before term, case in which anticipated completion penalties are possible.

Triple option – a right granted to the User through the financial leasing contract to choose at the end of the contract either to buy the financed asset, either to prolong the contract, either to return the financed asset.

User – party in a leasing transaction, which receives the right to use the asset in exchange for making periodic payments to the Lessor.

Residual value – the sum paid by the User at the end of the contract, usually one with the last leasing installment, in case the User chooses to buy the asset.