medium · Asset-Backed Securities asset-nuances
In an equipment lease ABS, what is the key distinction between the credit analysis of a 'Finance Lease' versus an 'Operating Lease'?
- Operating leases carry no credit risk whatsoever, since legal title to the underlying equipment never actually transfers to the lessee.
- Operating lease tranches are always structured senior to finance lease tranches within the transaction's contractual interest payment waterfall structure.
- Finance leases carry materially higher loss severity because the underlying leased equipment can never legally be repossessed after a lessee default.
- Finance leases primarily involve credit risk on the lessee, while operating leases also include significant residual value risk on the equipment.
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