THE ANALYSIS: Analysis showed that the source of the dramatic increase in Capital stemmed from a "penalty for long-datedness." Big-ticket (aircraft, railcar) tax-advantaged leases were often written with nominal terms of 20 years or more, saddling them with what Basel calls Credit Migration Risk multipliers, based upon the empirically documented notion that initially highly-rated Credits will likely deteriorate in quality over a long period of time. |
THE SOLUTION: Because we concurred that Migration Risk was substantial for long-dated leases, we turned attention to another lever of the Basel model, Loss-Given-Default (LGD). It was here that our simulations were able to demonstrate that LGD was substantially lower for the lease portfolio than had previously been assumed. This saved the Leasing Company an estimated $100 Million in annual capital charges. |