Chapter BLM71010

Published date10 April 2016
Record NumberBLM71010

The guidance that follows describes the lender in the scheme as ‘the Bank’ for short, but it is usually subsidiaries of banks which ‘lend’ the money via a finance lease. Non-banking groups flush with cash could also use the scheme. The mechanics have been over-simplified to illustrate the principles.

At the outset the parties agree the steps as follows:

  • The Bank buys an asset from the Borrower for £10 million.
  • The Bank immediately leases the asset back to the Borrower for (say) 20 years on finance lease terms. The rents in the early years are less than a normal finance lease rent; the payments in later years are correspondingly larger.
  • The Borrower never ceases to have full use of the asset.
  • The Borrower has an option to buy the asset back at the ten year point for a lump sum of £26 million. Sometimes there will be several options exercisable over the term of the lease.
  • The price the Borrower pays to get the property back under any of the options is calculated at the outset to be the amount needed to:
    1. repay the £10 million ‘borrowed’; and
      1. give the Bank a commercial rate of interest for the ten year period (allowing for the modest rent paid); for illustrative purposes assume that no rent is paid and that the interest rate is 10% (which compounds to...

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