How do leasing and hire-purchase agreements fit in with financial covenants?

Leasing and hire-purchase are generally regarded as financing solutions for SMEs - they can also bring their advantages to bear in combination with structured financing agreements, e.g. in the case of an LBO.

There are 3 prerequisites for this:

1. the basic question is whether the financing agreements permit leasing and/or hire purchase. This is regulated in the "Reps and Warranties" section of the "Permitted Financial Indebtedness". There is almost always a provision allowing leasing (and hire-purchase) up to a certain maximum amount ("basket").

2. Not to be neglected are the effects on the financial covenants, the calculation of which of course depends crucially on the relevant accounting under HGB, IFRS or others. 

Under HGB, for example, let's look at the EBITDA/net debt ratio ("senior leverage") and the equity ratio ("net worth"): Under HGB, hire-purchase is equivalent to an (additional) loan, i.e. the balance sheet is extended by the property and the hire-purchase liability, and the interest and depreciation on the property are recognised in the income statement. Therefore, the equity ratio and the gearing ratio decrease insofar as the net financial liabilities increase. 

If one chooses leasing, one can use the "off-balance sheet" effect under HGB: the balance sheet remains unchanged, in the P&L the EBITDA is reduced by the leasing rates, which represent other operating expenses. 

Now the question arises as to which variant is more advantageous. 

The short answer is: the longer the leasing term and the higher the residual value, the lower the leasing instalment, which at a certain point has an advantageous effect on the debt-equity ratio. The better equity ratio is an additional argument.     

However, the decisive factors should always be the choice of a reasonable financing partner, the appropriate type of contract and, last but not least, the financing costs. Diversification of financing sources is absolutely advantageous and structured loan financing is no reason not to consider leasing or hire purchase. If the interest barrier is still an issue, the tax deductibility clearly speaks in favour of leasing. 

LeasingPilot will be happy to advise you on the possibilities!