A captive lessor is a division, subsidiary or joint venture established with a leasing company by a manufacturer or dealer with the primary purpose of providing the lease financing of the sale of the sponsor’s products to its customers.  The financial-support facilities commonly provided by captive finance companies include inventory financing to their sponsor for new and used equipment and leasing to the vendor’s customers, usually on favorable terms in exchange for first refusal to finance the sale to the customers.  Credit decisions are the responsibility of the captive, who specializes in underwriting credit extended to the sponsor’s customers.  Funding is commonly obtained with support of the sponsor and often through the securitization of their equipment leases.

Captive Impact on OEM Balance Sheets
OEM Captive
Total Assets 50% 50%
Revenues 87% 13%
Total Equity 80% 20%
EBT 84% 16%
Source: KPMG

According to the US-based Equipment Leasing and Finance Association (ELFA), a captive lessor is a subsidiary or division of a parent manufacturer with over 50% of its asset base generated through financing products of the parent.  DBRS considers a captive leasing company to be “wholly owned and supported both financially and through a sharing of product expertise by the sponsoring parent entity”.

Captives generally have a competitive advantage over other lessors because of their direct access to customers and exclusive sales-aid techniques, such as special discounts, low finance charges or subsidized residual values.  Subsidizing the residual value of leased assets from their sponsor allows them to reduce the lessee’s lease payments while the sponsor controls the second-hand market for their own equipment.

Captives play an essential role in the vendor leasing programs of many equipment manufacturers and dealers, including Caterpillar (Caterpillar Financial Services), IBM (IBM Global Financing) and Volkswagen (Volkswagen Financial Services).  Because the primary purpose of captives is to facilitate leasing and financing of their sponsor’s products, they generally offer leasing on a narrow market sector.

US Captive Lessors* 2010
Rank** Company Net Assets (mn)
  5 Caterpillar Financial $25,679.0
  6 IBM Global Financing $22,326.0
  7 John Deere Financial $21,025.4
10 Volvo Financial Services $13,877.8
11 CNH Capital $12,134.0
* Captive = Significant portion of current activity and/or portfolio is related to financing/ leasing a parent’s products, excluding foreign affiliates (i.e., majority owned by a foreign bank or foreign investor).

** Of the 100 largest equipment finance/leasing companies in the US.
Source: Monitordaily

 

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