Loss Given Default in SME Leasing

Kaposty Florian, Klein Philipp, Löderbusch Matthias, Pfingsten Andreas

Abstract

Leasing provides a fundamental source of firm funding, especially for small and medium-sized enterprises. A crucial difference from loans and bonds is that the lessor retains ownership rights of the leased asset during the lease term. This facilitates the asset utilization and work-out process and leads to higher liquidation proceeds. Hence, previous findings on the loan and bond loss given default (LGD) are not transferable to the leasing industry. Our analysis is based on a very granular data set covering a great variety of information on the lessee, the leased asset, as well as contractual and transactional characteristics. We examine novel LGD determinants such as an external credit rating, the lessee’s limited liability, and the number of leased assets and collaterals. Moreover, new results on previously explored factors question earlier findings, for example, on the lease contract type. Most importantly, as proposed by Miller and Töws (J Bank Finance 91:189–201, 2018), we analyze two different LGDs, one based on the asset utilization proceeds, the other on repayments. Our results clearly indicate the crucial importance of this separation when analyzing the drivers of the leasing LGD in detail because several determinants affect these LGDs in different ways. Our study assists both lessors and regulators in assessing the effective risk of lease contracts and enables lessors to enhance their risk management and work-out processes.

Keywords
Credit risk; leasing; SME financing; Loss given default