When I first entered the equipment leasing business over 25 years ago, one of the most revealing things about this industry was learning how many different things could be leased. If the item is removable personal property, it is leasable. And that includes such unlikely items as fruit trees, fencing, and, yes, dairy cattle.
We have done airplanes, beef jerky manufacturing equipment, equipment that is used to manufacture the Patriot missile, motor homes, luxury cars but never any livestock!
Dairy cattle leasing is actually a pretty good business. At the end of the lease, a well-maintained herd should be larger than at the beginning, even after allowing for losses during the term due to disease and other events.
Usually, the lessee is a professional dairy farmer looking to increase the herd. But sometimes not. A story I heard recently went something like this.....
One day, at a small bank leasing company, in came applications for five small herds of cattle, not from dairy farmers, but from high-income people looking for tax shelters.
"Not our kind of business," the leasing rep said.
"But you're protected," said the customer. "You get the personal guarantees of wealthy individuals, you get an assignment of milk proceeds, you get all the cows and all their calves."
Still, they weren't interested. But so as not to disappoint the customers, the leasing company threw down on the table a condition they were sure would be a deal-killer: a requirement for an irrevocable letter of credit from a major bank for 115% of the equipment cost. To their surprise, the lessees agreed. Deal done.
Now, you would think an irrevocable letter of credit is bulletproof. Well, not always.
A couple of years into the leases, all was going well. And then one of the lessees stopped paying his rent. Instead of pouncing on the deal and seizing the letter of credit as soon as the five-day grace period had passed (a special condition of the lease), the collection manager treated it as a standard lease and sent out the usual warning letters. The lessee's excuse was that the herd had been stolen; he was working with the insurance company.
Fortunately, the credit manager learned about the default shortly before the letter of credit was due to be renewed, and warned the collection manager that the lessee might try to get the bank to cancel the letter of credit.
The collection manager immediately cashed in the letter of credit only narrowly missing losing the entire remaining balance.
So what are the lessons learned from this mess? First and foremost, never take your eyes off the ball. Everyone has leases with special conditions. Make sure those conditions are flagged and monitored. Second, no additional collateral, no matter how liquid, is totally safe.
And third, remember that it takes earnings on many deals to make up for the loss of the investment on one.
Or, in other words, in the leasing business, we make pennies - we lose dollars.