Meaning
Potential for physical loss of leased assets determines the credit spread in heavy equipment finance. Repossession risk is highest in sectors like aviation, shipping, construction and heavy machinery where the assets are mobile. The hazard includes the costs of locating, seizing, transporting and returning the property to the owner’s control.
This factor directly influences the interest rate charged on the loan.
Physical Difficulty
Physical and legal obstacles can prevent the retrieval of a machine or vessel. When assessing repossession risk, a lessor considers the cooperation of the local authorities and the accessibility of the site. A debtor might hide the asset or disable its tracking systems to frustrate the recovery process.
Speed is the primary factor.
Jurisdictional Threat
Variations in national property laws create different levels of security for international investors. Repossession risk varies by country, with some regions offering fast-track procedures while others require years of litigation. Treaties like the Cape Town Convention attempt to standardize these rights for mobile equipment.
Without such protections, the cost of capital in certain markets rises. The legal environment is the primary driver.
Value Impairment
Depreciation and damage occur while the asset is out of the owner’s possession. High repossession risk implies that by the time the lender regains control, the equipment may have been poorly maintained. This reduces the resale price.
Maintenance records are often lost.
