The Problem

Japanese Operating Leases with a Call Option (JOLCOs) are tax structures that are widely used in Japan for large movable assets like aircraft, ships, railway carriages and so on.

In a JOLCO, the provider of the equity must be a Japanese tax resident and the debt is financed by Japanese Banks. These structures are very attractive because the equity holders get significant tax rebates from the government. The buyer enters an operating lease with the client and sells him a call option to buy the asset at the end of the JOLCO’s tenure.

Our client was a notable airline from the Middle East that had found it difficult to tap into the Japanese market due to a lack of existing relationships and a lack of familiarity with Japan-specific structures like JOLCOs. This was made harder by significant cultural differences and the perception of higher risk with Middle-Eastern companies for Japanese investors.

The Solution

The first step in this engagement was to educate and inform the client about the particular nuances of doing business in Japan. We worked with the client to bring them up to speed on JOLCOs and other financial products available in Japan that would be relevant for their business, along with the cultural sensitivities of the Japanese market.

For the next step, we reached out to our network in Japan and identified a list of potential partners in the deal, including equity providers, leasing companies and banks. Having selected the ideal partners to work with, we established contact between all stakeholders and gave comfort to the Japanese investors regarding the airline’s financial abilities.

The final step of the engagement was to structure the transaction to best mitigate counterparty risk and negotiate, finance and close the JOLCO transaction.

The Outcome

Our client was very pleased to finance their first JOLCO through Japanese investors and the consequently lower financing costs. In turn, the Japanese investors were delighted with the higher yield on their investment and the ability to expand their network of partners. This first deal was the template that led to several other JOLCO transactions for our client.