What is a JOLCO?

Japanese Operating Lease with Call Option financing (JOLCO) is a type of financing arrangement commonly used in the aviation and shipping industries. It involves a Japanese investor purchasing an asset, such as an aircraft or ship, and leasing it to an operator for a fixed period of time, typically ranging from 5 to 12 years.

The lease payments cover the investor's costs, including the purchase price of the aircraft, interest payments, and fees.

At the end of the lease term, the operator has the option to purchase the asset at a pre-agreed price, known as the "call option". While JOLCO financing has become increasingly popular in recent years, particularly in Asia, it is not well-known in Australia, but it has the potential to be an attractive financing option for Australian businesses, such as those in the mining industry.

One of the primary benefits of JOLCO financing is that it allows businesses to acquire new assets without having to incur the upfront costs of purchasing them outright. Additionally, the lease payments under a JOLCO financing arrangement are usually tax-deductible, providing a tax benefit to the operator.

For the investor, JOLCO financing offers a steady income stream from the lease payments, providing a predictable return on their investment. Additionally, the investor can take advantage of tax incentives offered by the Japanese government to promote investment in the shipping industry.

However, as with any financing arrangement, there are risks to consider. One risk is the potential for fluctuations in the asset market. If the value of the asset depreciates more than expected during the lease term, the investor may not be able to recoup their initial investment or may only be able to do so at a lower price than anticipated. Additionally, there is the risk that the operator may default on their lease payments or may not exercise their call option at the end of the lease term.

To mitigate these risks, it is important for businesses to carefully structure their JOLCO financing arrangements and to work with experienced professionals who understand the complexities of the industry and the Japanese tax system. GASS is a company that specializes in structuring JOLCO financing arrangements and has experience working with businesses in a variety of industries.

One example of JOLCO financing in the shipping industry is the partnership between Nippon Yusen Kaisha (NYK) and Sumitomo Mitsui Finance and Leasing (SMFL). The two companies established a joint venture, NYK SMFL Marine & Aviation Fund, in 2019 to provide JOLCO financing to shipping companies. The joint venture has since financed the acquisition of several new vessels, including a liquefied natural gas carrier and an ore carrier, for NYK and other Japanese shipping companies.

While JOLCO financing is not well-known in Australia, it has the potential to be an attractive financing option for businesses in the mining industry. For example, a mining company could use JOLCO financing to acquire new equipment, such as trucks or excavators, without having to incur the upfront costs of purchasing them outright. Additionally, the tax benefits of JOLCO financing could provide a significant financial advantage to the company. If a business in Australia is interested in exploring the possibility of using JOLCO financing, they should consult with experienced professionals who can help structure the arrangement and navigate the Japanese tax system. GASS has experience working with businesses in a variety of industries and can help guide businesses through the process of obtaining JOLCO financing.

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