In the Winter 2017 edition of the Journal of Equipment Lease Financing, Paul Bent, the senior managing director of Legal Services for The Alta Group, addresses the fundamental shift in attitude toward traditional Hell-or-High-Water (HOHW) clauses and the new balance of risk in managed solutions.
Managed solutions transactions (MSTs) are becoming popular because they offer customers access to equipment, bundled with software and services and more flexible terms. Payments may be based on usage or in the form of a subscription. The agreement may be cancelable at will by the end-user.
In such cases the funding source, or lessor, will look at risks differently, as the agreement is more dependent upon how essential the service is to the business rather than the equipment’s residual value at the end of the contract.
While traditional credit risk remains an important factor in MSTs, Paul notes, asset management becomes more important to consider the ongoing utility of a solution. Also, covered in this in-depth article is the new accounting based on revenue recognition and on how such transactions will be documented and treated from a legal standpoint.
He suggests that as more MSTs are done and the practice becomes widely accepted the HOHW clause will become less relevant and eventually be superseded by alternative documentation to address emerging market forces.