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Business Leasing and Finance News August 2002

WELCOME TO THE AUGUST 2002 EDITION OF "BUSINESS LEASING NEWS."

Like my book, this e-newsletter will be informative, concise and helpful. It will generally be distributed on the second Wednesday of each month. Please contact Business Leasing News (BLN) to provide us with your feedback. Thanks for taking your valuable time to read this newsletter. You will find that BLN does more to help you than just report the news!

BLN's website has been rated by Alexa.com as one of the most visited leasing web sites in the world!

In this issue, you can read the following items:

1. The New Corporate Law and Order: Will Lessors and Lenders Benefit?
2. Private Charter Aircraft Face Stricter Security Rules as Protests Emerge
3. FASB Interpretation on SPEs Includes Some Exemptions for Leasing
4. As Revised Article 9 Ends Transition Year, Are Your Security Interests Still in Tact?
5. Luxury Cars Available with Cheap Leases
6. DIP Financing Offers Lifelines for Companies, But Poses Risks for Lessors and Lenders
7. Leasing 101: Understanding the "Operating Lease"
8. Events, Speeches and Training
9. Web Sites and Other Good Stuff
10. A Message From the Publisher

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1. The New Corporate Law and Order: Will Lessors and Lenders Benefit?

Spawned by abuse and scandals in the corporate suite, on July 30, 2002 the President signed the Sarbanes-Oxley Act of 2002 (H.R. 3763). See the summary and text of the new law (also called the Public Company Accounting Reform and Investor Protection Act of 2002 - Public Law 107-204) (the "Act").

Although opinions vary widely as to the effect of the Act, lessors and lenders should benefit by efforts of senior executives to fulfill the purposes of the Act. If executives violate the Act, they can suffer potentially severe criminal and monetary penalties. The Act's summary says that its purpose is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.

For lenders and lessors to public companies, financial disclosures form the bedrock of their credit and transaction approvals. Improved accuracy, detail and quantity of disclosure should enhance the reliability of financial or other information on which investors, lessors and lenders make their judgments and grant transaction approvals. The Act should help restore some confidence in relying on information that lessors and lenders had little reason to question, until Enron imploded. Joel Seligman, Dean of Washington University law school in St. Louis, predicts: "You will see much more rigorous compliance. You will see much less creative finance. You will see significant diminution of conflicts of interest." Others worry that the Act will create massive confusion, increase shareholder lawsuits and divert valuable executive time from running companies to confirming numbers. See: How Real Are the Reforms, The Wall Street Journal (S.W. Ed.), 2002 July 29; Section B:1 (Col. 1).

As a lessor, lender, or investor, you can gain some perspective on the Act by understanding its significant parts called "Titles." The following discussion, excerpted in part from the Act's summary, describes relevant portions of the Titles for lessors and lenders. It also offers some additional insights on how the Act may affect your business processes and judgments of public companies.

Title I: Public Company Accounting Oversight Board - Establishes the Public Company Accounting Oversight Board to (1) oversee the audit of public companies that are subject to securities laws; (2) establish audit report standards and rules; and (3) investigate, inspect and enforce compliance of registered public accounting firms accountants (Sec. 105). See: Reform Bill Seen as a 'Deterrent' Against Corporate Abuses, by James Toedtman, Chief Economic Correspondent at Newsday.com, July 26, 2002. This provision also prohibits boards from having more than two certified public accountants as members. See: Section 101.

Title II: Auditor Independence - Amends the Securities Exchange Act of 1934 limiting public accounting firms from performing certain non-audit services and audits simultaneously. Non-registered firms may become subject to state regulation (Sec. 209). Audit partners must rotate assignments every five years.

Title III: Corporate Responsibility - Vests the audit committee of a public company with responsibility for the public accounting firm employed to perform audit services. Requires committee members to be a member of the board of directors of the public company. Section 103 requires the chief executive officer and chief financial officer of a public company to (1) certify that periodic financial statements filed with the Securities and Exchange Commission (SEC) fairly present, in all material respects, the operations and financial condition of the issuer (Sec. 302), and (2) forfeit certain bonuses and compensation received after the company's accounting restatement that results from noncompliance with securities laws (Sec. 304).

*Tip: This provision adds to the new SEC certification requirement that became effective in June. The SEC order requires chief executive officers and chief financial officers of 947 of the country's largest companies (with revenue in excess of $1.2B last year) to confirm the truth and accuracy of their company's financial statements. The first 745 companies must post certifications by August 14, 2002 (the same day filings are due for the quarter ended June 30). SEC Order Forces Executives To Swear by Their Numbers, The Wall Street Journal (S.W. Ed.), 2002 July 5; Section A:1 (Col. 3).

For companies with a November 30 year end, the certification must be made by October 15, 2002, which is the due date of its August 30 Form 10-Q quarterly report filing. See: SEC posts CEO certifications, by Leticia Williams, CBS Marketwatch.com, July 29, 2002.

Companies based offshore, such as Tyco International Ltd. and Global Crossing Ltd., do not have to supply this certification (Sec. 302(b)). See: New SEC Order Doesn't Apply to Companies Based Offshore, The Wall Street Journal (S.W. Ed.), 2002 July 8; Section C:16 (Col. 5). As a lender or lessor, you may want to draw a distinction between certifying companies and these offshore (non-certifying) companies when you make credit judgments.

Title IV: Enhanced Financial Disclosures - Instructs the SEC to create rules that (1) require disclosure of all material off-balance sheet transactions and use of special purpose entities (Sec. 401); (2) prohibit loans to corporate executives (Sec. 402); and (3) mandate the presentation of pro forma financial information in a manner consistent with generally accepted accounting principles. This provision also requires the SEC to issue rules requiring a code of ethics for financial officers (Sec. 406).

*Warning: In January 2002, the SEC "suggested" that reporting companies provide more useful and informative disclosures of off-balance sheet arrangements in their management discussion and analysis (MD&A) in annual reports. See Release Nos. 33-8056; 34-45321; FR-61 . You can expect the SEC to keep the public focus on SPEs and off-balance sheet transactions. Such further SEC regulation in these areas may compound the adverse impact of the pending SPE "Interpretation" by the Financial Accounting Standards Board ("FASB"). See Item 3 below on Interpretation of the SPEs.

Title V: Analyst Conflicts of Interest - Requires the SEC to adopt rules governing potential conflicts of interest of securities analysts.

Title VI: Commission Resources and Authority - Authorizes appropriations for 2003 to the SEC for additional staff and compensation for all SEC staff.

Title VII: Studies and Reports - Mandates studies and reports to Congress on (1) the impact of consolidation of public accounting firms upon the capital formation and securities markets, and (2) the role and function of credit rating agencies in the operation of the securities market.

*Prediction: Watch for rating agencies to adapt to changes arising out of new financial reporting and disclosures, as well as the report from the SEC required by the Act. See my discussion in the July BLN entitled "Rating Agencies Extend Review Beyond the Numbers to Evaluate Credit Quality" for more insight into concerns of the rating agencies in the current economic and corporate environment.

Title VIII: Corporate and Criminal Fraud Accountability Act of 2002 - Amends Federal criminal law to prohibit (1) anyone from knowingly destroying, altering, concealing, or falsifying records with the intent to obstruct or influence an investigation in a matter in Federal jurisdiction or in bankruptcy, and (2) auditor failure to maintain for a five-year period all audit or review work papers pertaining to an issuer of securities. This title directs the SEC to promulgate regulations regarding the retention of audit records containing conclusions, opinions, analyses, or financial data.

Title IX: White-Collar Crime Penalty Enhancement Act of 2002 - Amends Federal criminal law to increase criminal penalties for (1) conspiracy to commit offense or to defraud the United States, including its agencies (up to 20 years in jail and $5 million fine for willful violations under Section 906), and (2) mail and wire fraud (adding new section 18 U.S.C. Sec. 1350 entitled "Failure of corporate officers to certify financial reports").

The Act, as briefly summarized above, may help lessors, lenders and investors make better judgments about regulated companies when they provide additional data and certify that their financials are true and correct in all material respects. However, whatever the effect of the Act, you can expect chief executive officers and chief financial officers to be at least as knowledgeable (and likely more so) about the financial results and condition of their companies. As a result, they should be able to tell the truth and nothing but the truth to lessors and lenders who want to make lots of cash available to them and their companies for financing and leasing in the future.

2. Private Charter Aircraft Face Stricter Security Rules As Protests Emerge

On June 19, 2002, the Transportation Security Administration ("TSA") issued "Private Charter Security Rules" affecting the private charter operations of aircraft, except a government charter, with a certificated takeoff weight of 95,000 pounds or more. The rules cover such aircraft as the Global Express manufactured by Bombardier Aerospace Corporation. By contrast, the Gulfstream G-V weighs about 91,000 pounds, and therefore falls under that threshold. For a summary and text of the new rules click on and search for Private Charter Security Rules or look at the Federal Register, Vol. 67, No. 118, Wednesday, June 19, 2002.

Comments were required to be submitted by July 19, 2002, but TSA may still accept late-filed comments if they are received during the TSA's review process.

Although the rule is scheduled to go into effect on August 19, 2002, TSA is still developing a standard security program for private charter operators, who will be given 30 days to comment on the proposed security program. A news article reported that implementation has apparently been delayed until November to allow charterers time to propose various methods of screening passengers. See: Security Rules For Air Charters Hit Turbulence, The Wall Street Journal (S.W. Ed.), 2002 July 29; Section B:1, 4 (Col. 6).

The TSA extended the security program requirements to large private charter aircraft to reduce the risk of a terrorist act or other security breach resulting in death or injury to persons or damage to the aircraft and other property within the United States. TSA believes it is now appropriate to require the operators of large private charter aircraft to ensure that individuals and their accessible property are screened prior to boarding.

*Technical Stuff: Section 49 C.F.R. Section 1544.101(f), establishes the basic required security program components for private charter operations and requires each aircraft operator to adopt and carry out a TSA-approved security program for each private charter operation in which passengers are enplaned or deplaned in a sterile area and each such operation of an aircraft with a certificated takeoff weight over 95,000 pounds. The existing language in Section 1544.101(f) requires private charter operators to establish a program that includes:

  • Enplaning or deplaning into a sterile area and screening of individuals and accessible property (Secs. 1544.201, 1544.207);
  • Use of metal detection devices (Sec. 1544.209) and X-ray systems (Sec. 1544.211), and security coordinators (Sec. 1544.215);
  • Law enforcement personnel (Sec. 1544.217) and accessible weapons (Sec. 1544.219);
  • Criminal history record checks (Secs. 1544.229, 1544.230), training for security coordinators and crew members (Sec. 1544.233), training for individuals with security-related duties (Sec. 1544.235), bomb or air piracy threats (Sec. 1544.303) and security directives (Sec. 1544.305); and
  • Screener qualifications when the aircraft operator performs screening (Subpart E).

The new rules clarify that screening must occur before a passenger enters the sterile area, as well as just before an individual boards an aircraft within sterile areas. Similar changes are made to Section 1540.111(a)(1), which provides that an individual may not have a weapon, explosive, or incendiary, on or about the individual's person or accessible property when screening has begun.

The broad application of this rule has drawn criticism and requests for exemptions. According to The Wall Street Journal, in the above-cited article, large companies such as Merrill Lynch & Co., Viacom Inc. and Vivendi Universal, and professional athletic teams, have objected to the screening procedures. They neither possess the staff or equipment to conduct such screening, nor desire to be charged with the responsibility. Bombardier Inc., manufacturer of the Global Express aircraft, has reportedly called the rule arbitrary and asked that it be withdrawn. By contrast Senator Herb Kohl (Dem., Wis.), owner of the Milwaukee Bucks, has been quoted that the "rule falls miserably short." It apparently covers only about 10 percent of the current charter fleet in the United States. According to the NBAA, Kohl proposes that aircraft weighing more than 12,500 pounds should be subject to such rule which covers a high percentage of all general aviation aircraft. For NBAA Members, see NBAA Update #02-26, July 1, 2002.

*Tip: For assistance in communicating with TSA on security or other issues, feel free to contact me at (214) 758-1545, my partner, Rodney Slater , former Secretary of Transportation, or Greg Walden former Chief Counsel of the Federal Aviation Administration. Greg and Rodney can be contacted a 202 457-6000. Thanks to Greg for his assistance with this article.

3. FASB Interpretation on SPEs Includes Some Exemptions for Leasing

On July 1, 2002, the Financial Accounting Standards Board (FASB) issued its Exposure Draft of a proposed Interpretation describing how and when to consolidate special purpose entities ("SPEs"). The proposed Interpretation, called Consolidation of Certain Special-Purpose Entities, will apply to public and private companies. It will not apply to not-for-profit organizations. The comment period ends August 30, 2002.

The FASB expects to issue the final Interpretation in the fourth quarter. The Interpretation will apply immediately to all SPEs formed after the issuance of the final Interpretation. It will also apply, without "grandfathering," to existing SPEs at the beginning of the first fiscal period after March 15, 2003. In other words, if you or your customers report as calendar year-end companies, you (or they) would apply the guidance on April 1, 2003.

The FASB aims to improve financial reporting by enterprises with interests in certain SPEs. It does not, and will not, restrict the use of SPEs that have valid business and legal purposes. However, when the FASB issues the final Interpretation more companies will have to consolidate SPEs than in the past. To read my previous discussions of the SPE saga to date, see: BLN on Synthetic Leases and BLN on Synthetic Leases Not Affected by FASB where I provide background on and analysis of the Interpretation.

The FASB approach requires the identification of the "primary beneficiary" in each SPE transaction. See Paragraph 7c of the Interpretation. Under the Interpretation you look for the business enterprise that has a controlling financial interest and the greatest "variable interest" in an SPE. When you find that party, you peg it as the primary beneficiary. The primary beneficiary must consolidate the SPE because, in effect, it has the greatest risks and rewards of the SPE. See Paragraph 7b of the Interpretation. According to the Interpretation, variable interests may arise from contractual rights or obligations resulting "from loans or debt securities, guarantees, residual interests in transferred assets, management contracts, service contracts, leases and similar arrangements or from non-voting ownership interests, such as preferred stock or limited partnership interests" in the SPE. Equity without voting rights qualifies as variable interests. The Interpretation then will cause the assets, liabilities and results of the activities of the SPE to be included in consolidated financial statements of the primary beneficiary.

So what's significant and new about the proposed Interpretation for leasing? On the way down the road to change, the FASB has decided on certain exemptions from the consolidation rules. These exemptions state, in part, that the Interpretation does not apply to SPEs (or similar groups of assets) owned and consolidated by a "substantive operating enterprise" (that is, a real operating, stand alone, self-financed business that issues financial statements and has employees). Watch for accountants and others to call this enterprise the "SOE." See Paragraph 7a of the Interpretation.

For example, the Interpretation exempts any subsidiary, division, branch, or department of a substantive operating enterprise (SOE) that acts as a lessor in a synthetic or other type of lease. Such leases include a leveraged lease, direct financing lease or sales-type lease. None of these leases will be consolidated with any entity other than the parent that already consolidates the entity. In effect, the Interpretation does not cover SOEs like a leasing company, bank or other finance company that consolidates a subsidiary or other enterprise that serves as a lessor.

Therefore, such a leasing subsidiary can engage in leasing without limitation from the current 3 percent (and newly proposed 10 percent) equity investment rules for non-consolidation. See Paragraph 8c of the Interpretation. The FASB made this decision to avoid the conflict of requiring two different and unrelated enterprises to consolidate on their respective financial statements the same assets and liabilities. See Appendix B to the Interpretation, Paragraph B18.

*Deal Opportunity: As a result of excluding lessors that consolidated with an SOE, many synthetic leases in SPEs and leveraged leases will be unaffected by the Interpretation. In addition, synthetic leases that do not use SPE structures should remain unaffected. However, some players in the market seem unnecessarily resistant of all synthetic leases, because of their off-balance sheet nature. You can still do these deals consistent with FASB Statement No. 13 ("FAS 13").

*Tip: The Interpretation is expected to become final near year-end. That time frame allows little opportunity to assess the changes and complete restructures of affected transactions. The failure to assess restructuring possibilities means that lessees and lenders (along with others), as the primary beneficiary, may have large debts (and assets) consolidated onto their balance sheets. Such new debt could breach loan or other covenants and cause other financial difficulties for the primary beneficiary.

As a result, you may want to consider alternative structures now to remedy potential consolidations for your business or businesses with whom you may do (or have done) SPE transactions. For some companies, such as restaurant chain Ruby Tuesday, and health care company HealthSouth, the time for change has already come. Both entities have replaced significant synthetic leases with on-balance sheet debt. Much more of this activity is expected to occur in what some believe is easily a $50 billion problem. See: Sale/Leaseback Flow Expected to Swell as FASB Prepares to Drain Synthetic Leases, by Eric Homer, www.abs.net, June 17, 2002. The questions is: Will you be part of the activity?

4. As Revised Article 9 Ends Transition Year, Are Your Security Interests Still in Tact?

More than one-year has passed since July 1, 2001 when all 50 states and the District of Columbia adopted Revised Article Nine of the Uniform Commercial Code (RA9). RA9 became effective on July 1, 2001 in all states except for Connecticut (effective October 1, 2001) and Alabama, Florida and Mississippi (effective January 1, 2002). I discuss the scope and impact of RA9 on leasing in Chapter 17 of my book, Business Leasing for Dummies (BLFD)®, titled "UCC Article 9 Affects Leasing." RA9 governs many (but not all) secured transactions.

A secured transaction is an arrangement in which a debtor grants a secured party a security interest in property to secure the debtor's obligations. A debtor may be a borrower or a lessee in a security agreement disguised as a lease. A secured party may be a lender or a lessor in a disguised lease.

RA9 made significant changes to former Article 9 (FA9) in the scope, rules and procedures governing security interests. The changes:

  • Expanded the scope of transactions covered by FA9;
  • Simplified methods to create and perfect security interests;
  • Established clearer priorities among secured parties to collateral; and
  • Clarified and improved enforcement methods and rules.

RA9 also initiated a transition period of one year to comply with RA9's new scope and rules. For all of the states except Connecticut, Alabama, Florida and Mississippi, that period ended on June 30, 2002. Connecticut, Alabama, Florida and Mississippi end their transition periods on their first anniversary (September 30, 2002 for Connecticut and December 30, 2002 for the others). For a detailed discussion of RA9, see: Legal Guidelines For Compliance With Revised Article 9 of the UCC, Jill A. Zellmer, Theodore E. Francis and Edwin E. Smith, The Secured Lender, November-December 2001 (Part I) and January-February 2002 (Part II).

*Warning: The transition rules are complex. Nonetheless, you should consider potential changes to your transactions to bring your portfolio into compliance with RA9. You must do so in some cases to retain a perfected security interest in collateral or to avoid the termination of a grant of a security interest. Ask your legal advisors for assistance to assess your transactions. Answer at least the following three "if" questions (from the secured party's viewpoint):

  • Did you properly create a security interest under both FA9 and RA9? If not, you may not have the rights you expect.
  • Have you properly perfected your security interest by filing a financing statement or other correct method under RA9? If not, you may not be able to enforce your rights.
  • Have you taken the right steps to establish priority to collateral under RA9? If not, other secured parties may get paid first.

For example, watch out for goods (including equipment) held as collateral for you by third parties as RA9 changes how you perfect your security interest. Notification to the third party will not suffice after the end of the transition period. An acknowledgment in writing (called "authenticating" a "record") is required by the end of the transition period to maintain perfection. See RA9-102(a)(7) & (69) and 313(c)). Security interests in deposit accounts must be perfected by "control" under RA9; so recheck reserve and deposit accounts for RA9 compliance. See RA9-102(a)(29), 104 and 312.

*Tip: Look at RA9 to find the new or different means (from FA9) of creating a security interest. Various types of collateral require specific actions on your part under RA9 to protect your security interests. In the case of a borrower or lessee, the same actions may be required under your documents to avoid a default as a result of having an ineffective or unperfected security interest. You may still be able to correct the problems before your secured transactions pass their respective anniversary dates or your deal is in default. When in doubt, don't wait for a problem or default to occur even if your transition period has passed. As a lessee or borrower, advise your lender or lessor of potential problems. As a lender or lessor, don't wait to find out the impact of RA9 in a bankruptcy, because you can count on your lessee or borrower to challenge your security interests and other rights to collateral in court. Evaluate your most significant transactions first; then review the others in your portfolio.

Thanks to my partner, Jim Chadwick, for forwarding the Secured Lender article to me.

5. Luxury Cars Available With Cheap Leases

Little doubt exists these days that the economy is stumbling and may even go into the so-called "double-dip" recession. Until May, luxury car dealers seemed unscathed. But May numbers changed their market. Car sales softened on some of the most profitable luxury cars such as Porsche, Jaguar, Volvo and Land Rover. BMW has not felt the same pinch, and apparently has offered fewer discounts, if any. Mercedes is under pressure with a 20 percent dip in sales so far this year, but may not have started lease incentives yet. See: Luxury Discounts: Now You Can Pay Less for a Porsche, The Wall Street Journal (S.W. Ed.), 2002 July 2; Section D:1 (Col. 2).

While I usually don't write about consumer leases, this situation caught my eye. Apparently the luxury car guys don't want to appear to be selling cars at "fire sale" pricing. They have resisted large rebates or zero percent financing. However, according to The Wall Street Journal dealers have responded to the softened market by offering less expensive leases on luxury cars. One Porsche advertisement recently read: "You can't buy happiness. It is, however, available for lease...." With these types of discounts available, some dealers say that monthly lease payments may be as much as 33 percent cheaper than other loan financing.

*Tip: Car leasing differs significantly from the lease transactions I usually discuss in BLN, but here are three negotiation points that may be attainable in today's market:

  • Negotiate higher residual value on the car. In general, the higher the residual the lower your payment. For the first time, the authoritative Automobile Lease Guide has recently published predicted resale values. These values may help you negotiate your lease. Also see: Will Your Car Hold Its Value? New Study Does the Math, The Wall Street Journal (S.W. Ed.), 2002 August 6; Section D:1 (Col. 2).
  • Insist on a lower security deposit, which reduces your risk and initial cash outlay.
  • Ask the leasing company to waive the last month's lease deposit, which also reduces your risk and initial cash outlay.

For more in-depth help with car leasing, take a look at Look Before You Lease - Secrets to Smart Vehicle Leasing, by Michael Schott Kranitz, Esq. (Buy-Rite Holdings, Incorporated 1995-7).

6. DIP Financing Offers Lifelines for Companies, But Poses Risks for Lessors and Lenders

What do Adelphia Communications Corp., WorldCom, K-Mart Corp., Ames Department Stores, Enron, Farmland Industries and thousands of other companies in bankruptcy have in common? Each company has received financing in its capacity as a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code. The so-called "DIP financing" provides a lifeline to keep these companies operating while under the protection of the Federal Bankruptcy Code.

Who provides such financing and why would they do it? Often the existing lenders provide DIP financing. The existing lender usually knows the debtor and its potential to survive the bankruptcy as well or better than any other lender. The operating debtor usually has few financing alternatives, and very little leverage with which to negotiate with lenders. As such, debtors and their lenders often present post-petition financing packages that are onerous and unfavorable to other creditors, including certain lessors. In addition, the existing lender does not want to take the risk of being primed itself by a new lender. But why take such high risk? Simply put, fees, higher interest rates, collateral protection and deal flow entice lenders to stay in the game. Once a company enters bankruptcy, lenders such as Citicorp. (Adelphia Communications, Inc.), J.P. Morgan Chase & Co. (K-Mart and Adelphia), Foothill Capital (Provell Inc.), Bank of America, N.A. (Birmingham Steel), and even asset buyers step in and provide financing to keep the company afloat. For example, WorldCom's lenders recently committed up to a $2 billion financing and Adelphia received approval for a $1.5 billion financing.

The proceeds of DIP loans pay for ongoing operations and other critically important expenses such as key vendors, employee salaries, inventory and other essential creditors during the bankruptcy case. Companies generally approach lenders before a bankruptcy to line up financing to occur after the debtor files a petition under Chapter 11 to reorganize.

Where do lessors stand when all these lenders obtain approval for these priming financings? Lessors may confront challenges from debtors or lenders that their leases constitute disguised security agreements instead of true leases. If it's a true lease, the leased property can't be pledged as collateral due to the fact that the debtor has no ownership interest in the leased property.

*Warning: If a Bankruptcy court characterizes a lease as a secured transaction, a lessor, if perfected, may find that DIP lenders can:

  • Prime (take priority) to the lessor's lien on the collateral/leased property; and
  • Receive limited "adequate protection" payments (assurance of being paid as a lender).

If unperfected, a Lessor becomes an unsecured creditor with no collateral support for his lease.

*Tip: Lessors can mitigate the risks in a bankruptcy by:

  • Participating diligently in bankruptcy cases to protect their property by obtaining carve outs in collateral grants to DIP lenders and/or reaching other compromises with DIP lenders;
  • Conducting lease reviews to assure that their leases constitute "true leases" or that they have properly perfected a security interest in collateral subject to a disguised lease; and
  • Objecting to provisions in DIP court orders that may be detrimental to their interests or leased property.

DIP financings can increase lenders profits, but also involve significant risks. For example, when a debtor converts its Chapter 11 reorganization to a Chapter 7 liquidation, the lenders may receive disappointing returns on the sale of assets to repay their loans. Nonetheless, lenders who understand and depend on assets for repayment, called "asset-based lenders," make good candidates to provide DIP financing.

Similar to other financings, the challenge for all concerned is how to balance the rewards of financing companies in bankruptcy against the risks of not being repaid. With our fragile recovery now limping, it's a sure bet that lenders and lessors will play an important role in DIP financings.

Thanks to my bankruptcy partner, Bruce White , for his assistance with this article.

7. Leasing 101: Understanding the "Operating Lease"

The term "operating lease" has different meanings depending on whether the context is accounting, business transactions or tax.

In an accounting approach, the term operating lease as used in FAS 13 does not have the same meaning as the term operating lease in a general business, or a state or federal tax sense. In FAS 13, the accounting approach applies a four-part test. This test determines whether a lessee shows a lease on its balance sheet as a "capital lease" as contrasted with an "operating lease." A lessee only discloses an operating lease in the footnotes of its financial statements. An operating lease constitutes an "off-balance sheet" transaction, which is the term that has created such a stir after the Enron debacle. However, the Enron transactions are a far cry from a typical operating lease within the meaning of FAS 13, which offers transparent and useful information about the lease term and rents.

In a business approach, the term operating lease refers to a lease that extends for a relatively small portion of the useful life of the property (when new). Although such a lease can last for a day (like a rental truck), these leases often cover a period of three to ten years (and longer for certain assets). Lessors expect lessees to return the property at the end of the term and lessors plan to put the property "on lease" again to a new lessee. As a reward for taking this risk these lessors often charge a higher rent.

In a tax approach, by contrast, states have their own definitions of a lease or an operating lease. Under federal tax concepts, some leasing gurus call a "true lease" or "guidelines lease" (under Rev. Proc. 75-21) an operating lease. This characterization indicates that the lessees only act as users or operators of the leased property while lessors retain the benefits and burdens of a tax owner. The lessor owns the operating lease property and takes the tax benefits on the leased property.

*Remember: To use this term properly, simply remember the definition in the context of its use, whether it is accounting, business or tax. Then apply the definition to the use of the leased property without mixing contexts. For other definitions of this term, see the glossary of the Equipment Leasing Association and of Asset Management Central. Chapter 1 of my book, Business Leasing for Dummies (BLFD)®, also discusses the definition of an operating lease.

8. Events, Speeches and Training

Mayer Speeches on New SPE Rules, International and Off-Balance Sheet Leasing to Occur This Fall:

I will be delivering several speeches this fall and invite you to join me for any or all of them.

Leading the Way Through Change: Developing New Approaches to Off-Balance Sheet Leasing in the Post-Enron Era. Sponsor: The Equipment Leasing Association. Event: 41st Annual Convention of the ELA. Dates and Times: Monday, October 14, 2002 at 2:00 p.m. - 3:25 and 3:35 p.m. - 5:00 p.m. at the San Francisco Marriott Hotel, San Francisco, California.

Global Cross-Border Transactions Leadership. Sponsor: The Equipment Leasing Association. Event: 41st Annual Convention of the ELA. Dates and Times: Tuesday, October 15, 2002 at 3:35 p.m.- 5:00 p.m. at the San Francisco Marriott Hotel, San Francisco, California.

Structuring and Pricing Transactions in the Current Market. Sponsor: Institute of International Research. Event: Conference on Synthetic Lease Structures and Credit Tenant Leasing Forum. Dates and Times: Tuesday, October 29, 2002 at 9:15 a.m. -10:00 a.m. in New York City. For information/registration, contact IIR USA or call (888) 666-8514 or (646) 336-7030.

How the New (Accounting) Rules Will Affect Lease Financing Transactions. Sponsor: Infocast. Event: Unwinding, Restructuring & Consolidating Special Purpose Entities Under the New FASB Guidelines. Dates and Times: Thursday, November 21, 2002 at 3:30 p.m. - 4:15 p.m. in New York City (location to be announced). For information/registration, contact Infocast or call (818) 888-4444.

Training Offered. To help you improve your business and cope with change involving such topics as synthetic leasing, I offer private training seminars at your designated location tailored to your specific needs. My interactive and informative approach relies, in part, on my book, Business Leasing for Dummies (BLFD) ®. We can customize a format for your training needs ranging from a three-hour course to a two-day course. The course can cover a broad range of topics from the basics of leasing for beginners to strategic planning for senior leasing executives. Just call me at (214) 758-1545 or e-mail me at dmayer@pattonboggs.com to discuss your needs or interests.

9. Web Sites and Other Good Stuff

Here are some diverse and informative sites to use in writing, pricing and marketing:

Look Boss, No Hands - Speech Recognition Technology for the Office. At http://www.scansoft.com/ you can find "Dragon Naturally Speaking Professional Suite." According to the Bottom Line Magazine (Oct. 2001), page 9, this program is the only voice recognition technology that can operate hands-free in every Windows application, including Access, Excel and Word. Its top-rated speed is up to 160 words per minute with 97 percent accuracy. The less sophisticated version is "Dragon Naturally Speaking Preferred 5.0." Call for the Dragon guys at (800) 443-7077. IBM also weighs in with its top of the line IBM ViaVoice for Windows Release 9 Pro USB Edition at http://www-3.ibm.com/software/speech/ Call IBM at (888) 746-7426. IBM also offers a variety of similar products for Macs, too.

Powerful Economic Data Site. We are bombarded with economic data these days but it all serves a purpose. Take a look at http://www.usg.edu/galileo/internet/business/econdata.html that compiles a huge array of economic information, including currency and stock market reports and other domestic and international business, economic or market data.

Fortune's 100 Best Companies. In spite of the difficult time of cuts and layoffs, Fortune Magazine has once again identified companies at http://www.fortune.com/lists/bestcompanies/ that fit its list of the 100 Best Companies to Work For. Fortune gave companies credit for coming up with creative ways to keep employees satisfied and for offering generous severance and compassion when they had to make cuts. This site also includes the Fortune 500, the Global 500, the America's Most Admired Companies (which is no small feat to find today) and the 100 Fastest Growing Companies.

10. A Message from the Publisher, David G. Mayer

In the last several months, we have seen the economy attempt to recover, while the stock market has fallen dramatically. We have seen corporate scandals fill our newspapers with questionable behavior that has drawn the ire of the public and Congress. Consequently, it is little surprise that the media remains active, despite the usual summer slow period, with significant events, accounting, financial and legal news. In this issue, I have covered some of the topics that will affect financing and leasing for years to come. I have also included some lighter topics. Please let me know what you think and if you have preferences for topics or approaches that offer you leasing and financing strategies for your success.

In preparing this newsletter, I keep very current in legal and business issues affecting leasing and financing. It also enables me to provide you, my clients, colleagues and friends, with insightful strategies to use in various business situations. Feel free to call me to discuss your views. I value the opportunity to build relationships with you.

As you may be aware, I spend a substantial part of my legal practice in business transactions that include buying, selling, financing and leasing property of all kinds. This property includes aircraft, energy, facility and technology assets. At Patton Boggs we negotiate fractional ownership of business aircraft, close vendor programs and underlying transactions, handle tax-exempt and federal leasing deals, complete portfolio acquisitions, assist in syndications of deals of all sizes, and much more. We also spend a substantial amount of time working out troubled deals.

Thanks again for reading BLN and for your feedback. One BLN reader wrote recently: "Once again, bang up job on the July 02 BLN. Truly some of the best reading of the month." Another BLN reader wrote: "I am a sales manager...and (my) VP...receives ...(BLN) directly and forwards to me for the quality content... Great information. Very informative." Still another BLN reader wrote: "Your July 2002 Business Leasing News issue had an excellent discussion of the use of offshore tax havens." Keep the comments and suggestions coming!
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