Welcome to the November/December 2008 edition of
Business Leasing and Finance News (BLFN)

*************************************************************

FOUNDER'S NOTE
By David G. Mayer

Opportunity

Out of distress in business comes opportunity to make positive changes, opportunity to make money differently, and opportunity to reevaluate our strategies for success.

Although we now live in a difficult economic environment to say the least, we must adapt and keep moving forward. Is there an easy solution for any of us? Although few of us live on easy street, some organizations can and will make money despite this economy. Their businesses profit from difficult times or remain so fundamentally important that customers will still buy their products or services despite our economic travails.

For example, we will all buy groceries, but we might go “down-market” to cut our costs. The down-market stores profit from this change. So do other businesses that position themselves to take advantage of the economic crisis that is so evident to all of us. We need transportation, but we may carpool more often because of high fuel prices.

The economic crisis has scuttled many business plans. For example, most, if not all, of the assumptions about business aircraft cycles, sales, and financing went out the window as the markets took a nose dive. However, as brokers, financiers, and owners reassess the situation at hand, opportunity should arise for leasing business aircraft. Leasing may enable savvy lessors to gain residual upside in anticipation of aircraft values stabilizing or increasing again. Sale-leasebacks of business aircraft may also enable owners to secure funding while other financing remain scarce.

I have experienced several significant downturns in the economy, but nothing like this one. This time we all face unprecedented challenges in our work and unique, if not somewhat obscure, opportunities to exploit. Whether you work in a bank, leasing company, brokerage firm, law firm, or other business, you can search for opportunity, even if you must reinvent yourself and refocus your expertise. As a business aircraft broker said to me recently, “We come to work every day and ask ourselves: ‘what can we do differently today to make money and help our customers?’” This kind of thinking requires creativity, experience, and fast action, not to mention patience and, sometimes, true grit.

Each of us in today’s economy must demonstrate these attributes and others to survive and profit. We must position ourselves to see the wave of changes in our businesses, embrace the changes, and seize the opportunities they present. I would not be the first one to tell you that change is hard, and taking these steps in a down economy is anything but easy. But, do we really have a choice?

As one of my partners said to me long time ago, “In our business, we have to work smarter, not just harder.” Today, it seems to me that we must do both.

Thanks for reading BLFN. Good luck to you in the balance of the year. Look for BLFN’s next bi-monthly issue in January – February 2009.

1. Tsunami of Bad Economic News Drowns Many, But Not All, Financing Transactions

The breadth and depth of the downturn in our economy seems to defy rational explanation. Businesses that seemed viable six months ago crater every day. A giant of the auto industry, General Motors Corp. (GM), reported a 45 percent drop in sales in October as compared to the same period last year. Former Federal Reserve Chairman, Alan Greenspan, called the current economic crisis a "once-in-a-century credit tsunami" that policymakers did not anticipate. See Greenspan Calls Financial Crisis A 'Credit Tsunami', National Public Radio (Oct. 23, 2008).

Other business titans have failed or had a near death experience. They include Bear Stearns, Washington Mutual, IndyMac, Lehman Brothers, and Wachovia Corp. American International Group (AIG) has survived, primarily because the federal government acquired a controlling stake in the huge insurance firm. See Fed’s $85 Billion Loan Rescues Insurer, The New York Times (online) (Sept. 16, 2008). In a new development, the U.S. government has agreed to purchase $40 billion of newly issued AIG perpetual preferred shares and warrants to purchase a number of shares of common stock of AIG equal to 2 percent of the issued and outstanding shares as of the purchase date. U.S. Treasury, Federal Reserve and AIG Establish Comprehensive Solution for AIG, Market Watch (Nov. 10, 2008).

The economic downturn leaves business wreckage everywhere. Fear and, some would say, panic in the stock markets, runs rampant. The 0.3 percent annual rate of shrinkage in the gross domestic product foretells of more economic pain to come. See Stark Signs of Slowdown, Days Before Election, The New York Times (Oct. 31, 2008). Unemployment is skyrocketing.

You may think that the fate of General Motors Corp. alone will send the greatest shock waves through the economy. Although GM’s fate affects thousands of jobs and supporting businesses, current analysis suggests even greater cause for concern.

First, S&P predicts the capital goods sector of the economy will report deteriorating results.

S&P makes this prediction even though 70 percent of the 115 rated issuers in the capital goods sector remain stable. The worry appears to focus on evaporating cushions in loan covenants, decreasing access to commercial paper markets and approaching debt maturities coupled with companies’ uncertain abilities to pay their creditors. See Capital Goods Companies And The Credit Crunch; Financial Covenants Are a Key Concern, Standard & Poor’s (Oct. 30, 2008).

*Warning: Expect and prepare for downgrades in the capital goods sector over the next 12 months. Such downgrades could spawn more defaults for suppliers as well as the downgraded companies. Do not wait for the bad news. Review your portfolio exposure to rated credits that may be downgraded. Do not assume that a lessee or borrower who is current in payments will continue to do so, especially in troubled industries such as construction and trucking.

Second, credit manager’s index shows an “increasing sense of doom.”

According to Daniel North, who analyzes the data and prepares the credit manager’s index (CMI) report for the National Association of Credit Management,:

Certainly the economy is in dismal shape after the effects of high energy prices and the housing market bubble burst have been dragging on for some time. Now the increasing number of job losses, shrinking GDP, negative real retail sales and a host of other indicators confirm that the recession has arrived. Perhaps most troubling though is the disruption in the financial markets which has severely curtailed the availability of credit. As a result, which credit managers are so clearly telling us, not only is the economy bad, but the credit situation is making it even worse . . . .” See NACM Credit Manager's Index (Oct. 2008).

Separately, the latest survey of banks by the Federal Reserve showed that a staggering 95 percent have imposed higher loan standards on commercial and industrial loans. Demand for loans has weakened in the past three months. See The October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, U.S. banks also pulled back the maximum loan size and shortened maturities for business loans. See Bank Clampdown Dogs Economy, The Wall Street Journal, SW Ed., Page A:3, Col. 1 (Nov. 4, 2008).

Credit managers live in a “no-win” world these days. They realize that they usually cannot get deals approved. Therefore, they often have to turn down potentially good deals with such phrases as: “We can’t do deals these days” or “We don’t have the capital to do new deals, but we might be able to do an ‘add on’ deal occasionally.” Even worse, they may write up a deal and support it because it looks really strong, and the credit committee shoots it (and them) down.

*Insight Point: The reality is somewhere in the middle between free money and the difficult experience of credit managers. Financiers have imposed tougher, but not impossible credit standards. They will approve transactions if the customer meets the standards and, in loan or lease deals, makes substantial deposits at the lending bank. Independent lessors may establish other criteria, but do not, like banks, have the requirement to make bank deposits. Another approach for a borrower or lessee is to use the bank for multiple services that provide profitable fees to the lender/lessor’s bank. Look for the independents to require additional tangible collateral or security deposits. As a borrower or lessee, you must be ready to pay higher rates or rents, pledge more collateral, and accept rigorous terms and conditions.

Lenders and lessors should be prepared to lend if the borrower or lessee can meet the tougher requirements., Lending or leasing especially if the federal government has pushed institutions to lend after receiving funding from the federal bail out. White House tells banks getting federal aid to quit hoarding money and start lending it, By Jennifer Loven, AP White House Correspondent (Oct. 28, 2008).

Third, the manufacturing sector has contracted for three consecutive months.

Although manufacturing experienced eighty-three continuous months of growth, the “PMI”, published by the Institute of Supply Management (ISM), shows that the rate of declines is accelerating when compared to September 2008. See October 2008 Manufacturing ISM Report On Business®. Supply chain managers use the Project Management Institute data (PMI) to obtain valuable information important to strategic managerial planning. The PMI is an index of business activity and proxy for the general business cycle. An ISM survey indicates that 59 percent of the suppliers have been affected by troubled financial markets, and 45 percent reported reduced availability of credit.

*Warning: The manufacturing segment depends on financing of receivables and equipment to function. If, as the lender, you cut off a manufacturer’s credit lines or, as a lessor, you refuse to purchase equipment for lease, then you may encounter a downward spiral of the business toward liquidation, which serves no one’s interests. In the past, the business could often reorganize in bankruptcy or through financial restructuring. The same may not be true today as debtor in possession (DIP) financing may simply not be available.

For example, this dilemma has already resulted in the demise of well-known stores in the retail sector that plan to liquidate rather than rehabilitate after a bankruptcy filing. These companies include Linens 'n Things Inc., Levitz Furniture, and Mervyn’s LLC. See Buyers Dry Up, So More Firms Liquidate, CFO.com (Oct. 31, 2008).

If lenders and lessors cannot or will not extend credit, many businesses, including manufacturers and supporting vendors, may have to close their doors and liquidate. If that occurs too often, as appears now to be the case, the larger economy may grind to a halt for lack of critically important financing sources.

However, not all lenders or lessors follow the leader this way and some do continue to lend money or lease equipment. Their terms may be more rigorous and the pricing higher, but they continue to do the business for their good customers. Perhaps, when this unprecedented economic crisis begins to recede, their customers will develop the lost sense of loyalty and stay with the lenders or lessors who saw them through this very difficult period.

2. Four Ways to Manage “Operational Risk” in a Tough Economy

With major banking and financial institutions struggling to extend credit in today’s economic climate, they should reevaluate their risk management strategies, including business risks that have come to be known as operational risk.

*Term to Know: “Operational risk” is a catch-all category of risks that primarily relates to internal risks associated with the day-to-day operations. Typically applied by banks, financiers can also apply these concepts to manage transaction risks that are inherent in normal operations and extensions of credit to debtors. The concept of operational risk is not new. However, what is new is the idea that operational risk management (ORM) is a discipline that requires separate management structures, tools, and processes. Tracking and managing these risk factors through an ORM program that is separate and distinct from the credit and market risk programs can provide a bank or other business additional safety and soundness in this troubled economy.

For years banks could not reach consensus on a definition for operational risk and the ways in which it should be managed and supervised. The Basel Committee on Banking Supervision (Basel) is an organization that issues recommendations on banking laws and regulations. Basel II offered a definition that defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.”

This definition includes legal risk but excludes strategic and reputational risk. This definition has been widely accepted and is used by the Office of the Comptroller of the Currency (OCC) in the regulation of its member banks. Legal risk arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or conditions of a banking organization.

*Tip: Legal risk management becomes even more important when debtors default on loan and lease tr