"Enron has given off-balance sheet financing a bad name.  But not bad enough."  These words, written by Jesse Eisinger on January 30, 2002, in an article for the Wall Street Journal entitled "Enron Has Given Off-Balance Sheet Debt a Bad Name," perhaps foretells the story yet to unfold for leasing.   See: http://www.monitordaily.com/Story_Page.cfm?News_ID=5209&Type=TopStories 

As background, General Accepted Accounting Principals in the U.S. (GAAP) and the International Accounting Standards Board (IASB) both permit off-balance sheet debt.  Under Financial Accounting Standards (FAS) No. 13, if a lease constitutes an operating lease, the lessee neither shows the leased asset nor the corresponding lease obligations on its balance sheet.

According to Bill Bosco, Vice President at CitiCapital, Chairman of the Equipment Leasing Association Financial Accounting Committee and contributor to BLFD, "there will be big effects in leasing" resulting from the Enron debacle.  Bosco cites four ways: (1) heightened scrutiny of off-balance sheet leasing under FAS No. 13; (2) greater questioning of consolidation of special purpose entities; (3) closer review of sale recognition in transactions in which a one party sells assets to its special purpose entity (SPE) in a questionable arm’s length sale while guaranteeing the performance of the lease assets in the SPE; and (4) increased disclosures required about leasing transactions.  The UK Accounting Standards Board continues to work on a new asset/liability approach to leasing that would require capitalization of all material leases.  See Chapter 15 of Business Leasing for Dummies entitled: "Accounting Meets Leases."  For a discussion of off-balance sheet leasing in the context of the Enron matter, click on:

http://executivecaliber.ws/sys-tmpl/offbalancesheetfinancing/. 

On January 22, 2002,  the Wall Street Journal (on page A2) reported that Moody’s Investors Service sent notices to Wall Street firms asking for new disclosures on "off-balance sheet financial arrangements."   The Wall Street Journal  (on page A4) also reported on January 25, 2002, that Arthur Levitt, Former Securities and Exchange Commission Chairman, has suggested for the first time that systematic accounting problems can only be fixed by legislation. 

Warning: Do not neglect training when your business is slow or just to cut expenses.  Training can help you understand basic concepts, properly address troubled credits, compete more effectively, develop new financial products, and profit from leasing or financing opportunities.  Review the white paper entitled: Profiting from Training: Do Investments in Education and Training Pay Off? at http://www.astd.org/virtual_community/research/PFLWhitePaper.pdf.  The paper clearly shows that training pays.

Tip: Whether you train with me or someone else, you can profit from training.  Your training initiatives and creativity in a slower market may help you achieve higher returns and business volume as the economy recovers.

Historically, in my experience the leasing and financing businesses have lagged six to nine months behind economic downturns and likewise have lagged for the same period behind expansions in the economy.  The Conference Board's leading indicators jumped by 1.2 percent in December for its third monthly gain in a row.  The National Association of Manufacturers expects the economy to grow at a rate of 2.8 percent this year and at an even faster clip of 3.2 percent in 2003.  

New opportunities for growth could first arise in defense and homeland security.  The federal government's increase in spending for the war on terrorism bodes well for businesses involved in these endeavors.  These businesses may need to acquire equipment or working capital lines to respond to defense and related security issues.  According to U.S. News and World Report, January 14, 2002 (on page 32-35), look for manufacturing to expand in 2002 while technology may be a late comer toward the end of the year.  The trucking business continues to suffer from overcapacity, which is painfully clear to those of you with huge inventories of repossessed equipment.  The airlines, battered by huge losses attributable to the recession and September 11, remain candidates for recovery later in the year.  For example, Delta posted a massive $734 million dollar fourth quarter loss, but expects to be profitable during the second half of 2002 according to an article in the Wall Street Journal (on page A4) on February 1, 2002.  Finally, look for consumer spending to improve as evidenced by a 5.4 percent increase in the fourth quarter of 2001.  The industries that support consumer spending may also be good prospects for renewed investment in, and leasing of, capital equipment.  For those with tolerance for risk, consider entrepreneurial or emerging growth companies seeking to preserve equity investment capital.

Tip:  Despite these bits of good news, the recovery's effect on leasing and financing of capital equipment remains, well, fuzzy for now.  But stay tuned as good things are happening.  Although a new economic stimulus package may now be in doubt, cheer Congress on to pass legislation that includes significant upfront tax benefits for investment in capital equipment.  Such legislation could jump start leasing and financing and help you achieve or exceed your budget this year.  For great statistics and analysis of the economy from people who really know this stuff, see http://www.economy.com.  For a survey by Fleet Bank of middle market lenders' views on the economic recovery see:  http://www.fleetcapital.com/resources/capeyes/article.php?a=02-02-77. 

Thanks to R.V.I. Group at http://www.rvigroup.com/ for showing off  Business Leasing For Dummies. According to R.V.I. Group, it is the world's largest specialist in residual value insurance.  R.V.I. is certainly worthy of mention in my book.

Thanks to McAfee & Taft (and Frank Polk, Esq.) at http://www.mcafeetaft.com/Aircraft/aircraft_welcome.htm (one of the leading FAA/aviation law firms in the U.S.) for posting an icon of my book cover.  Frank did a superb job of commenting on Chapter 12 in my book entitled: "Leasing and Financing Aircraft."  His site provides more detail on FAA/aviation issues than "page count" allowed me to write in my book.

In honor of Valentines Day, BLN shares some ideas from a new book, to be published on Valentines Day, February 14, 2002 (so don't forget!). The book is entitled: Love Is the Killer App: How to Win Business and Influence Friends (Crown Business), by Tim Sanders.

Here are some web sites that cover the financing business in ways that will help you stay informed and competitive:

See "Monitor Daily" for one of the most comprehensive sources of financial and industry news, including a rating each year of the top 100 leasing companies called the "Monitor 100".  You can register at: http://www.monitordaily.com/app_enews/members_registration.cfm .  The related print publication,  for the equipment leasing and financing industries, is known as the Monitor.  The Monitor will publish a Key Note Speech in its March 2002 issue that I delivered on February 7, 2002 at the annual FAA Aircraft, Lien and Security Interest Conference sponsored by Strategic Research Institute (SRI).  Look for my speech.  It is entitled: The Changed World of Aircraft Finance: New Security and Opportunity.  Let me what know what you think of its message.

See "Executive Caliber," created by Jeffrey Taylor, a very capable leasing industry veteran.  Jeffrey offers training worldwide, and reports and analyzes news that includes technical and international areas of interest.  Don't miss his good sense of humor!  Click on: http://www.executivecaliber.ws/sys-tmpl/door/

See the "National Business Aviation Association, Inc." site for in depth industry news about business aircraft, business aircraft operations guidance, research and public policy affecting the business aircraft community.  Click on: http://www.nbaa.org/ 

To help those of you who would like to refresh basic concepts in leasing or even build some new knowledge each month, this section describes some fundamentals of the leasing and finance businesses that you need to know and may even be in the news.  This month, BLN takes on the most basic of questions (or so you would think): What is a "lease"?

Recently, the "Streamlined Sales Tax Project" (SSTP) has created a new definition of a lease or rental, which provides one of many places that this ubiquitous term is defined and used.  See: http://www.streamlinedsalestax.org for an explanation of the project.  The SSTP defines a "lease or rental," in part, as follows: "Lease or rental means any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration.  A lease or rental may include future options to purchase or extend."  Section 2A-103(10) of the Uniform Commercial Code (UCC) defines a "Lease" as "a transfer of the right to possession and use of good for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease."  See Section 1-201(37) of the UCC for a companion definition of a "security interest."  See: Chapters 1 entitled "Getting Focused On Leasing" and 17 entitled "UCC Article 9 Affects Leasing" in BLFD to help you classify a transaction as a lease or security agreement.

Remember: How a court classifies your transaction determines your rights.  At the inception of a transaction you should differentiate between a lease and a secured transaction. Then you can book and document your deal accordingly.  With bankruptcies rising, we see disputes with respect to the classification of a deal.  These disputes often end with very negative effects on lessors who find out, to their surprise, that the Bankruptcy Court treats their leases as secured transactions. This result often diminishes the value of a lessor's claims.

Tip: Conduct loan and lease reviews early in troubled credit situations and address this issue fully.  For more help, contact my law partner Clifton Jessup, who heads our Bankruptcy Group.  Clifton contributed to Chapter 18 of BLFD entitled: "Bankruptcy Hits Leasing: Lessee Tools and Lessor Consequences."  You can tap into Clifton's many years of experience, personable approach and first-rate judgment on these matters by clicking on his name above or by contacting me.

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