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.
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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.
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]
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?
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]
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:
xpanded
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.
[
TOP ]
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).
[ TOP
]
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.
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]
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.
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]
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.
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]
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.
[ TOP ]
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!
I extend a special thank you to my editors
at Patton Boggs LLP for their comments on this edition: Adrian Nicole
McCoy, Sheila Pedersen, Steve Reagan, Julie Rivard, Nikki Rovito and Tom
Stumpf.
Please forward this e-mail to other
people whom you know.
You may, for
this purpose, disregard the Patton Boggs distribution restriction that
appears at the bottom of this email.
