1.
Mezzanine Financing Increases as Senior Lenders Retrench
As traditional
lenders have tightened their credit standards over the past two
years, middle-market companies are increasingly turning to mezzanine
financing for capital. A hybrid and flexible form of capital,
mezzanine financing fits neatly between senior debt, which sits on
top of the capital structure, and pure equity, which provides the
base layer of capital for companies. One writer recently described
mezzanine finance this way: "Like the architectural feature from
which it derives its name, it sits above the main floor of equity
capital and below the upper floors consisting of senior debt. Like
most mezzanine floors, it is smaller than the floors above and below
it." See: Mezzanine Finance Can Be Critical Capital by Marc
A. Riech, Monitor, Specialty Lending Section, September 2002.
This article briefly describes the
circumstances in which mezzanine financing may be useful to a
company and the typical terms and structures of mezzanine
investments.
Reasons for a Company to Use
Mezzanine Finance
Companies often face a shortage of
senior debt and/or equity to meet their business objectives. This
shortfall may be caused by:
- a lack of "leverageable" assets
(that is, assets that an asset-based senior lender will accept
as eligible collateral to support a first priority senior loan);
- increasingly conservative senior
credit standards (resulting in reduced asset-based loan advance
rates as a percentage of collateral value and reduced amounts of
senior debt as a multiple cash flow); or
- the inability of a company to
access the public capital markets.
Mezzanine financing is an attractive
source of capital designed to fill this financing gap. Mezzanine
financing is typically used to fund acquisitions, recapitalizations
or the expansion of product lines or distribution channels (i.e.,
for growth capital). Mezzanine financing may also be used to attract
senior lenders by creating a larger junior capital base under the
senior loan. Some experts have indicated that in today's tight
credit markets, mezzanine financing is often the determining factor
in whether or not a transaction closes. See:
Mezzanine Finance: Closing the Gap Between Debt And Equity,
Fleet Capital's, CapitalEyes (October 2002).
Basic Structure of Mezzanine
Financing and Target Rates of Return
Mezzanine financing consists of two
primary investment components: a subordinated loan (also called
"subordinated debt" or "sub-debt") and an equity investment (known
as an "equity kicker"). The equity kicker most commonly takes the
form of a common stock warrant. Ultimately, the total economic
return for the mezzanine investor depends on the yield obtained from
both investment components.
Mezzanine investors normally seek
internal rates of return of 18 to 24 percent on their investments
(as opposed to 25 to 35 percent for equity investors). Although
equity capital sits on the bottom of a company's capital structure
from a payment priority perspective, equity capital is more
expensive than mezzanine debt and equity investors often demand a
significant amount of control over the issuing company. Moreover,
equity investments are highly dilutive to pre-existing stockholders
(dilution refers to the reduction in value of outstanding units of
equity as a result of the issuance of additional units of equity
capital). On the other hand, mezzanine investors generally require
limited contractual control over the issuing company and the "equity
kickers" received by mezzanine investors usually have limited
dilutive effect on the outstanding stock of the company. These
important distinctions may make mezzanine debt more attractive to
closely held companies than equity.
- Subordinated Debt. The debt
portion of a mezzanine investment is most often made in the form
of an unsecured loan. However, the mezzanine investor may seek a
second lien position if the mezzanine investor believes that the
issuing company will have residual asset value after giving effect
to the prior payment of senior debt. In either instance, the
mezzanine lender's loan will be subordinated in priority of
payment to identified senior debt. The parties typically do so by
negotiating a subordination/intercreditor agreement or by
including the subordination provisions in the subordinated loan
documents.
Sub-debt normally has a stated term of five to eight years and
most often pays current, cash interest (and perhaps a small amount
of principal) during its stated term. At maturity, the company
must pay the entire principal balance of the mezzanine loan.
Almost uniformly, the maturity date of the mezzanine loan is set
to occur after the maturity date of the senior debt in order to
avoid any conflict for payment between the senior and the
subordinated loans. Interest rates on mezzanine loans vary but
most typically range between 10 and 14 percent. See:
Hold On to What's Yours. Get the money you need without giving
up too much of the company, by David Worrel, Entrepreneur
Magazine (on line), September 2002, Vol. 30, No. 9 at page 58.
Recent industry data suggests that the average and median interest
rates on mezzanine loans are currently 13 percent and 12.5
percent, respectively.
The amount of mezzanine debt
potentially available to a company is primarily determined by the
amount of a company's senior debt and its cash flow. Cash flow is
typically measured by a company's earnings before interest, taxes
depreciation and amortization ("EBITDA"). During the late 1990s,
it was not uncommon to see senior debt providers lending up to 3.5
times annual EBITDA, without collateral support. During that same
period of time it was not uncommon to see total debt lending
multiples (including mezzanine debt) of up to 6.0 times annual
EBITDA. Today, in light of more restrictive senior lending
standards, it is unlikely that a senior debt provider will advance
more than 2.5 times annual EBITDA, and collateral support is
required in most cases. It is also more common to see total debt
lending multiples at or near 3.75 times annual EBITDA (with
mezzanine lenders providing financing of approximately 1.5 times
EBITDA). As a result, mezzanine investments are now occupying a
larger percentage of companies' capital structures at historically
low senior debt levels.
- Equity Kicker. To achieve a
total internal rate of return of 18 to 24 percent, mezzanine
investors normally purchase an equity interest in the issuing
company for nominal value with the expectation of realizing a
substantial increase in equity value over the term of their
investment. Alternatively, mezzanine investors may make up their
total return with additional "deferred" or "paid in kind" interest
(which is paid at the final maturity of the sub-debt loan). The
equity interests purchased by mezzanine investors often take the
form of warrants that are exercisable into common stock of the
issuing company. The return sought by mezzanine investors on this
component of their investment most often ranges from 10 to 14
percent, with returns currently falling into the lower end of the
range. Mezzanine investors generally expect to realize their
equity return through a liquidity event, such as an initial public
offering or a sale of the company, or through the exercise of a
"put." A put obligates the issuing company to purchase the
mezzanine investor's warrant at a future date for a set price
established at the inception of the financing. The mezzanine
investor and the issuing company frequently establish the "put
price" as a multiple of EBITDA or as the appraised value of the
warrant on the date of exercise of the put.
Candidates for Mezzanine Financing
Most mezzanine investors seek
companies with a leading or niche industry position, management
expertise and experience, dependable cash flow, consistent earnings
and a mature business model.
*Tip:
Each mezzanine investor has particular investment criteria or
company profiles that it will accept. These investment profiles may
be diverse and quite specific as to the industries in which the
principals of the mezzanine investment fund have expertise.
Likely investment candidates include
manufacturing, distribution and service companies. Early-stage
companies usually do not make good candidates because they don't
generate the cash flow necessary to pay current interest charges on
the subordinated debt portion of the mezzanine investment.
Similarly, real estate and technology companies are often excluded
from mezzanine investment funds' investment criteria due to the
perceived risks of those industries.
*Tip:
Mezzanine financing is a dynamic, growing and evolving area of
finance. In May of each year,
Atlantic Conferences Inc. produces the "Symposium on Mezzanine
Finance" at the Plaza Hotel in New York City. Patton Boggs LLP is
one of the key sponsors. The next event occurs on May 13-14, 2003 in
New York. Industry respected speakers provide current insights into
mezzanine finance. The gathering also offers an excellent
environment for networking. If you participate or desire to
participate in the mezzanine financing business (either as a
principal or as an investor in a mezzanine fund), or if you desire
to obtain mezzanine financing, mark your calendar for this key 2003
event.
I wish to thank my partner,
Jeff
Cole, for his assistance in preparing this article. Jeff is one
of a substantial group of lawyers at Patton Boggs who regularly
represents domestic and foreign commercial banks and their
affiliates, as well as public and private investment funds, with
respect to mezzanine, private equity, commercial lending and fund
formation transactions.
[Top]
2.
Forbearance Arrangements Help Troubled Companies and Creditors
If your lessee or
borrower falters but the last thing you want to do is foreclose -
then forbear instead. A forbearance arrangement can help a troubled
company survive in tough times. It can also be very helpful to
lenders, lessors and other creditors. A forbearance arrangement
simply eases a company's burden of performance and often provides
liquidity to a company in financial distress. You can even use a
forbearance arrangement to stave off a bankruptcy filing while you
restructure a company's financial obligations. As the economy
remains sluggish, the use of forbearance arrangements has expanded.
For example, you can use them where:
- A borrower has defaulted and is
trying to find new capital; so you give the borrower more time
to pay;
- A lessee has not paid a vendor and
you need to reduce lease payments to ensure the lessee pays
the vendor to avoid a vendor foreclosing on your leased asset
(such as an aircraft engine); or
- A lessee has failed to maintain
required insurance levels. Consequently, you waive the default,
allow your lessee to carry reduced coverage for a short period of
time or help provide the coverage by making premium payments or
using your own coverage.
You structure forbearance contracts
to accomplish many objectives, including to:
- Delay the exercise of
rights and remedies by a lender, lessor or other creditor;
- Require workout
professionals to be retained or new management to be hired;
- Charge fees for allowing
the customer time to cure a default;
- Change the timing of
performance or payment; or
- Increase the lease or
interest rate, or other compensation to the creditor in exchange
for not exercising rights and remedies.
Forbearance agreements tend to be as
unique as the facts and objectives they address. However, consider
including six important provisions in every forbearance agreement
(as a lessor, lender or other creditor) to:
- Require your
lessee/borrower to acknowledge the default, the amounts due and
the validity of your rights;
- Confirm your collateral
rights or rights as owner of the leased asset;
- Specify the revised timing
of the performance or payment in detail;
- Insist that the
lessee/borrower, within legal limits, waive rights and release
rights against you that may have arisen during your transaction;
- Insert default provisions
that state the consequences if the lessee/borrower fails to
perform under the forbearance arrangement (sometimes called a
"Forbearance Event of Default");
- Obtain consent in writing
to the forbearance deals from any surety, such as a guarantor.
This consent confirms his obligations to keep him on the hook to
you as revised by the forbearance agreement;
- Charge a fee for agreeing
to the forbearance or waivers; and
- Remedy problems in the
provisions of your lease, loan or other transaction documents to
strengthen your collateral position and enforcement rights and
remedies.
*Tip:
Other provisions of equal importance may
be required. Consult your legal advisors concerning remedies and
terms of these arrangements. You could avoid even more troublesome
events or even a bankruptcy if you act early in a problem situation.
Look for warning signs in a business. For example, as a lessor or
lender, act immediately to work with your customer if you see a cash
crunch, a brain drain, loan covenants nearing breach or in breach,
serious weakness in financial performance or inadequate financial
reporting by your customer. See: Early response often the key in
effective turnarounds, The Dallas Morning News, August
18, 2002, H:1, 3 (Col. 1). Conduct a lease or loan review at the
first sign of trouble. As the customer, don't waste time if any of
these events occur. Talk to your lenders, lessors or other
creditors. They hate surprises and may be more willing to forbear if
you consult them before significant trouble occurs.
I wish to thank my partner,
Bruce White, for his assistance in preparing this article.
[Top]
3.
Investors Brace for Impact of the FASB's New Off-Balance Sheet
Financing Rules
In a September 30 "public roundtable
discussion" with over 30 business representatives, the Financial
Accounting Standards Board (the "FASB") confirmed its intent to
prevent companies from hiding debt off-balance sheet in special
purpose entities ("SPE") like Enron did. See:
FASB Resolves to Reform Rules on Off-Books Deals, by a
Washington Post, Staff Writer, October 1, 2002. SPEs are
corporate or other entities with a limited or singular purpose such
as owning and leasing an office building or a power plant. The FASB
is also implementing rules that require greater financial disclosure
of a variety of guarantees, including tax indemnity agreements and
residual guarantees.
Although these efforts may seem
appropriate in light of the recent corporate scandals, equipment
leasing, credit tenant leasing (CTL) and other financial service
companies have begun to brace for the potentially negative impact on
traditional off-balance sheet leasing and financing transactions.
Investors, lenders, lessors, lessees, service providers and others
must quickly understand the new rules on SPEs and guarantees. They
must assess how these rules will affect existing deals such as
synthetic leases and determine whether the deals must be
restructured or consolidated. Once the rules called
"Interpretations" become final, the leasing industry will have no
choice but to change how it does future off-balance sheet
transactions. While the scope and effect of the rules remain far
from clear, few industry experts doubt that these changes present
significant new challenges to doing business.
Consolidation of Special Purpose
Subsidiaries
On July 1, 2002 the FASB issued its
"Consolidation of Certain Special-Purpose Entities — an
interpretation of ARB No. 51 (Proposed Interpretation), referred to
here as the "SPE
Interpretation." The current status, effective date, purpose,
scope and impact of the SPE Interpretation explains some reasons for
industry concern.
- Status of SPE Interpretation:
The comment period on the SPE Interpretation ended August 30,
2002. The FASB held the recent "public roundtable discussion"
(mentioned above) to consider all comments to its project
regarding the consolidation of special purpose entities, and said
that it will do its best to finalize the SPE Interpretation in
December 2002. The effective date of the Interpretation occurs
upon issuance regarding new transactions within the scope of the
new rules. Otherwise, companies must apply the SPE Interpretation
to the existing SPEs at the beginning of the first fiscal period
commencing after March 15, 2003. Calendar year-end companies must
apply the SPE Interpretation on April 1, 2003. The FASB has
published a
summary of comment letters as of September 24, 2002. These
letters generally comment negatively on the SPE Interpretation
while some comments express approval of the broad framework for
using a "principled-based standards approach" (that is, a
statement of principles guides accounting practice instead of
specific rules).
- Purpose: The SPE
Interpretation generally requires one party to consolidate an SPE
that lacks independent economic substance. Yet, the FASB does not
intend to interfere with the use of SPEs for valid legal and
structural purposes. For example, you can use an SPE as a
"bankruptcy remote" owner of assets such as an aircraft or power
plant.
- Scope:
The SPE Interpretation excludes certain CP conduits under
Financial Accounting Statement (FAS) 140, SPE's owned by
substantive operating enterprises (such as an SPE created by a
leasing company for a specific transaction), certain
securitizations (using qualified SPEs) and employee benefit plans.
The FASB also seems willing to allow substantive operating
enterprises (entities with employees and self-sustaining
operations such as bank leasing or independent finance companies),
called "SOEs," to use SPEs without complying with the SPE
Interpretation if they consolidate their SPEs. However, the recent
roundtable cast doubt on whether SOEs will escape the new
guidelines. In short, the scope of the SPE Interpretation remains
unclear and may even affect certain leveraged lease SPEs (such as
grantor trusts of various types of real and personal property).
- Impact: As more becomes
known about the SPE Interpretation, the impact will affect the
market that involves over $50 billion of transactions by some
estimates.
*Predictions:
Until the FASB finalizes the SPE Interpretation, the volume
of synthetic leases and other off-balance sheet structures within
its scope will remain sluggish at best. Even upon issuance of the
final SPE Interpretation, the market will take some time to
understand and adapt to the changes. Once the final SPE
Interpretation becomes effective, you can expect that:
- Existing SPE structures may be
restructured if feasible, depending on the type of transaction,
and its tax, economic, legal, public perception and regulatory
attributes.
- The cost of capital may increase
as a result of new risks imposed on equity capital and the
disruption of routine off-balance sheet transactions. It is also
likely that large amounts of available capital could chase very
competitive deals under new structures and drive down pricing to
levels that don't reflect the risks of the new structures.
- Old SPE structures may become
undesirable for synthetic leases due to the new 10 percent equity
first loss/at risk rules. These new rules provide that true equity
of 10 percent (or another appropriate amount) must be at risk for
the first loss in a synthetic lease. This significant change
creates a bright contrast with the current rule that the equity
investor has as little as a 3 percent risk of loss after applying
a lessee's residual guarantee.
- SPE debt may be consolidated by a
lessee, lessor, lender or even a service provider as the "primary
beneficiary" (the entity with the most to gain or lose or the
entity that has the dominant "variable interests" in the SPE).
Variable interests represent the means by which one party provides
support to an SPE or accepts the risks and rewards of the SPE's
operations.
- The estimated
2000 companies that use synthetic leases in real estate or
equipment deals may have to obtain financial covenant waivers, at
a price, from their lenders as a result of the adverse impact of
the consolidation of SPEs on their balance sheets.
*Tip:
The SPE Interpretation
establishes some new approaches to addressing accounting abuses
discovered in the Enron debacle. See: The Wall Street Journal
(S.W. Ed.), Enron Report Provides Details Of Deals That Masked
Debt, September 23, 2002; Section A:6 (Col. 5). However, these
approaches have created new complexity and ambiguities in many types
of off-balance sheet transactions that will take time and expense to
understand. Consult accounting, legal and tax professionals now to
protect your investments and identify new opportunities as you begin
to grapple with the changes. Bear in mind that the FASB rules not
only trigger a host of accounting issues, but also economic, tax and
legal implications for existing and future deals. For more
background on the FASB rules, see my previous discussions in the
February, March, June and August 2002 issues of
Business
Leasing News on the SPE Interpretation and synthetic leases.
The Guaranty Project
On May 22, 2002, the FASB issued its
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others — an
interpretation of the FASB Statements No. 5, 57, and 107 (Proposed
Interpretation)," referred to here as the "Guaranty
Interpretation." The current status, effective date, purpose,
scope and impact of this interpretation provide some insight into
the FASB's drive to increase disclosure of company liabilities.
- Status of Guaranty
Interpretation: The comment
period on the Guaranty Interpretation ended June 21, 2002. The
disclosure requirements in paragraphs 10-12 of the Guaranty
Interpretation will be effective immediately for financial
statements of interim or annual periods ending after December 31,
2002. Disclosure will be required for financial statement periods
ending after December 15, 2002. Guarantees issued after December
31, 2002 must be accounted for at “fair value” (as described
below). Guarantees in existence at December 31, 2002 are
“grandfathered” (that is, they are not subject to “fair value”
accounting). Media reports indicate that the FASB received
117 comment letters. On one hand, the letters generally approved
of the disclosure requirements, but, on the other hand, criticized
the rules concerning the valuation of the guarantees.
- Purpose: The Guaranty
Interpretation requires accounting for and immediate disclosure of
guarantee liabilities. These guidelines supposedly will improve
disclosures over those required by the existing rules.
- Scope: The SPE
Interpretation covers residual guarantees (including those
inherent in synthetic leases), indemnities (including tax
indemnities), direct and indirect financial guarantees,
performance guarantees and manufacturer/deal support of products
sales and leasing. The scope excludes product warranties, residual
guarantees booked as a part of capital lease under FAS 13, and
other items.
- Impact: Guarantees must be
valued at "fair value." Fair value will be measured without regard
to probability that the guarantor has to pay the guaranteed
obligation. This requirement differs from prior rules that
contained disclosure and reserve requirements when the guarantor
would probably have to make a payment. Fair value equals a number
less than the present value of the guarantee based on the probable
amount of payment (as contrasted with the probability of payment).
As a consequence, synthetic leases may become less desirable
structures because the implicit residual value guarantee that will
be valued and disclosed by lessees. In tax leases that are true
tax lease indemnities, the tax indemnification will be valued
regardless of the likelihood of payment. Even general indemnities
will apparently be subject to review, valuation and additional
disclosure.
*Tip:
The FASB staff will expand upon its Guarantee
Interpretation with examples and explanations. Watch for these
comments to add real substance and complexity to the new rules. See
my previous discussions in the March and June 2002 issues of
BLN for
more background on the Guarantee Interpretation.
For more information on the topics in
this article, please join me at the
41st Annual ELA National Convention where I will moderate
back-to-back panels on these topics. See Item 7
below. You may also call me at (214) 758-1545 if Patton Boggs can
assist you with any restructuring or other questions concerning the
impact of the FASB changes on your business.
[Top]
4. Trucking
Firms Roll Out Available Capacity as Consolidated Freightways
Collapses
When Consolidated
Freightways ("CF") collapsed in early September, it filed for
bankruptcy and dumped almost $2 billion dollars of capacity on other
trucking firms. It also ceased operations, laid off 15,500 Teamsters
and initiated efforts to sell 27,000 trailers, 6,600 tractors and
most of its 300 terminals. See: The Wall Street Journal (S.W.
Ed.), Consolidated Freightways Files Bankruptcy Papers,
September 5, 2002; Section A:2 (Col. 3). Bill Zollars, Chairman of
competitor Yellow Corp., said: "This is a sea of change for our
industry." Zollars called the CF bankruptcy a "classic case of too
much capacity."
If this is a sea of change for
trucking, what is the consequence for lessors and lenders to that
industry? The outcome may be mixed. For lessors doing business with
the survivors, including Yellow Corp., Roadway Corp. and Arkansas
Best Corp., these companies (and some others) can pick up CF's
capacity without much disruption in the industry. Some major
customers such as Dollar General, Home Depot and Ford Motor Company
confirmed that they had prepared for the CF problems and made plans
to use alternate carriers. See: The Wall Street Journal (S.W.
Ed.), Big Collapse Won't Slow Trucking Sector, September 4,
2002; Section A:2 (Col. 1). Prices for carriers may also strengthen.
However as equipment sales flood the market from CF, the already
dismal residual values of similar assets may experience further
downward pressure on resale prices.
*Warning:
If you think that the recent bankruptcy of Consolidated Freightways
solved the capacity problems and ended industry consolidation, think
again. Although the laws of supply and demand should work
effectively to absorb the CF capacity, Bill Zollars believes that
industry consolidation will continue. "In our case," he said, "of
the 30 top trucking companies in our industry during the beginning
of consolidation, there are only four left." See: Zollars Sees
More Consolidation After CF Collapse, TTNews.com, Sept. 4, 2002.
Zollars cautioned that you should expect more consolidation. This
consolidation may create more investment problems for lenders and
lessors to the trucking industry.
*Tip:
As a lessor or lender, evaluate your portfolio/collateral consisting
of trucking assets. Consider forbearance or other similar
arrangements with troubled lessees or borrowers to keep assets
working while the industry absorbs the CF capacity. Try to avoid
selling assets until the market absorbs the CF inventory of trucks
and trailers over the next 6 months. Keep an eye on yields to make
sure that your lessees don't give in to price pressures. Market
forces should enable them to charge their customers what it takes to
carry the freight. See: Item 3 above about
forbearance agreements. Also see: LTL Carriers Warn CF Customers
on Price, TTNews.com, September 9, 2002. Watch for the "LTL"
market to benefit from the departure of CF. The LTL market refers to
the "less-than-truckload" carriers who fill trailers with freight
from multiple customers (as contrasted with full truckload carriers
who fill a whole truck with the goods of one customer). For more
timely information on the trucking industry, visit the
American Trucking
Association.
[Top]
5.
Export-Import Bank Reauthorization Focuses on Small Business
When President Bush signed the
Export-Import Bank Reauthorization Act of 2002 (the "Act") on
June 14, 2002, he set his sights on helping small business. The new
law extends the
authorization of the Export-Import Bank of the United States
("Ex-Im Bank") until September 30, 2006 (the end of the 2006 fiscal
year of Ex-Im Bank). The Act, called
S. 1372, became Public Law 107-189. The Act amends the
Export-Import Bank Act of 1945. It establishes the objective of
Ex-Im Bank to contribute to maintaining or increasing employment of
U.S. workers.
Formed in 1934, Ex-Im Bank is an
independent export credit agency of the United States Government. It
helps finance the sale of U.S. exports primarily to emerging markets
throughout the world. Ex-Im Bank
provides
support by extending loans, guarantees, credits and insurance to
exporters. These exporters include lessors, sellers and lenders
between the United States (including its territories or possessions)
and other foreign countries. Ninety percent of Ex-Im Bank's
transactions support small business. According to the
2001 Annual Report, Ex-Im Bank states: "Ex-Im Bank approved
2,124 small business transactions that represented 90 percent of the
total number of transactions in FY 2001." It acts as the lender or
guarantor of last resort to further commercial activity outside of
the U.S. In Ex-Im Bank's 2001 fiscal year, Ex-Im Bank
reported that it supported $12.5 billion of exports worldwide.
*Tip:
Numerous other export credit agencies (ECAs) exist around the world.
These ECAs do not all follow similar philosophies, maintain similar
structures or operate under policies similar to Ex-Im Bank. For a
list of some other ECAs, see
Ex-Im Bank News, Summer 2002 Special Edition covering the
extension of authorization of Ex-Im Bank.
The Act includes, among others, the
following salient provisions relevant to small businesses:
Section 4 provides that
emphasis should be placed on the importance of technology
improvements (such as new computers) for Ex-Im Bank. This focus
should be especially beneficial to small businesses completing
export transactions with Ex-Im Bank in less time and with less
paperwork.
*Tip:
According to its
Policy Handbook, Ex-Im Bank defines a small business as one that
is generally considered to be a U.S. producer of capital equipment
or services that meets the Small Business Administration (SBA)
size standards. According to the SBA, "SBA's size standards
define whether a business entity is small and, thus, eligible for
Government programs and preferences reserved for "small business''
concerns." Size standards have been established for types of
economic activity, or industry, generally under the North American
Industry Classification System (NAICS).
Section 5 increases the
aggregate amount of Ex-Im Bank loans, guarantees, and insurance that
may be outstanding at any one time. This increased amount will aid
in financing exports and imports and the exchange of commodities and
services between the United States and other foreign countries. See:
12 U.S.C. Section 635(b)(1)(E)(v).
Section 7 increases from 10
percent to 20 percent of its aggregate amount of loan, guarantee and
insurance authority that Ex-Im Bank must make available to finance
exports directly by small business concerns. See: 12 U.S.C. Section
635(b)(1)(E)(v). According to the
2001 Annual Report, Ex-Im Bank states: "Ex-Im Bank authorized
more than $1.6 billion in support of U.S. small businesses in FY
2001 - nearly 18 percent of total authorizations." Section 7 also
directs Ex-Im Bank to place emphasis on conducting outreach by
increasing loans to socially and economically disadvantaged small
businesses, small businesses owned by women, and small businesses
employing fewer than 100 employees. See: 12 U.S.C. Section
635(b)(1)(E)(iii)(II).
Section 8 directs Ex-Im Bank
to implement certain technology improvements designed to improve
small business outreach, including allowing customers to apply for
all Ex-Im Bank financing over the Internet. See: 12 U.S.C. Section
635(b)(1)(E)(iii)(II). Ex-Im Bank is already working on a way to
apply for insurance over the Internet.
Section 17 declares that Ex-Im
Bank deny applications for credit for non-financial or
non-commercial considerations to fight terrorism. See: 12 U.S.C.
Section 635(b)(1)(B).
For more information on this topic,
please join me at the
41st Annual ELA National Convention where I will speak on this
topic. I will also offer a research paper, excerpted above. See
Item 7 below. You may also call me at (214)
758-1545 if Patton Boggs can assist you with any cross-border or
other international transaction.
[Top]
6. Leasing
101: What is an "Asset-Based Loan"?
When a borrower enters into a loan secured primarily by its
assets, the borrower receives an "asset-based loan." Typically, the
borrower grants to a lender a security interest in its assets in
exchange for a term loan (a fixed loan amount with a set pay back
period) and/or a revolving credit facility.
A revolving credit facility allows a
borrower during a loan term to obtain advances from a lender, repay
the advances and borrow again, based on the amount and eligibility
of the borrower's collateral in a "borrowing base" at the time of
each advance. Eligibility of collateral for asset-based loans
normally depends on the quality, value, aging (for current assets)
and liquidity of the collateral. The collateral for revolving loans
usually consists of current assets such as accounts receivable from
customers and inventory (eligible goods available for sale). A term
loan, by contrast, relies on fixed assets as collateral such as real
estate, equipment and machinery owned by the borrower.
The volume of asset-based loans tends
to increase when the economy slows down and/or the creditworthiness
of borrowers becomes strained. Traditional lenders that rely on
business performance of the borrower may resist lending while
asset-based lenders can take more pure credit risk of the borrower.
These lenders, often called "asset-based lenders," take that risk
expecting to collect primarily by liquidating collateral if their
loan goes bad. Middle-market companies use asset-based loans to
obtain flexible financing during downturns. They also use these
loans during times when they can't attract bank or "cash flow
lenders" (lenders who primarily count more on cash flow from
business operations for payment than collateral). Asset-based
lenders often lend to middle-market companies that may have strong
assets but they constitute "story credits." A good story may cause
cash flow lenders to flee the deals where asset-based lenders may
still tread. For more on asset-based loans, see
Demystifying Asset-Based Loans, Fleet Capital's CapitalEyes
(October 2002).
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7. Events
and Speeches; Training Offered
I will be delivering several speeches
and moderating two panels starting this month and invite you to join
me for any or all of them. Please, come say hello. My readers often
do so, and I really appreciate it!
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; 2:00 p.m. - 3:25p.m. and 3:35 p.m. - 5:00 p.m. at
the San Francisco Marriott Hotel, San Francisco.
Global Cross-Border Transactions
Leadership. Sponsor: The Equipment Leasing Association. Event:
41st Annual Convention of the ELA. Dates and Times: Tuesday,
October 15, 2002; 3:35 p.m.- 5:00 p.m. at the San Francisco Marriott
Hotel, San Francisco. I will be discussing how to use the
Export-Import Bank of the United States, the Overseas Private
Investment Corporation (OPIC) and other government resources to
enhance capital investment and leasing internationally.
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; 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 ; 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 to a
two-day course. As a cost savings, we can offer these courses, or
even lunch specials for one hour by video teleconferencing at a
fixed cost.
*Tip:
Don't neglect training in these times of change. Call me at (214)
758-1545 to discuss your needs or interests. By training now you can
profit as the economy recovers!
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8. Web
Sites and Other Good Stuff
Here are some
informative, useful web sites for business and personal use:
Experts Galore. If you need to find an expert or want to be
one, go see
http://www.experts.com for a long list of expert witnesses and
consultants who assist law firms and businesses. Some of the
searches yielded unexpected results, but experts.com seems to offer
some quality gurus on various topics.
Gateway to Government Information
- Personal and Business. Provided by
Office of Citizen Services and Communications, U.S. General
Services Administration, this site at
http://www.firstgov.gov/ offers gateways for citizens
interacting with government (such as birth, death, divorce and
marriage information); businesses interacting with government (such
as federal tax identification numbers); and information for
government employees.
[Top]
A Message From the
Publisher,
David G. Mayer
I recently learned
that Business Leasing
News made the Alexa.com, an independent Internet rating service
affiliated with Amazon.com, rankings as one of the top 10 most
visited leasing web sites in the world — very cool! Then, thanks to
the Patton Boggs LLP Webmaster, we searched both Netscape and
Internet Explorer for BLN under "business leasing law" and other
searches. These searches revealed that Business Leasing News
appeared in the top half dozen results (and in one case, Number 1!)
out of as many as 178,000 hits. I believe that we owe these results
largely to you, our friends, clients and readers. We will continue
to work hard to earn your trust and readership.
But don't stop with BLN. 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.
Patton Boggs also
negotiates fractional ownership of business aircraft, closes vendor
programs and underlying transactions, handles tax-exempt and federal
leasing deals, completes portfolio acquisitions, assists in
syndications of all sizes, and much more. We also spend a
substantial amount of time working out troubled deals. Feel free to
call me for information about any of these areas, or the many others
available at Patton Boggs LLP.
Thanks again for reading BLN and
for your feedback. In honor of the Alexa.com ratings,
here is a rating of Business Leasing News that I found on
September 12, 2002 on the Alexa.com site:
"* * * * * (Five stars-top
rating) Business Leasing News… the BLN, 9/10/02. Reviewer:
Watcher – The Business Leasing News is bright, timely,
informative, and best of all, interesting. Beautifully produced by
the legal powerhouse Patton Boggs LLP, and written by
author/attorney David Mayer, the BLN is must reading for those
engaged in professional commercial (business) leasing."
I also extend a special thank you to
my editors at Patton Boggs LLP for their comments on this edition:
Adrian Nicole McCoy, Julie Rivard, Sheila Pedersen, Steve Reagan,
and Tom Stumpf. I cheer on the technical team led by Webmaster,
George Barber, and assisted by Winston Jackson. Last but not least,
Patton Boggs has selected a team of partners who look over BLN to
make it the best it can be for you when BLN appears on our web site.
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