Forecasters predict that business investment will expand in 2005, but at slower pace than 2004. Because the economy now has positive momentum, it should provide substantial opportunities for lessors and lenders to finance and lease capital assets, including business aircraft, rail equipment, healthcare assets, technology assets and heavy trucks.

Business investment is an important and volatile component of overall spending in the U.S. economy. It represents about 10 percent of the U.S. gross domestic product (GDP). Economists indicate that the volatility associated with business investment will be even more evident in reports on 2004 and 2005. The extra volatility may occur in part as a result of the expected shift of business investments from 2005 into 2004 by companies that rushed to use bonus depreciation before its expiration date last year. See: Ringing In the New Year with an Investment Bust, Federal Reserve Bank of St. Louis (Dec. 2004).

*Tip: Bonus depreciation expired on December 31, 2004 for most assets other than certain aircraft. The rules require a close reading to determine the eligibility of an asset for bonus depreciation in 2005.

According to Global Insight, Inc., an economic information company, the economy should expand more slowly this year. It suggests:

For more world economic analysis, see: The World Economy: Headed for a Slowdown or a Slump? by Nariman Behravesh, Global Insight (Nov. 22, 2004).

Global Insight asserts that capital spending has become one of the engines of the U.S. recovery fueled by record growth in corporate profits and cash flow. It expects the Federal Reserve to raise interest rates five times to reach a federal funds rate of 3.5 percent by the end of 2005. It also believes taxes will increase as the pressure by financial markets (especially the currency and bond markets) mounts to halt rising budget deficits, potentially foiling any plan to make existing tax cuts permanent. See: Top-Ten Economic Predictions for 2005, by Nariman Behravesh, Global Insight (Dec. 9, 2004).

*Tip: Higher interest rates and taxes generally encourage true tax leasing. In tax leases, lessors can transfer to lessees the benefit of depreciation deductions and thereby lower the lessee’s rent and after-tax cost of capital.

Reporting in October 2004 on its recent survey results, the National Association for Business Economics confirmed that capital spending remains strong but is softening slightly. Focusing on the year from about October 2004 to October 2005, a majority of its respondents said that they would increase the capital spending at their firms. Similarly, manufacturing and durable goods production should remain firm and show moderate growth in 2005. See: Manufacturing Growth Stays Firm, by Michael Schroeder, The Wall Street Journal (S.W. Ed.), Page A:2 (Dec. 24, 2004). On a brighter note, the Institute for Supply Management (ISM) reported recently that economic activity in the manufacturing sector grew in December 2004 for the 19th consecutive month, while the overall economy grew for the 38th consecutive month. Orders of commercial equipment and computers also grew in December. See: December Manufacturing ISM Report On Business®, Institute for Supply Management (Jan. 3, 2005). ISM expects the positive momentum to carry into 2005.

In a survey of chief financial officers (CFOs), Bank of America Business Capital found that CFOs believe the economy will expand in 2005, but less than half of them expect manufacturing will grow this year. See: 2005 CFO Outlook: Bullish On Economy, Less Optimistic About Manufacturing Sector, CapitalEyes, Bank of America Business Capital (Dec. 2004).

Though the big picture for the economy seems generally favorable for 2005, a closer look at specific asset types reveals a mixed bag of potential deal flow for acquisitions, leasing and financing. According to the Bank of America CFO Outlook: "[T]he top three types of financing CFOs plan to use are bank financing (72 percent), internal sources (65 percent) and leasing (37 percent).  The money raised will go into machinery and equipment (cited by 36 percent), expansion (the choice of 28 percent) and working capital (picked by 24 percent)."

*Comment: It’s interesting to note that CFOs plan to rely on leasing for 37 percent of their financing needs. Yet public statements about leasing often indicate that 80 percent of businesses  lease equipment. This wide gulf between the 37 percent and 80 percent usage of leasing may create a question of whether the penetration rate and/or desirability of leasing in the market has dropped significantly for the responding CFOs.

*Prediction: In 2005, business aviation leasing, financing and acquisitions will remain highly competitive, expand slowly and offer a low number of transactions for new whole aircraft and under 10-year old, used aircraft relative to the lessors and lenders able and ready to finance deals. Fractional shares and 25-hour aircraft jet cards have real lift, and should have a strong 2005. Look for 2006 and beyond to see business aviation deals take flight.

*Prediction: Even with the gains and stabilization in IT, obtaining financing opportunities in the maturing, cyclical sector will continue to take persistence, knowledgeable sourcing and specialized knowledge to win and close deals in 2005.

*Prediction: Lessors and lenders are likely to remain wary, at best, of providing funding to commercial airlines, and the volume of deals will likely be low in 2005 relative to funding capability in the market, as few, if any, good credit deals will be deemed to exist by lessors or lenders. Discounters will continue to gain on the majors in operations and completed financings. See: Major U.S. Airlines Struggle as Discounters Carve Up Their Markets, Business Leasing News (Aug. 2004).  

*Prediction: This area continues to offer strong growth potential for lessors and lenders who target the highest growth parts of healthcare, understand the business and provide first-rate service to specialized healthcare organizations. Healthcare providers will likely focus on new and replacement technology assets. See: Hospitals Focus on Technology as Capital Spending Ramps Up by David G. Mayer, Business Leasing News (June 2004).

*Prediction: Volume and revenue from railroad operations should continue to be strong in 2005. However, the cautious approach of railroads to the possibility of slower growth of the U.S. economy could throttle potential growth of traditional leasing and financing of rail equipment.

*Prediction: The good results should keep rolling in 2005 and 2006 as carriers continue to replace older units, prepare for greater environmental regulation of diesel engines and expand trucking capacity.

Congress designated the FAA Aircraft Registry as the U.S. entry point to the International Registry relating to U.S. civil aircraft for which a U.S. identification has been assigned (but only for notices of prospective sales, assignments, and interests) and aircraft engines. Under the Treaty, priority is established by the first in time to file an interest in aircraft and engines.

Parties with recordable interests in U.S. registered aircraft and equipment will continue to file documents with the FAA Aircraft Registry, but they will be required only to file electronic notices of such interests with the International Registry.

To conform to the Treaty, the FAA has made other revisions to Parts 47 and 49. The rule excepts an irrevocable deregistration and export request authorization prepared under the terms of the Treaty from the requirement that a corporation file a copy of the Board authorization in connection with filing a request for registration or cancellation. For aircraft last previously registered in a foreign country in which the Treaty is in effect, the rule requires the owner to submit evidence satisfactory to the FAA that all interests ranking in priority have been discharged or that they have consented to deregistration and export. The same evidentiary showing is required for an application to cancel a U.S. aircraft registration certificate for purposes of export of an aircraft subject to the Treaty. The regulations also lower the aircraft engine horsepower threshold from 750 to 550 for eligibility for recording of conveyances affecting title to specifically identified aircraft engines.

Different types of liens arise in complex financing transactions and leases. Borrowers or lessees (Borrowers) often request that their lenders or lessors (Lenders) permit another Lender or seller to have liens on the Borrower’s assets, which are also subject to the first Lender’s transaction. Intercreditor or subordination agreements (Intercreditor Agreements) establish the rights and priorities of secured parties to same or different collateral. Because these agreements affect the degree of risk a Lender accepts and the pricing of its credit accommodation, Intercreditor Agreements tend to involve extensive negotiation by the Lenders.

*Terms to Know: Intercreditor and subordination agreements operate in a similar fashion. Each agreement sets forth the respective rights and remedies of the Lenders with respect to specified collateral. However, to be a bit more precise, a "subordination agreement" may refer to an arrangement that sets the priority of rights to payment of debts and other obligations to Lenders. If a creditor agrees to be paid second, the creditor is "subordinated" to the creditor who is entitled to be paid first. By comparison to subordination agreements, "intercreditor agreements" principally control rights to liens in collateral. To distinguish the parties in these arrangements and their particular rights, the Lenders with the first priority may be called the "senior creditors" or "senior lienholders" while the other Lenders with secondary or lesser priority rights may be called "junior creditors" or "junior lienholders."

Intercreditor Agreements may be used in a wide variety of transactions by and among different types of creditors. A lessor may enter into a subordination or intercreditor agreement, just as various secured lenders may do so. See examples of an intercreditor term sheet (affecting senior creditors in power project) and an intercreditor agreement (affecting mezzanine and senior debt lenders in a securitization transaction).

*Tip: Secured creditors with competing "senior" claims (claims with first priority over other claims) often prefer to sign an "intercreditor agreement" (rather than sign a "subordination agreement") because such naming more effectively describes their positions.

*Term to Know: A "standstill" provision is an agreement by one creditor not to take certain actions (such as collecting the debt or foreclosing on collateral) for a certain period of time, or until the other creditor’s debt is paid off.

*Tip: If a Borrower leases property or otherwise does not own the property outright, the Lender should obtain a landlord waiver or similar rights from the landlord, real estate lender (if the property is encumbered) and other third parties if to assure access and other rights.

*Tip: The junior lienholder usually will not object to such a provision. The junior lienholder is in no worse position than it would have been had the senior lienholder directly received the proceeds.

Thanks to Scott C. Wallace, a partner in the Business Transactions Group in the Dallas office of Patton Boggs LLP. This article is a revision of an article written by Scott and published in "Tailored to Fit: Defining Rights & Priorities with Intercreditor Agreements," ABF Journal (Oct. 2004), pages 78-80.  

Although the financial services section ratings should remain stable in 2005, lessors and lenders can still work to achieve more positive ratings. Perhaps with strong earnings in the financial services sector, the ratings and earnings will rise together.

This ruling is important for two reasons. First, it frees banks to rely on account numbers only and continue the rapid and automated flow of wire transfers each day without having to match up beneficiaries named in the wire instructions with the name appearing on the numbered account. In the TME case, the beneficiary who actually received the wire transfer was not the person to whom the wiring party wanted to send his money. The beneficiary was a wrong recipient in an alleged investment transaction, but the sender used the right wire transfer number on which the bank relied. Second, the ruling underscores the importance in transactions to confirm, through due diligence, that when you wire transfer, you confirm that the wire account matches the name of the beneficiary to whom you intend to wire your funds.

I am a member of the Patton Boggs LLP Business Transactions Group in our Dallas office. Patton Boggs LLP is a law firm of more than 400 lawyers located in five offices in the United States and internationally in Doha, Qatar. The firm has extensive capabilities in over 50 distinct areas of legal practice that include leasing, secured transactions, personal property financing, corporate finance, syndications, power project regulatory, development and finance disciplines, mezzanine financing, bankruptcy, real estate, public policy, litigation, intellectual property and technology law, and much more.

The leasing and secured transaction practices regularly involve the buying, selling, financing and leasing of real and personal property of all kinds, including business aircraft, energy, facility, production, power plant, technology and health care assets. We also structure, negotiate and close secured transactions of all kinds, securitizations, tax-exempt and federal leasing arrangements, and corporate and portfolio acquisitions, among a full range of financing and acquisition transactions. Despite the improving economy, we continue to assist our clients with troubled deals and bankruptcies, including repossessions, lift stay actions, true lease contests, deficiency litigation, workouts and forbearance arrangements.

If I, or any other lawyer at Patton Boggs LLP can help you with your legal or business challenges, feel free to call me at (214) 758-1545 or e-mail me at dmayer@pattonboggs.com for information about any of these areas or the many others available at Patton Boggs LLP, or to discuss anything I have written in Business Leasing News. We welcome the opportunity to build a relationship with you!

Here are two feature articles published this month:

This issue marks the beginning of the fourth year of publishing Business Leasing News. Thanks for reading BLN. The list of subscribers grows every month.

The format of this issue has been changed from 2004. As 2005 progresses, you will see more changes in the appearance and content of BLN. You may also receive a questionnaire or other communications from me asking about your preferences, though many of you have expressed your approval of BLN as it is. Please take a few minutes to give me your thoughts. In 2005, we will strive for even more relevant, timely and market-sensitive legal and business topics with supporting research on a broader array of topics than leasing alone.

Starting in this issue, BLN will adopt a more flexible format. We may add or delete articles as the editing and topics dictate. I will provide training as the opportunity arises, but not refer to training in BLN.

The following changes will also occur starting with this issue:

• Enterprise Publication; More Contributors. I have been privileged to be a partner at Patton Boggs LLP for many years. It is a unique law firm full of high-quality people of tremendous capability. As this year progresses, you will see a theme unfold that began in 2004. That is, while BLN will bear my personal touch, we will make every effort to provide you with the content representing the best of the Patton Boggs LLP enterprise. Consistent with this enterprise theme, you will continue to see partners and some associates at Patton Boggs LLP contributing to BLN.

• Broader Topics. Although BLN uses the word "leasing" in its name, BLN has covered and will continue to cover a broader range of topics in leasing, lending, project finance and corporate finance, and many related topics such as tax matters, litigation, intellectual property, environmental law and creditors rights. While leasing is a specialized form of financing, it reaches an extensive range of topics such as real estate lending and development, facility financing, technology and intellectual property issues and health care finance.

• Dropped Departments. Though "BLN Briefs" has been popular, we will drop that section in favor of producing at least one brief article in each issue on an important topic. "BLN Case & Comment" will appear periodically, but not monthly, to focus on the most important or interesting case law developments within the scope of BLN.

Remember: Your comments provide valuable insights into the most important topics of the day. Please feel free to communicate with me anytime, including ideas for articles or changes in BLN. We read all communications closely and appreciate receiving your ideas.

I extend a special thank you to my editors at Patton Boggs LLP for their comments on this edition, Atwood Jeter, a real estate and wind power associate, Margaret Anderson and the rest of our great BLN staff, as well as our primary web site review partner, Jeff Turner. The technical team, consisting in part of George Barber and Winston Jackson, provides you the easy-to-use e-mail navigation and artistic appearance of BLN. Claire Campbell, our Chief Librarian in Dallas, provides research for BLN.