Taking Another Look at Syndication Risks in the Changed Economy

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					    Taking Another Look at
    Syndication Risks in the
      Changed Economy
                                                  By Alan J. Mogol




T
             here is an old Chinese proverb (blessing or             In this article, the author will outline certain com-
             curse?): “May you live in interesting times.”      mon approaches to syndication, identify standard cus-
             Well, the equipment finance industry is cer-       toms and practices, and consider whether the parties
             tainly living in an interesting time.              should reanalyze the risks and rewards associated with
     It is no longer business as usual on                                          those customs and practices. Funders
the front end of transactions. Although          Funders need to take a            need to decide whether they are com-
some banks and equipment finance                                                   fortable going along with past customs
companies say they have liquidity and           fresh look at—and apply            and practices or whether they should
are willing to do business, the reality                                            ask for additional protections from the
is that only the most creditworthy cus-         a critical eye to—certain          originators. For their part, originators
tomers, willing to pay heavy spreads,                                              need to be aware of these potential is-
are in the running for new financing.              issues to be sure they          sues in order to formulate responses
Many regional banks are restricting                                                when they are asked to change their
new business opportunities to com-
                                                  remain protected, and            standard documents.
panies in their footprint or companies                                                  As used in this article, the term
                                                   originators should be
willing to establish a banking relation-                                           “funder” means assignees, purchasers,
ship.                                                                              and financiers of lease and loan trans-
                                                 prepared to respond to
     It should also no longer be busi-                                             actions; the term “originator” means
ness as usual with respect to syndica-            changed requirements             syndicators, assignors, and lessors that
tion of equipment finance transactions.                                            originate the lease or loan transactions;
Due to the lack of liquidity available in              from funders.               and the term “obligor” means lessees,
the marketplace and the weakened fi-                                               borrowers, and guarantors. This ar-
nancial condition of some originators, syndications have        ticle uses the terms “lease” and “loan” without regard to
also been affected by the current economic situation. As        whether the transactions are true leases, financing leases,
a result, previously accepted customs and practices—            or equipment finance agreements.
and allocations of risk—should be reexamined in the
current economic marketplace. This is not to say that           COMMON STRUCTURES
funders will not ultimately remain comfortable dealing          In syndicating equipment finance transactions there are
with certain originators as they have in the past, but at       three common structures: (1) the assignment of the lease
the very least funders need to take a fresh look at—and         and leased equipment (an “outright assignment”); (2) the
apply a critical eye to—certain issues to be sure they re-      assignment of the rental stream and certain rights under
main protected, and originators should be prepared to           the lease (a “discounting transaction”); and (3) the sale
respond to changed requirements from funders.                   of a participation interest in the payments and proceeds
 TAKING ANOTHER LOOK AT SYNDICATION RISKS                         JOURNAL OF EQUIPMENT LEASE FINANCING • FALL 2009 • VOL. 27/NO. 3


payable under the transaction documents and from the               the originator’s rights under the lease, the rental stream,
equipment and any related collateral.                              and the equipment.
                                                                        Because the originator/borrower remains the owner
Outright Assignment                                                of the leased equipment and the lessor under the lease,
With respect to the first typical structure, the outright          the originator/borrower incurs contractual obligations to
assignment of the lease, most parties wait unt
				
DOCUMENT INFO
Description: Due to the lack of liquidity available in the marketplace and the weakened financial condition of some originators, syndications have also been affected by the current economic situation. In syndicating equipment finance transactions there are three common structures: 1. the assignment of the lease and leased equipment, 2. the assignment of the rental stream and certain rights under the lease, and 3. the sale of a participation interest in the payments and proceeds payable under the transaction documents and from the equipment and any related collateral. Standard customs and practices have evolved in the syndication marketplace that address the management of the risks associated with the underlying transaction and allocate those risks to either the originator or the funder. The customs and practices are representations and warranties, compliance with the requirements of the Uniform Commercial Code, and the use of agency relationships.
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