Leasing News

Friday, November 23 ,2001

Headlines

Dwight Galloway’s Early Christmas Present Congratulation

Commercial Money Center Controversy Feedback

Bob, Bring Back the Printed UAEL Membership Directory!!!

Appeal for FDNY Fire Truck

Why Credit Has Tightened—Corp.Chap.11 Record Filings

Windows XP Sales Fall

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Special Report:

Nuggets from “Why Successful Leasing Companies Exited the Marketplace”.

The List to be Up-Dated Next Week

Dwight Galloway’s Early Christmas Present Congratulation!!!!

What Mr. Galloway purports that the new RLC can do will be more than well

received by the broker community. We are living in a small ticket world of

exorbitant buy rates from lenders looking for "A" credits,

overscrutinization of deals that we have already over-scrutinized, and a

reticence to look "outside the box", even when elements of a deal dictate

that it makes good business sense. At times while quoting rates to my

existing customers, I fell like I am akin to the service station operator

that hiked his pricing to $ 6.00 per gallon on September 11.

If someone else had staked this claim, I would have doubted its veracity.

Coming from a fellow graduate of the U S Army's , 82nd Airborne Division,

I'll take him at his word and hope that his new owners will give he and his

people the latitude to perform as such.

"All The Way" Dwight

Bob Borden

Universal Leasing Services

Kansas City, Missouri

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Commercial Money Center Controversy Feedback

I couldn't agree with you more with your response to "name withheld" as to CMC. CMC serves a purpose in the leasing community by funding sub-sub prime "last chance" credits at usurious rates. Their drawback is, of course, the excruciating length of time it takes to fund. CMC makes no secret about this, nor should the broker to his/her vendor. In fact, it is probably best to be hyperbolic when explaining the lengthy funding time to vendors expecting to be paid as they do with better credits. It may even be in order to share with your vendor your biggest concern, the funding source's future, before offering the deal. Once the vendor fully understands and gives you the go-ahead, he and the broker both forfeit their right to complain.

As to why should a broker continue to submit deals to CMC without knowing their financial condition, well I guess that is a risk everyone takes who is dependent on a third party for funding their deals, regardless of the credit quality the funding source buys. Certainly problems in funding deals is a hallmark of financial difficulty, but one cannot use the synergism to suggest all funding sources who are slow funding deals are having financial difficulty.

For me, the bigger question is does the profit one earn on such deals worth the investment of time, resources and emotion? Is the weight on the conscience of presenting these rates to such unfortunate souls, the potential stress of dealing with a vendor short on patience, and the uncertainty of whether the deal will fund at all, even if that uncertainty was invented by yourself, worth the points you will earn on a deal that isn't going to make your month anyway?

Jim Fleming

National Business Credit

800-811-8371

nationalbusinesscredit@yahoo.com

___

I have to agree and disagree with CMC's response on returning the advance money to the lessee after it was cancelled. Legally, they are correct, but some refund should have occurred to satisfy the lessee and the vendor. CMC has refunded money in the past.

As name withheld stated in his comments, we found that although the vendor and lessee was informed of the funding practices at CMC, vendors can not wait 3-6 months to get paid. The equipment they sell do not carry terms "when CMC gets enough bundles to fund".

Don't kid yourself. The vendor could care less about CMC's funding practices. They want their money in a reasonable period of time. 90 days is fine, 6 months is not. We decided a long time ago that it is less of a headache to just tell the vendor "We tried our best to get the deal approved, but the credit does not fit.

Yes, we made money with CMC in the past. How many vendors came back to you after a CMC experience? Most lost money long run because they lack repeat business.

Look at the past history of the "C & D" credits in the auto industry. They have gone under. CMC is the equipment lessor for these credits. How long will they survive?

Name withheld

( A long time because CMC can secure their transactions with an insurance program,

a major reasons for their rates---not just a “better” margin. They are active in

many associations, and you heard from Mark Fisher, the broker who brought

the complaint to the National Association of Equipment Leasing Brokers is

still doing business with them. Too bad, we can’t hear from Joseph Bonanno

on his opinion on this. Leasing News appreciates his position as legal

counsel, but perhaps the NAELB board of directors would authorize

him to make a comment on the controversy.

You know, there are many local companies who take real estate for start-ups, community banks who will match certificate of deposits or savings accounts, private investors who want

a 18% return. The national companies lost their warehouse lines and had

cash flow problems because of this---read the Nuggets article in today’s

Leasing News.

Jim Kalinski, a leasing veteran, used to say, “ If I can get the time to hold the deal together, I can put any deal together.” I think that is basically true, even in today’s market place, although it is harder to do today, but the veterans who have been to the conferences, network, read the books, stay on top, know what they are doing----can do it. editor )

Bob, You Want to be Popular President?------Bring Back the Printed Version of

the United Association of Equipment Leasing Membership Directory!!!!

The current one is now current to May or June of 1999. My address, for

instance, is wrong

I have been told several times over the last four or five months that the new

directory is "at the printers" / "we hope to have it in the mail before we go

to San Antonio" / "almost ready to mail". I agree the on-line version is a

pain in the ass to use, especially when you have a "different" deal on your

desk and are looking for that "special" funding source.

Maybe, with your clout, you could get a definitive answer from UAEL

Thanks!

Charlie Meaker

Lease Financing, Inc.

800-478-2330 - 520-398-2650 - Fax 520-398-2652

Since 1987 - Financing for Business Equipment and Modular Buildings

( The members have the clout. If they want the directory, they should speak up

like you are.

I don’t think we can blame this on the present administration. There is a lot

behind the scenes why a directory has not been printed, but suffice to say, I wish

Leasing News had the “clout” as we find the printed version much, much easier and

convenient to use than the internet. I “love” the internet, but I still make

lists on a yellow note pad, paste “post it notes” on my screen ( even thought I have

a Post It program running on the computer ), and you know how this

computer does not find the typo’s or missed spelled words---so the

paper dictionary is still my best companion....as the printed membership

list is, too, as I still use the old directory for telephone numbers, addresses,

and to learn about a company.

Hey, Bob Fisher, if you want to be a popular president of the United Association

of Equipment Leasing in 2002,bring back the membership directory!!!! editor )

_________________________________________________________________________

Appeal for FDNY Fire Truck

Kit,
Thank you for a great news letter, I look forward to reading it everyday. I've been in leasing 22 years, the first 11, in commercial and the last 11 in municipal.

It's good to see the names of some old friends I worked with in the past. I've contacted Gerry Oestreich, whom I hadn't seen or heard from in 15 years as a result of the leasing news and it was good to get Phil's updates from New York after 9/11.

We've established The Public Sector Lenders and Professionals Fund to pay for a fire truck for the Fire Department of the City of New York. I'm sure many of your readers have municipal leases in their portfolios.

Here is an opportunity for us to do something as a group. I hope you will share this with your readers.

Thanks,
Dennis Balodis

The Public Sector Lenders and Professionals FDNY Fire Truck Fund

Do you want to do something good for the holiday season? The Fire Department of the City of New York (FDNY) lost $28 million in equipment on 9/11/01, 19 pumpers, 14 ladder trucks, 5 tractor-drawn aerials, a mask service with 300 SCBAs, as well as more than a dozen other major apparatus and dozens of smaller vehicles. As a group, our companies as well as ourselves, make the public sector business our business.

We spoke with the general manger of the current supplier of FDNY apparatus who gave us the general cost of apparatus for FDNY, it is as follows: pumper $360,000, ladder $530,000, tower ladder $770- 850,000.

The people of the City of Akron, Ohio, are giving a 100' ladder truck to New York fire fighters. Folks from eastern Tennessee are giving a 95' ladder truck. The children from Columbia SC and the people from Louisiana are each giving a 1,000 GPM pumper. Why shouldn't we, as a group who make our living in the public sector, help those in need by contributing to something tangible.

We ask you to participate in donating a fire truck to the City of New York. One hundred percent of the donations will go to the FDNY for the acquisition of a fire truck. A check for the amount collected, along with a list of the donors and the amount they contributed will be delivered to Fire Department of the City of New York on February 1, 2002.

The trust department of Peapack-Gladstone Bank, Gladstone, New Jersey has agreed to establish the account and receive the donations free of charge.

Please make you checks payable to:

Public Sector Lenders and Professionals FDNY Fire Truck Fund

Send to: Peapack-Gladstone Bank, Trust Department 190

Main Street PO Box 178 Gladstone, New Jersey 07934

Attn: Cathy McCatharn, Asst. Trust Officer

In our own little way we can all make a difference. If you have questions or comments, give me a call.

Thanks

Dennis


Dennis R. Balodis, President
The Apris Group, Ltd.
Municipal Lessors/Financial Advisors
1719 Route 10 East, Suite 207
Parsippany, NJ 07054
Phone: (888) 480-5377 x 101
Fax:     (973) 656-0325
Email: dbalodis@aprisgroup.com
Website: http://www.aprisgroup.com

Why Credit Has Tightened------

Public Corporate Ch. 11 filings hit record $189 Billion Assets

By Bloomberg News WASHINGTON –

A record 224 publicly traded companies with more than $180 billion in assets filed for bankruptcy this year, 27 percent more than last year's record 176, says BankruptcyData.com, a Boston-based Web site that tracks such filings.

The collapse of unprofitable Internet businesses, a faltering economy after an unprecedented decade of expansion, overconfidence and over-expansion contributed to the carnage. Since hitting a peak of 5,048 on March 10 last year, the Nasdaq Composite index has plunged 63 percent.

The bankruptcy victims include such brands as AMF Bowling balls, Polaroid cameras, Converse sneakers, Schwinn bicycles, Vlasic pickles, Coleman camping supplies and Sunbeam appliances. Companies that depend on travel and tourism, including the parent of Alamo Rent-A-Car and National Car Rental, have been particularly hard hit.

Last week, Greensboro, N.C.-based Burlington Industries Inc., once the world's largest textile maker, became the 38th company with more than $1 billion in assets to seek Chapter 11 protection this year. That's almost double the previous record of 21 set last year.

The booming 1990s inflated share prices, letting companies accumulate debt with junk bonds and big bank loans. Sliding share prices and increased debt means a ''double whammy'' now, said Henry Miller, vice chairman and head of restructuring at Dresdner Kleinwort Wasserstein, an investment banking firm. ''We're paying the piper for an over-optimistic view of future performance.''

A multibillion dollar Chapter 11 filing affects thousands of people, including employees, customers, suppliers, investors and other creditors. The effects can spill over into healthy businesses, says Bill Brandt, president of Chicago-based turnaround firm Development Specialists Inc.

Still, bankruptcies give companies the chance to change strategies and fix mistakes. The court-supervised recovery process can take years to complete, and sometimes leads to liquidation.

Trans World Airlines Inc. spent the better part of a decade in bankruptcy before AMR Corp.'s American Airlines bought it out of its third Chapter 11 in January for $4.2 billion.

Businesses that rely on travel and tourism have suffered particularly since the Sept. 11 attacks.

Two cruise lines, the VecTour Inc. bus line, Las Vegas's Aladdin casino, Planet Hollywood International Inc. and several other restaurant chains have filed for bankruptcy.

US corporations are more likely to file for bankruptcy today because the stigma has faded, said Chuck Tatelbaum, a Naples, Fla., attorney. The advantages include escaping from unprofitable leases and onerous union contracts, he said.

''Filing for bankruptcy is now looked upon as a business strategy rather than an admission of failure,'' said Tatelbaum, former vice president for research at the American Bankruptcy Institute.

Bankruptcies were on the rise well before Sept. 11. Flocks of telecommunications and Internet start-ups, movie theater chains, retailers, chemical companies, and textile and apparel manufacturers opted for Chapter 11 earlier this year.

Bethlehem Steel Corp. last month joined LTV Corp. and more than a dozen other steelmakers in bankruptcy court due to competition from low-priced imported steel. LTV this week asked a judge for permission to close its factories and put them up for auction.

The largest movie theater chains, including Regal Cinemas Inc. and Loews Cineplex Entertainment Corp., were mired in red ink after new ''multiplex'' theaters led to an oversupply of screens.

In April, California's largest utility, Pacific Gas & Electric Co., became the third- largest Chapter 11 case ever behind Texaco Inc. in 1987 and Financial Corp. of America in 1988. The utility lost more than $9 billion paying more for power than it could bill customers under the state's deregulation plan.

Lax lending standards and an overheated junk-bond market in the late 1990s allowed companies to borrow with ease.

''These days banks are terrified,'' Miller said. ''As the value of collateral deteriorates, it becomes harder to get rescue loans.''

US banks have scaled back. Syndicated loans, where a group of lenders back a borrower to spread risk, dropped 18 percent to $854 billion this year from 2000, according to Bloomberg data.

Internet and telecommunications companies such as Net2000 comprise the largest group seeking bankruptcy help. Net2000, founded in 1993, went public on March 7, 2000, and traded as high as $40. It last traded at 20 cents.

''The market simply overestimated how much the world needed telecom services,'' said Terry Savage, co-head of restructuring at Lazard Freres & Co.

Among the dozens that sought Chapter 11 are AtHome Corp., 360networks Inc., Covad Communications Group Inc. and PSINet Inc.

Upstart phone companies may never repay almost 80 percent of their combined $900 billion in debt, a failure exceeding the savings and loan industry collapse of a decade ago, former Global Crossing Ltd. chief executive Leo Hindery Jr. recently said.

The claims by creditors of many bankrupt high-tech companies have become almost worthless. Viatel Inc., for instance, couldn't find a buyer at any price for a fiber-optic network it spent more than $2 billion to build.

''I've never seen businesses of this magnitude being rendered non-viable,'' said Jeff Werbalowsky, co-head of restructuring at Houlihan Lokey Howard & Zukin. ''There's been more money wiped out than I've ever seen in 20 years of restructuring work.''

The increase in bankruptcies is likely to continue, said David Hamilton, director of default research at Moody's Investors Service, citing an accelerating junk-bond default rate.

The default rate on the high-yield bonds reached 9.6 percent last month, the highest since 13 percent in July 1991, he said. He predicted it may peak near 11 percent in the first quarter next year.

The gloomy forecast is echoed by investment bankers who help steer companies through Chapter 11.

''I don't see this as a short term phenomenon,'' said Dresdner Kleinwort's Miller.

----------------------------------------------------------------------------------

Windows XP sales fall,

Bloomberg News,

EDMOND, Wash. - Microsoft Corp.'s US retail sales of its new Windows XP operating system plunged in their second and third weeks on the market, in part because of the slowing economy, an analyst said.

Retailers sold 260,000 copies of XP from Oct. 25 to Oct. 27, the product's first three days on the market. Sales dropped 40 percent to 155,000 during the following seven days, then fell another 51 percent in the week ending Nov. 10, said Steve Koenig, a senior analyst who tracks software sales at NPD Intelect.

While it's common for sales to fall after the initial introduction of a product such as XP, the decline was quicker and steeper than usual, Koenig said. Sales were hurt by the economic slowdown and by the company's decision to allow sales of personal computers pre-loaded with Windows XP a month before individual copies of the software were available in stores.

''Sales are falling off pretty rapidly,'' Koenig said, based on his survey of retail sales of packaged versions of Windows XP.

Microsoft, the largest software maker, wasn't available to comment. The company is developing new products such as Windows XP to boost sales as customers pare spending on software because of the slowing economy. In the fiscal first-quarter ended Sept. 30, Microsoft's sales fell below initial analyst forecasts.

Windows XP is a significant overhaul of the personal-computer operating system that runs 90 percent of PCs and was expected to fuel demand for PCs this quarter. Now analysts say it isn't doing much to boost PC demand and retail sales are slower than they were for Windows 98.

Microsoft said last week that, including retail sales, sales of copies installed in PCs, and sales to business customers, it sold 7 million copies of XP in the first two weeks it was available, more than previous versions. The company acknowledged, though, that an exact comparison is impossible because it has different sales programs and counts sales differently than it did in the past.

According to NPD Intelect, Windows 98 sold 300,000 copies in its first week. Sales declined 18 percent to 245,000 copies in the second week and fell another 54 percent to 112,000 copies in the third week it was on sale.

___________________________________________________________________________

Nuggets from “Why Successful Leasing Companies Exited the Marketplace”.

“The Perfect” storm was a book made into a movie starring George Clooney where the skipper takes his fishing boat out into a storm that unprecedented. They go beyond the grasp of the boat, led by one person who is “determined,”

with a crew or board of directors who have little control nor knowledge and their catch ( credit ) begin to sour and basically they are caught in the “Perfect Storm” and perish.

The analogy is perfect for what has recently happened in

the leasing industry, and this study by the Equipment Leasing

and Finance Foundation of several of the major companies

gives information that may help us not repeat history.

John Deane, Managing Principal, Alta Group, says it best, “ It is important to recognize the study for what it is---a post mortem analysis to be used as a learning tool for the industry. In completing the study and analysis, Alta had the benefit of hindsight. The managements of the Perfect Storm’s victims were not so fortunate.”

There were seven major casual themes for why these companies exited the industry:

--external factors

---flawed business models

---weak controls

---inadequate infrastructure

---rapid growth

---management issues, and

---divergence from core competencies

Choice Nuggets from this report in chronological order (follows the report):

“ One of these changes will be a renewed focus of value, for it is a focus on value that will determine the winners and victims of the next Perfect Storm.”

“Management’s belief that aggressive growth rates could be sustained indefinitely led to many of the decisions creating The Perfect Storm.”\

“:...significant credit losses were the trigger for FINOVA’s demise.”

“Key factors noted included negative working capital ( inadequate cash from operations,) significant declines in retained earnings ( mounting or continuing losses), an inability to raise additional

equity ( liquidity crisis/flight to quality), and debt maximization ( high leverage.).”

“ Management held stock ownership positions in many of the target companies. Management ownership in Comdisco, for instance, was both significant and widespread. Comdisco embarked on a strategy to transform itself into a sector that commanded higher price/earning multiples. Since higher multiples create direct pecuniary consequences for management, it is possible that management self-interest played a role in the direction this company was taken.”

“Some companies chose growth as the vehicle for increasing shareholder value. LSI sought growth both in the number of its vendor relationships and in the international market, while FINOVA and LINC chose to grow internally and through acquisitions. SierraCities.com and UniCapital, on the other hand, relied on acquisitions for their growth.

“T&W focused on rapid organic growth and, by using funds, raised through its IPO, portfolio acquisitions. As one T&W interviewee put it, “ imagine suddenly finding yourself with millions and millions of dollars to plow back in the business and couple that with the ‘grow or die” mantra of the rapid industry consolidation that was taking place in the late 1990s. They went on a buying spree...”

“ LINC, BankVest, SierraCities.com, T&W, and UniCapital all relied on gain-on-sale accounting to drive their earnings. Although acceptable under GAAP, total reliance on gain-on-sale accounting represents a flawed business model. This model is unsustainable, as it forces a company into a cycle of ever-increasing volume expectations. Due to the flight to quality in the capital markets, particularly after the Asian financial and Russian debt crises of 1998, these companies were forced to rely on bank lines.

“Because of the reliance on this flawed business model, they faced dramatic increases in borrowing costs and the slashing of margins and returns. The fallout from this tactic hastened the departure of these companies from the industry.”

“Relaxing and/or ignoring credit controls. Nothing can be said to justify this tactic

as being reasonable, yet it was utilized by several of the companies. BankVest

employed relaxed credit parameters as a market tactic. This approach was a conscious decision, as opposed to a breakdown in control and governance. in several other instances, credit quality deteriorated as a result of lack of control due to high growth, but this not a tactic.”

“Rapid growth, for instance, was a contributing factor for exiting the industry

in 70% of the companies studied.”

“The results of Alta’s interviews and analyses indicated a potential failure

on the part of several Boards of Directors to exercise their fiduciary duty of control and governance. Interviewees also raised questions as to how the problems that were developing in some of the companies could be missed by the external auditors.”

“Management simply did not have the skills and leadership ability to contend with rapid changes. As one executive remarked, “ For the most part, I think these

were good people trying to do the right thing. It is jus that their reach

exceeded their grasp.”

“Seven of the ten lessors in the study experienced rapid to very rapid growth

during the several years preceding their exit from the industry. Growth, for

purposes of this study, means the volume of new business generation. Rapid

growth refers to growth in excess of 25% per annum.

“ In some cases, growth was a central point in the lessor’s strategy. In others, growth was a byproduct of the lessor’s move into new markets or industries.

In yet others, growth was a management tactic to address declining margins. Whatever the reason for the rapid growth, its existence often contributed materially to the company’s exit form the industry by exacerbating other issues.”

Page 28 beings with “Lessons Learned”.

“At lease 50% of the companies involved in the Perfect Storm became victims because substantive portions of their business cycle were inadequately managed.”

“ The strength and adequacy of senior management was a factor in 60% of the cases studied. These factors ranged from management experience that was not relational to the environment of the lessor, to situations where too much reliance was placed on too few executive managers, to situations where executive managers did not have, or did not require, sufficient support from second line managers.”

“Leverage works to the company’s advantage when things go well, but it magnifies and accelerates problems when they do not. As a result, much like a supertanker whose course has been set, these companies found themselves unable to turn quickly enough to avoid The Perfect Storm.”

“The captain of the Andrea Gail, was looking for the ‘big catch.’ In doing so, he took his boat and crew into waters outside his experience. Although there were more fish there, he increased the risks in a business already fraught with risk. Furthermore, he ignored the warning sings of impending trouble, thinking he could

work his way through what turned out to be a dire situation.

“ The Perfect Storm in the equipment leasing and finance industry has many parallels with that of the movie. Many of these lessors, looking for the ‘big catch’, entered businesses outside their core competencies. Others created additional risks beyond those systemic to the industry. And, many ignored the warning signs when they came, hoping to work their way through the situation.

“ The combination of these factors with a cold front of inadequate infrastructure, a hurricane of external events, and a great Lakes gale of poor controls brought the seas crashing down upon them. In the end, Captain Tyne’s reach, like many of those in this study, exceeded his grasp.”

“Value is the key to continued financial health and viability. Equipment leasing

and finance companies of the future must:

Create value to survive.

Add value to keep customers.

Prove value to attract capital.”

The Equipment Leasing and Finance Foundation commissioned this study to examine the true view of what happened and why previously successful companies exited the marketplace during the past two years. Each company's story is unique but the ends are similar. This study looks at company business models and strategy, core strengths, capital structure, capital raising strategy, growth strategy, management experience, corporate infrastructure and accounting principals. Discover what are the lessons learned from these companies. The study identifies patterns and trends that will help industry leaders make decisions for their companies.

If you have Adobe Acrobat Reader, you may download

the entire report. It is well worth reading, at least twice.

http://www.leasefoundation.org/pdfs/perfectstorm.pdf

__________________________________________________________________

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