NEW YORK - Amid seemingly relentless post-Enron securitization scrutiny, more than 200 patrons of the equipment industry attended last week's Investor Opportunities in Equipment Leasing, Finance & Securitization, co-hosted by the Equipment Leasing Association and Information Management Network held at the Essex House.
While you might not expect Enron to be a topic at an ELA conference, Joseph Lane, chairman of the ELA and a senior vice president at IBM Global Financing, named "generalization risk" as one of the industry's biggest challenges going forward.
By that, Lane was referring to the dangers of isolated events negatively impacting relatively unrelated industries - such as the case with Enron and securitization (see Securitization News p. 2).
"The greatest single risk at this juncture is perception versus reality," added Michael Palitz, executive vice president at Financial Federal Corp., an agricultural and construction equipment leasing firm headquartered in New York. FFC completed its first securitization last year, selling leases into a conduit.
Despite the Enron hangover, panelists at the general sessions argued that securitization is still a must-have option for issuers of all sizes, as it adds significant diversity to a firm's funding strategy.
"If you have other places to fall back on, you'll always sleep better at night," said Peter von Bleyleben, president of MicroFinancial, which leases "micro-ticket" equipment with values in the $1,500 range. "You might spend a little money [to complete a deal], but you have a stable source of funding."
Still, the risk-adverse investor sentiment has been less conducive to off-the-run sectors and new issuers than in the past. In fact, as noted by Jewel Bickford, who heads up the securitization practice at Rothschild, issuers are facing a level of scrutiny never before seen in the market.
"A negative [aspect of securitizing], from the issuer's point of view, is that you're under a microscope," Bickford said.
Along those lines, Steven Garfinkel of benchmark issuer DVI expressed concern over the current environment, which he says has "zero-tolerance" for mistakes. "You wonder, Am I one press release away from a problem,'" Garfkinkel said. "That's just not a good environment for small cap, highly leveraged firms."
Like other asset classes that saw securitization-driven growth in the mid-to-late 1990s, competition led some players to move outside their niches, price too aggressively, or abuse gain-on-sale accounting. Again, as seen in other asset classes, the survivors of the consolidation and correction that followed are the companies with sound business models that have grown at rational levels. Still, these companies are dealing with tighter capital markets, especially towards finance companies.
Also, over the last few years, banks, which enjoy a substantially lower cost of funds, have become more active in the leasing arena, adding a new level of competition. These banks may be infringing on the leasing market without necessarily having the experience in underwriting the asset.
"In the long-term, it will backfire, as it always has in the past," said FFC's Palitz. Palitz maintains that FFC will not lower its rates to compete with banks, however.
Though diversifying business lines is a common strategy of companies and banks alike, securitization favors specialization, which has historically been a mixed blessing for the independent finance companies.
Innovation never dead
Despite some of the challenges currently facing issuers and investment bankers in equipment ABS, innovation is still taking place. Rothschild's Bickford noted that recent deals have been able to include rental contracts, which perform differently than leases.
Bickford also said that issuers have been able to get credit for other fees, such as loss and damage waivers, which can be subordinate to the lease payments in the securitization.
Dale Lum, of Sidley Austin Brown & Wood, led a discussion on developments in bundled lease contracts, where the financial component of a contract, that includes both the lease and maintenance payment, can be securitized, seen in Xerox's 2001 deal via Merrill Lynch. The challenges lie in the linkage between the servicer and the asset, as the servicer/maintenance provider is essential in mining the value from the asset; i.e. the lessee will stop paying if the servicer stops maintaining the equipment (see ASR 11/26/01).