Although market watchers are seeing relative value in the equipment lease-backed sector, the retail side of the business continues to show the wear-and-tear seen in other sectors dominated largely by specialty finance companies - namely, consolidation and bankruptcy.

Market sources attribute these complications to accounting methods used by the companies.

One sector analyst identified Washington-based T&W Financial Corp., a specialty commercial finance company that provides equipment leasing, as being in serious financial trouble.

"I don't know if they officially filed for bankruptcy protection, but they're in deep, deep trouble," said the source.

To ASR's knowledge, T&W has not filed for bankruptcy but the company did not return phone calls.

T&W privately placed a number of equipment lease-backed deals, the most recent in the first quarter of 1999. Several of its stand-alone deals have been downgraded by Duff & Phelps and Fitch IBCA (now the same agency), the source added.

More recently, UniCapital Corp., based in Miami, was hit with a number of class-action lawsuits charging that the company and some of its officers and directors violated federal securities law by providing materially false and misleading statements regarding the company. Also, the company represented in the prospectus issued in connection with the companies initial public offering that it recognized $588.7 million in goodwill as an asset in connection with twelve corporate acquisitions. However, UniCapital did not disclose that it overvalued the acquisitions.

"Well, the fact that their stock is under $1 a share indicates that there may be some problems," the source stated.

UniCapital originates, acquires, sells and services equipment leases, as well as arranges structured financings.

The company declined to comment on its financial soundness.

Last year, Leasing Solutions Inc., a California-based company, also filed for bankruptcy protection.

As with most evolving sectors, consolidation is also a trend that is being seen in the equipment lease market. For example, Charter Financial is being acquired by Wells Fargo, Copelco was bought by Citigroup and more recently, Fidelity Leasing by EAB Bank. This raises the question as to whether or not these better capitalized companies will continue using securitization as a funding source.

"Clearly, there is a question as to whether issuers such as Copelco, Charter and Fidelity Leasing will continue to use securitization as a funding source given the profile of the acquirers in those cases," said Leah Torstrick, a director with First Union Securities, Inc.

Nothing to Gain

Some of the problems that are hitting the small-ticket equipment lease sector may be a direct result of gain-on-sale accounting techniques. Gain-on-sale accounting happens when the proceeds generated by securitization are recorded as earnings which artificially inflate the company's profits. Such accounting, also seen in the residential and auto-ABS sectors, has historically been problematic for many specialty finance companies.

For many of the small-ticket companies, gain-on-sale accounting was the only way that they could gain access to equity, which historically has not been readily available to leasing companies, said Torstrick.

Torstrick added that the companies were not used to the sort of capital received from gain-on-sale securitization.

"They were being rewarded for it in the equity markets and went out and raised capital and had access to more capital than they have ever had access to in the past," said Torstrick.

This overvaluation put the companies in a position where they had the incentive to continue to generate volume because generating volume basically meant generating earnings.

"The pressure of needing to grow really led to companies making some bad decisions in terms of credit underwriting, pricing for a rate basis and that sort of thing," Torstrick added. "When the equity analysts sort of backed off in terms of their valuations of gain-on-sale companies, these companies have had a hard time raising equity."

The good news, Torstrick noted, is that with the elimination of premiums for gain-on-sale earning, we should see more rational pricing and growth in the sector going forward.

It's All Relative

Despite the problems that some of the originators are having, analysts still see the bonds as having good relative value, and being fairly shielded from economic cycles.

Torstrick predicts that the overall issuance for the year will cap out somewhere between $12 billion and $13 billion, exceeding the $9.5 billion that was seen last year.

"Many of the larger companies that operate in the public arena are finding that things are stable in terms of performance," said Kent Becker of Moody's Investors Service. "The delinquencies and losses seem to be within expectation for these deals."

There is not a whole lot of prepayment risks associated with equipment leases because most of the lease contracts have penalties written into them.

Torstrick added that in the equipment lease sector, the underlying obligors are commercial obligors, as opposed to consumer obligors, which leads to better performance through different economic cycles.

A Competitive Sector

So far the sector is seeing a splurge of issuance as familiar players are moving up the rankings ladder.

Currently holding the number one slot, with the most issuances for year-to-date, is Case Receivables Inc. The company, jumping up from its number three slot that it held in 1999, has already raked in $1.13 billion in proceeds according to Thomson Financial Securities Data. For 1999, the company accounted for $1.44 billion of equipment lease-backed issuance.

CIT places second among equipment-backed issuers so far, with $615 million in issuance. It was ranked the No. 1 overall public issuer in the equipment lease sector last year, with $1.8 billion in issuance.

First Union continues to be the leading underwriter of public equipment-backed ABS with a 45% market share in lead managed volume this year, the comapny said. The company expects to underwrite substantially higher volumes this year compared with 1999.

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