Advanced Syndications: Cutting Edge Issues for Buyers and Sellers of Equipment Lease and Finance Transactions 2007 ELFA Legal Forum Miami, Florida Stewart G. Abramson, Wells Fargo Equipment Finance Mark D. Kohler, GE Commercial Finance Philip R. Rosenblatt, Nutter McClennen & Fish LLP
What is Syndication in the context of an Equipment Lease or Finance Transaction? ELF Syndication overview: - A referral, sale, assignment or security interest of a discrete financing transaction. - Post-Syndication, Buyer controls the underlying transaction (Maybe by designating Seller as its servicer or agent) 2
What is Syndication in the context of an Equipment Lease or Finance Transaction? How ELF Syndications differ from a typical Bank Loan Syndication? Several loans governed by same terms No ability to go-it-alone see e.g. Beal Savings Bank v Sommer, 2007 N.Y. LEXIS 267 (March 22, 2007) 3
What is Syndication in the context of an Equipment Lease or Finance Transaction? How ELF Syndications differ from a typical Bank Loan Syndication? Majority or required lenders control Agent makes no reps Cf -participations 4
Why does a Seller want to sell? Source of Capital or Fee Income Reduce exposure to particular credits or industries Enables seller to do new deals with customer Reduce equipment/residual risks 5
Why does a buyer want to buy? Increased Volume and Income over time Generate deal flow without additional sales force Seller s niche expertise and origination infrastructure 6
Equipment Lease and Finance Syndication Structures Assignment (Equity Deal) Outright, Full Sale and Assignment Non-Recourse Loan (Sale of Receivables Only) Lessor grants Security Interest to Investor in Equipment and Lease 7
Equipment Lease and Finance Syndication Structures Participation Sale of an undivided proportionate interest in the Transaction Documents 100% Participations Referral or Broker Only Deals No Assignment Investor is the initial Lessor or Lender 8
Equipment Lease and Finance Syndication Structures Resyndications Transaction was previously Syndicated to Seller Is Seller assigning to Investor rights under Original Syndication Documents? 9
Equipment Lease and Finance Syndication Structures Sale of Trust Certificates Seller sells its Beneficial Interest under a Trust Tax, Retitling and Filing Benefits MDK 10
Equipment Lease and Finance Syndication Structures Portfolio Sales Sale of Multiple Transactions at One Time A Market Trend? 11
What s really happening in an ELF Syndication A real world case study: In re: Commercial Money Center, Inc., U.S. Bankruptcy Appellate Panel of the 9 th Circuit, 350 B.R. 465 (9 th Cir. BAP 2006). 12
What s really happening in an ELF Syndication A real world case study: In re: CMC: - Loan vs. Sales - Chattel Paper vs. Payment Intangibles 13
What s really happening in an ELF Syndication A real world case study: In re: CMC: - Resulting Perfection issues: - Taking possession of Chattel Paper - Automatic perfection against payment intangible - Filing UCC-1 financing statements against Sellers 14
What s really happening in an ELF Syndication The future of In re: CMC: - The reaction of the UCC Bar and the UCC Permanent Editorial Board 15
Allocating Risks Between Sellers and Buyers What Risks are Shifted? - Credit Risk - Risk of customer bankruptcy or failure to pay - Shifted to Buyer 16
Allocating Risks Between Sellers and Buyers Are These Risks shifted? - Customer or Vendor Fraud Risk - Documentation Risk enforceability, authorization, etc. Discount Rates and Stipulated Loss Values 17
Allocating Risks Between Sellers and Buyers What Risks are retained by Seller? Performance of lessor/lender obligations Special concern when future performance required e.g. bundled, maintenance or software transactions 18
Allocating Risks Between Sellers and Buyers What Risks are retained by Seller? Risk of failure to pass good title to paper (and equipment, if true lease) 19
Allocating Risks Between Sellers and Buyers Methods for Allocating/Shifting Risks Seller s Representations and Warranties Two schools of thought hard reps vs. best of knowledge How much diligence can be done by Buyer? 20
Allocating Risks Between Sellers and Buyers Methods for Allocating/Shifting Risks Searches, customer acknowledgement, direct contact, resos, strength of documentation Single deal or many deals? Disclaimers Re: Customer Information 21
Allocating Risks Between Sellers and Buyers ELF World vs. Syndicated bank Loan World See e.g. Unicredito Italiano v. JP Morgan Chase Bank (2003 U.S. Dist., LEXIS 18262) (2003 SDNY) Carve out for knowingly delivering materially false information, knowingly withholding material adverse information or modifying customer info 22
Allocating Risks Between Sellers and Buyers Accepting the Risk: Buyer Due Diligence on Underlying Deal - Do the Documents match the public records- names and other info match? - Alterations or other tell-tale signs? 23
Allocating Risks Between Sellers and Buyers Accepting the Risk: Buyer Due Diligence on Underlying Deal - Direct Contact with Customer? - Acknowledgement of Assignment? - Resos and incumbency certs 24
Allocating Risks Between Sellers and Buyers Accepting the Risk: Buyer Due Diligence regarding Seller: Know Your Seller Buyer may be held responsible for Seller non-performance (e.g. Norvergence Atty gen actions) 25
Allocating Risks Between Sellers and Buyers Accepting the risk: Buyer Due Diligence on Underlying Deal Market scuttlebutt? Reps are only as good as the party who makes them Credit-worthiness 26
Allocating Risks Between Sellers and Buyers Accepting the Risk: Vendor and Equipment Due Diligence Invoices, Proof of Payment Is the Vendor known? Credit-worthy? 27
Allocating Risks Between Sellers and Buyers Accepting the Risk: Vendor and Equipment Due Diligence: Equipment Inspection? Is it practical? One piece or many One location or many? Vendor Warranties Program Agreements 28
Allocating Risks Between Sellers and Buyers Resyndications: Where the Seller did not Originate the Paper Who is the Originator? Are there restrictions on assignment? Are originator assignment documents available? Are Originator reps passed through? 29
Allocating Risks Between Sellers and Buyers Know Your Customer: Buyer Due Diligence Customer Identification Program Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, ( USA Patriot Act ) and regulations issued pursuant to it by the Financial Crimes Enforcement Network ( FinCEN ) 30
Allocating Risks Between Sellers and Buyers USA Patriot Act: Requires financial institutions to obtain certain information and confirming documentation to identify each customer as a condition of entering into an account relationship with a customer. Includes lease or loan. 31
Allocating Risks Between Sellers and Buyers Know Your Customer: Buyer Due Diligence The Office of Foreign Assets Control ( OFAC ) of the United States Treasury Department: Regulations prohibiting and/or blocking financial transactions (e.g. opening of accounts or entering into transactions) with or on behalf of certain DFCs, persons and entities resident or domiciled therein and certain SDNs. 32
Allocating Risks Between Sellers and Buyers Know Your Customer: More Buyer Due Diligence Is Buyer required to comply with Patriot Act or OFAC information? banks, bank affiliates - see Patriot Act Is lessee/borrower the Buyer s Customer? Yes, if Buyer funds vendor; No, if Buyer pays seller 33
Allocating Risks Between Sellers and Buyers Know Your Customer: More Buyer Due Diligence Can Buyer rely on Info obtained by Seller? Yes, if Seller is an entity who is required to comply with and operates under a formal Customer Identification Program ( CIP ) consistent with Section 326 of the USA Patriot Act, Buyer may enter into a CIP Reliance Agreement whereby Buyer may rely on the performance by the Seller under Seller s CIP. 34
Allocating Risks Between Sellers and Buyers Is the Seller a Customer for CIP purposes? Yes! Must do Due Diligence on Seller 35
Allocating Risks Between Sellers and Buyers Remedies and Fixes: - Where Buyer has access to Lessee/Borrowers Notices and Acknowledgements of Assignment - Accomplish Due Diligence - Clarify underlying documents - Amend underlying documents 36
Allocating Risks Between Sellers and Buyers Remedies and Fixes: Where Seller accepts the risk: Make whole provisions - e.g. Discount Rates and SLV Table discrepancies Indemnifications Representations and Warranties 37
Allocating Risks Between Sellers Remedies and Fixes and Buyers - Timing Issues: - Buybacks - Temporary Indemnities 38
Allocating Risks Between Sellers Special Circumstances: and Buyers e.g. Portfolio Transactions - Due Diligence - Broader Representations, Warranties and Indemnifications 39
Allocating Risks as well as rewards Between Sellers and Buyers FAS 140 Accounting for Transfers and Servicing of Financial Assets Only Applies to Financial Assets Operating Leases are Generally not Financial Assets Distinguishes between Transfers that are Sales vs. Transfers that are Secured Borrowings 40
Allocating Risks as well as rewards Between Sellers and Buyers FAS 140 Accounting for Transfers and Servicing of Financial Assets In order to qualify as a True Sale under FAS 140 Seller must surrender control of the asset Assets must be Isolated from Seller (i.e., put beyond reach of Seller s creditors) Transferee has general right to pledge assets Transferor does not maintain control over assets 41
Allocating Risks as well as rewards Between Sellers and Buyers FAS 140 Accounting for Transfers and Servicing of Financial Assets If there is continuing involvement by Transferor, Isolation must be supported by Legal Opinion Continuing Involvement means servicing, recourse, remarketing, etc. Exception not required if there is a reasonable basis to conclude that the appropriate legal opinion would be given if requested based on experience with other transfers with same facts and circumstances 42
Servicing by Seller What must the Seller do? Timely bill Timely remit Perfect Pay Clarify who gets late fees 43
Servicing by Seller What must the Seller do? Send, receive and forward notices What Else? Dunn, enforce etc - Maybe 44
Servicing By seller What may the Seller do? Ordinary course relationship contacts, correspondence, handling end of term and mid term options, upgrades and relationship matters 45
Servicing By seller What may the Seller do? Important to set forth standards Commercially reasonable Non-discriminatory Consistent with Seller s standard operating procedures 46
Servicing by Seller What the Seller shall Not do (without Buyer consent) Amend payment terms Release obligations (stated exceptions, e.g. late charges per stated standards) 47
Servicing by Seller What the Seller shall Not do (without Buyer consent) Release or dispose of equipment or rights therein Accelerate, repo, commence suit other remedies 48
Servicing by seller Fees costs and expenses Important to cover in agreement Not for overhead Out of pocket what is automatic, what requires prior consent, categories and dollar amounts 49
Servicing by seller Fees costs and expenses Servicer needs ability to service in ordinary course Owner needs to know it won t be surprised by large expenses 50
Termination of Servicer Customer defaults which ones? How long? Limited to affected deal(s) Option to repurchase? Servicer defaults (either under servicing or purchase agreement) All deals 51
Termination of Servicer Servicer resignation? Recent trends 52
Servicing by Seller Fiscal Agencies compared to Participation Impact on True Sale Analysis Blind Transactions and Prohibitions on Assignment See Break-Out Session on Private Label Programs 53
Syndication of Titled Motor Vehicles New Financings vs. Sale of Transactions out of Portfolio 54
Syndication of Titled Motor Vehicles Syndication of Motor Vehicle Leases vs. Syndication of Motor Vehicle Loans Sales Tax Up front Sales Tax vs. Rental Tax Retitling Re-liening Other statutory requirements: Odometer readings, notices, inspections 55
Syndication of Titled Motor Vehicles How to Structure Transactions to Avoid Sales Tax or Retitling / Re-Liening Requirements Titling Trusts Agency Agreement Loans Only? Participations 56
Syndication of Titled Motor Vehicles Who holds titles after sale? Use of Powers of Attorney 57
Remarketing Arrangements Why Sellers Like Remarketing Arrangements Share in Residual Upside Enhance Customer Relationships 58
Remarketing Arrangements Why buyers Like Remarketing Arrangements Residual Risk Protection/ Ultimate Net Loss Seller may afford best access to market Take advantage of Seller s expertise 59
Electronic Chattel Paper Has GE s experience its Time Come? Wells Fargo s Experience See Break-Out Session: Doing Deals in a Paperless Society (Electronic Chattel Paper) To ecommerce and Beyond! 60
Advanced Syndications: Cutting Edge Issues for Buyers and Sellers of Equipment Lease and Finance Transactions Q&A Stewart G. Abramson, Wells Fargo Equipment Finance Mark D. Kohler, GE Commercial Finance Philip R. Rosenblatt, Nutter McClennen & Fish LLP
2007 ELFA Legal Forum Miami, Florida Advanced Syndications: Cutting Edge Issues for Buyers and Sellers of Equipment Lease and Finance Transactions. Presenters: Stewart G. Abramson, Wells Fargo Equipment Finance, Inc. Mark D. Kohler, GE Commercial Finance Philip R. Rosenblatt, Nutter, McClennen & Fish, LLP I. A Quick Introduction to Equipment Lease and Finance Syndications: A. What is an Equipment Lease or Finance Syndication Transaction? B. Why engage in Equipment Lease and Finance Syndication Transactions? 1. Seller s Perspective: a. Source of capital; b. Reduce exposure to particular lessee; and c. Reduce exposure to particular assets. 2. Buyer s Perspective: a. Investment opportunities; and b. Piggy-back on Seller s infrastructure and areas of expertise. C. How are Equipment Lease and Finance Syndication transactions structured? 1. Equity Deals: Sale of Equipment and Assignment of Lessor s position under a Lease; 2. Payment Stream Acquisitions/Non-Recourse Loans, secured by the Equipment; 3. Participations; 4. Referrals, or Broker Deals; 5. Resyndications;
6. Sales of trust certificates; and 7. Portfolio transactions. D. What s really going on in an Equipment Lease Syndication Transaction? 1. A Real World Case Study: In re: Commercial Money Center, Inc., U.S. Bankruptcy Appellate Panel of the 9 th Circuit, 350 B.R. 465 (9 th Cir. BAP 2006). a. Loan vs. Sales; b. Chattel Paper vs. Payment Intangibles; c. Resulting Perfection issues: (i) (ii) (iii) Taking possession of Chattel Paper; Automatic perfection against payment intangibles; Filing UCC-1 financing statements against Sellers; and d. Reaction of the UCC bar and the Permanent Editorial Board of the UCC. II. Allocating Risks and Rewards Between Sellers and Buyers. A. Risk of the Underlying Deal vs. Documentation Risk. B. Methods for Allocating Risks: 1. Seller s Representations and Warranties. a. How far should they go? (i) (ii) Documentation Risk; and Underlying Deal Risk. 2. Seller s Broad Disclaimers regarding Lessee s/borrower s Creditworthiness. a. Negative assurances: No Modifications and No Omissions.: 3. The Outer Limits: a. Knowledge of fraud vs. Participating in fraud. 4. Due Diligence-Recommended Practices: - 2 -
a. Nature of Equipment: Practical Realities. (i) (ii) (iii) Large piece or many small pieces; Geographic distribution; Bundled transactions: (a) (b) Bundling with intangibles (e.g. software); Bundling with services. b. Credit-Worthiness: Who should a Buyer worry about?: (i) (ii) (iii) (iv) Lessee/Borrower/Guarantor. Seller? Prior Seller? Vendor? 5. Remedies and Fixes: a. Where there is access to Lessee. (i) Clarifying or amending the Lease/Notices and Acceptances of Assignment. b. Where Seller accepts the risk. (i) Make Whole provisions. (a) e.g. Discount rate and SLV table discrepancies; (ii) Indemnifications. c. Timing issues: (i) Buybacks. d. Special Circumstances: e.g. Portfolio transactions and their impact on: (i) (ii) (iii) Representations and Warranties; Due Diligence; and Remedies and fixes. - 3 -
C. Another perspective on why it matters: True Sale: 1. True Sale vs. Loan. a. Definitions; and b. The real world: (i) (ii) (iii) Varying levels of recourse against Seller; What risks have been allocated, and how have they been allocated; and Remedies: Calls vs. Puts. 2. Why it matters: a. Taxes and financial reporting: Sale Treatment. b. Risks presented by Seller s bankruptcy. 3. Special Circumstance: Software finance. 4. Impact of Deal Structure: Participations vs. hybrid equity deals; and 5. True Sale Opinions. III. Special Situations Arising in Equipment Lease and Finance Syndication Transactions: A. Protecting the Seller s Relationship with its Customer: 1. Fiscal Agencies. a. What a Seller does and doesn t do: (i) (ii) True Sale implications; and Bankruptcy implications. b. Special Case: Perfect Pay : (i) (ii) (iii) What it means; Who gets the late fee and other complications; and Unwinding Perfect Pay. c. When can a Buyer or Seller terminate a fiscal agency; and d. Fiscal Agencies compared to Participations: - 4 -
(i) Impact on true sale analysis. 2. Blind Transactions. a. Prohibitions against assignment in the underlying documents. (i) Impact of UCC Sections 2A-303, 9-406, 9-407 and 9-408; and (ii) An aside: prohibitions against assignments in Leases compared to such prohibitions in vendor documents and syndication documents. B. Syndication of titled motor vehicles. 1. Title Issues. a. Accepted industry practices. (i) (ii) (iii) (iv) Who holds the title; Retitling and powers of attorney; Collateral Agency arrangements; and Titling Trusts. 2. Loans vs. Leases. C. Remarketing Arrangements: 1. What are remarketing arrangements? 2. Why Sellers want them: a. Share in residual upside; and b. Control market for certain Equipment. 3. Why Buyers want them: a. Best access to the market for some equipment. 4. Implications for True Sale. D. Electronic Chattel Paper Has its time come? 1. GE s experience; 2. Wells Fargo s experience; - 5 -
3. The key issues: a. Who will serve as the Vault? b. How do you know you re perfected? 1611856.3-6 -