advanced syndications: cutting edge issues for … syndications: cutting edge issues for buyers and...

Advanced Syndications: Cutting Edge Issues for Buyers and Sellers of Equipment Lease and

Finance Transactions

2007 ELFA Legal ForumMiami, Florida

Stewart G. Abramson, Wells Fargo Equipment FinanceMark 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 securityinterest of a discrete financing transaction.

- Post-Syndication, Buyer controls theunderlying transaction (Maybe by designatingSeller as its servicer or agent)

• How ELF Syndications differ from a typical BankLoan 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)

• How ELF Syndications differ from a typical BankLoan Syndication?

– Majority or “required lenders” control

– Agent makes no reps

– Cf -participations

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

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

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

• 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

• Resyndications

– Transaction was previously Syndicated to Seller

– Is Seller assigning to Investor rights under Original Syndication Documents?

• Sale of Trust Certificates

– Seller sells its Beneficial Interest under a Trust

– Tax, Retitling and Filing Benefits

• Portfolio Sales

– Sale of Multiple Transactions at One Time

– A Market Trend?

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 9th Circuit, 350 B.R. 465 (9th Cir. BAP 2006).

• A real world case study: In re: CMC:

- Loan vs. Sales

- Chattel Paper vs. Payment Intangibles

• 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

• The future of In re: CMC:

- The reaction of the UCC Bar and theUCC Permanent Editorial Board

Allocating Risks Between Sellers and Buyers

• What Risks are Shifted?

- Credit Risk - Risk of customerbankruptcy or failure to pay - Shifted toBuyer

• Are These Risks shifted? - Customer or Vendor Fraud Risk- Documentation Risk • enforceability, authorization, etc.• Discount Rates and Stipulated Loss

Values

• What Risks are retained by Seller?

– Performance of lessor/lender obligations

• Special concern when future performancerequired

– e.g. bundled, maintenance or softwaretransactions

• What Risks are retained by Seller?

– Risk of failure to pass good title topaper (and equipment, if true lease)

• 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?

• Methods for Allocating/Shifting Risks

– Searches, customer acknowledgement,direct contact, resos, strength ofdocumentation

– Single deal or many deals?

– Disclaimers Re: Customer Information

• 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

• Accepting the Risk: Buyer Due Diligence on Underlying Deal

- Do the Documents match the publicrecords- names and other info match?

- Alterations or other tell-tale signs?

• Accepting the Risk: Buyer Due Diligence on Underlying Deal

- Direct Contact with Customer?

- Acknowledgement of Assignment?

- Resos and incumbency certs

• 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)

• Accepting the risk: Buyer Due Diligence on Underlying Deal

– Market scuttlebutt?

– Reps are only as good as the party whomakes them – Credit-worthiness

• Accepting the Risk: Vendor and Equipment Due Diligence

– Invoices, Proof of Payment

– Is the Vendor known? Credit-worthy?

• 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

• 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?

• “Know Your Customer:” Buyer Due Diligence

– Customer Identification Program –– Uniting and Strengthening America by Providing

Appropriate Tools Required to Intercept and ObstructTerrorism Act of 2001, (“USA Patriot Act”) and regulations issued pursuant to it by the FinancialCrimes Enforcement Network (“FinCEN”)

• USA Patriot Act:

– Requires financial institutions to obtaincertain information and confirmingdocumentation to identify each customer asa condition of entering into an accountrelationship with a customer. Includes leaseor loan.

• “Know Your Customer:” Buyer Due Diligence– The Office of Foreign Assets Control (“OFAC”)

of the United States Treasury Department:Regulations prohibiting and/or blockingfinancial transactions (e.g. opening ofaccounts or entering into transactions) withor on behalf of certain “DFCs”, persons andentities resident or domiciled therein andcertain “SDNs”.

• “Know Your Customer:” More Buyer Due Diligence– Is Buyer required to comply with Patriot Act

or OFAC information? – banks, bankaffiliates - see Patriot Act

– Is lessee/borrower the Buyer’s Customer? –Yes, if Buyer funds vendor; No, if Buyerpays seller

• “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 formalCustomer Identification Program (“CIP”)consistent with Section 326 of the USA PatriotAct, Buyer may enter into a CIP RelianceAgreement whereby Buyer may rely on theperformance by the Seller under Seller’s CIP.

• Is the Seller a Customer for CIP purposes? – Yes!Must do Due Diligence on Seller

• Remedies and Fixes:- Where Buyer has access to Lessee/Borrowers

• Notices and Acknowledgements ofAssignment- Accomplish Due Diligence- Clarify underlying documents - Amend underlying documents

• Remedies and Fixes:– Where Seller accepts the risk:

• Make whole provisions - e.g. Discount Rates and SLV Table

discrepancies• Indemnifications• Representations and Warranties

• Remedies and Fixes

- Timing Issues:

- Buybacks

- Temporary Indemnities

Special Circumstances:

• e.g. Portfolio Transactions

- Due Diligence

- Broader Representations, Warranties and Indemnifications

Allocating Risks as well as rewardsBetween 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

– 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

– 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

Servicing by Seller

• What must the Seller do?

– Timely bill

– Timely remit

• “Perfect Pay”

– Clarify who gets late fees

Servicing by Seller

• What must the Seller do?

– Send, receive and forward notices

– What Else ?

• Dunn, enforce etc - Maybe

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

Servicing By seller

• What may the Seller do?

– Important to set forth standards• Commercially reasonable• Non-discriminatory• Consistent with Seller’s standard

operating procedures

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)

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

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

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

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

Termination of Servicer

• Servicer resignation?

• Recent trends

Servicing by Seller

• Fiscal Agencies compared to Participation– Impact on True Sale Analysis

• Blind Transactions and Prohibitions onAssignment– See Break-Out Session on “Private

Label Programs”

Syndication of Titled Motor Vehicles

• New Financings vs. Sale of Transactions out of Portfolio

• 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

• How to Structure Transactions to Avoid Sales Tax or Retitling / Re-LieningRequirements– Titling Trusts– Agency Agreement

• Loans Only?– Participations

• Who holds titles after sale?

• Use of Powers of Attorney

Remarketing Arrangements

• Why Sellers Like Remarketing Arrangements

– Share in Residual Upside

– Enhance Customer Relationships

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

Electronic Chattel Paper – Has its Time Come?

• GE’s experience

• Wells Fargo’s Experience

• See Break-Out Session: “Doing Deals in a Paperless Society (Electronic Chattel Paper) – To eCommerce and Beyond!”

Advanced Syndications: Cutting Edge Issues for Buyers and Sellers of Equipment Lease and

Finance Transactions

“Q&A”

Stewart G. Abramson, Wells Fargo Equipment FinanceMark 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 9th Circuit, 350 B.R. 465 (9th Cir. BAP 2006).

a. Loan vs. Sales;

b. Chattel Paper vs. Payment Intangibles;

c. Resulting Perfection issues:

(i) Taking possession of Chattel Paper;

(ii) Automatic perfection against payment intangibles;

(iii) 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) Documentation Risk; and

(ii) Underlying Deal Risk.

2. Seller’s Broad Disclaimers regarding Lessee’s/Borrower’s Credit-worthiness.

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:

a. Nature of Equipment: Practical Realities.

(i) Large piece or many small pieces;

(ii) Geographic distribution;

(iii) Bundled transactions:

(a) Bundling with intangibles (e.g. software);

(b) Bundling with services.

b. Credit-Worthiness: Who should a Buyer worry about?:

(i) Lessee/Borrower/Guarantor.

(ii) Seller?

(iii) Prior Seller?

(iv) 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) Representations and Warranties;

(ii) Due Diligence; and

(iii) Remedies and fixes.

C. Another perspective on why it matters: True Sale:

1. “True Sale” vs. “Loan”.

a. Definitions; and

b. The real world:

(i) Varying levels of recourse against Seller;

(ii) What risks have been allocated, and how have they been allocated; and

(iii) 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) True Sale implications; and

(ii) Bankruptcy implications.

b. Special Case: “Perfect Pay”:

(i) What it means;

(ii) “Who gets the late fee” and other complications; and

(iii) Unwinding Perfect Pay.

c. When can a Buyer or Seller terminate a fiscal agency; and

d. Fiscal Agencies compared to Participations:

(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) Who holds the title;

(ii) Retitling and powers of attorney;

(iii) Collateral Agency arrangements; and

(iv) 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;

3. The key issues:

a. Who will serve as the “Vault?”

b. How do you know you’re perfected?

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advanced syndications: cutting edge issues for … syndications: cutting edge issues for buyers and...

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