Every day we read about the federal government bailouts, and how commercial and investment banks will be changed forever due to regulation, compensation caps, and a new view of systemic risk. A “what can go wrong” mentality has replaced Alfred E. Newman’s “what, me worry?” approach to the capital markets.
But only here at Leasing News can you read that in fact leasing has changed forever too, like banking going back to its roots where lessors had capital and lessees needed equipment, and they were willing to pay a premium for fleet flexibility, or off balance sheet treatment, or tax efficiency, or because conventional loans weren’t quite enough. There is a new world order coming for leasing and in fact it is the old world order... If you can access capital you are king of the leasing hill. But, there is unlikely to be any more securitizing because toilet paper apparently is not AAA. To the extent that institutional markets play the leasing game they will be hard to distinguish from the terms you always got from your banks.
Bank of America (BAC) was the first bank to get into leasing in the late 1960’s. The move made financing 100% a tax advantage in the small ticket market place, as well charging interest and principal on a lesser amount for larger transactions, valuing the residual to make the transaction financially successful. It was not just airplanes, railroad, or ships, but actually made large computers and IT more affordable.
As leasing grew into the financial marketplace, meaning small ticket for Avco Thrift & Loan, Budget Financial, Fireside Thrift & Loan, Foothill Thrift and Loan and a host of others were tearing up the small ticket marketplace with First and Ten Percent, approving start-ups, new and businesses based on consumer credit. This led to funds generated by loans recourse and non-recourse from banks and other financial institutions as those selling to these institutions learned more and CIT, Ford (F) Motor Credit, Westinghouse also entered the “private label lease contract” market place. Soon independent lessors were born, first with direct salesmen, and then in the late 1970’s and early 1980’s brokers were acceptable as dealers found the easy financing created more sales and a company could grow without a large salaried staff. In addition, there were now experienced salesmen who believed they could earn more commission on their own, sending transactions to many leasing companies who were anxious to receive their business, allowing them to keep first and last, the residual, as well as type and fund their own “private label” contract.
The 1990’s found more radical changes as volume controlled the marketplace under two major changes. While recourse and non-recourse borrowing continued at a rapid rate, the change came in two manners, somewhat similar but quite different.
Major companies went directly to individuals and made them partners in raising the money, including ATEL, ICON, and Cypress Financial. Millions of dollars and hundreds of thousand people were involved. There were tax advantages often involved, too. In comparison to the stock market, these companies have been quite successful.
The other change was securitization, such as done by Gus Constantin, Phoenix Leasing, Novato, California, and Mike Price at T and W Leasing, Tacoma, Washington, two of the earliest. Joining the group was Tom Depping, SierraCities. They went to the public, but through pension funds, hedge funds, investment firms, with an “asset” called “security.” They could bundle up leases with a bank line and sell it off, making another profit on the sale of the security.
It changed leasing, including US Equipment leasing, Greyhound, GE Capital (GE), Colonial Pacific. It created “revolver loans” at fixed and/or adjustable rates or both, payable at any time or a conclusion, and enable the marketing company to basically substitute rather than pay off a “default” or “terms” not being met. The marketing company could then bundle the leases by utilizing a “warehouse line,” most often an adjustable line of credit that the lender either approved the transactions or most often did not. This enabled marketing companies to become “funders,” when in fact they were like Preferred Lease, selling off transactions to others, very similar to the real estate mortgage industry. Preferred Lease tax returns show the owners viewed the operations as a “sales entity, “ not a lessor.
Credit agency software put consumers into credit scores and “application only” grew to $150,000, $250,000, and even higher for the medical profession. Leases were approved in hours with very little due diligence as volume was the master to package into a portfolio and sell it off. Telemarketing was in its heyday as sales staff with the ability to pre-judge a credit by financial statements or tax returns were not longer necessary. A college student or recent graduate could read a script and if they made 300 calls a day, they created sales, particularly with pre-scored marketing from consumer and commercial credit agencies. Everyone had a “private label” contract program.
The volume allowed leasing companies with and without equity to access securitization in the 90s. The rates were good for qualifying issuers. Why would securitization money be cheaper? Banks knew a fair rate to lend at; institutions buying securitizations didn't know their paper types; notes and toilet paper were indistinguishable. This because the rating agencies gave AAA ratings to the kind you achieve personal hygiene with. They had “security.” And the buyers could re-package into larger portfolios and sell them off, making a fee right away. That group then could bundle more, and sell a larger bundle off, making another fee along the way.
Software made small to medium size companies profitable to sell off $500,000 and even $100,000 portfolio’s, something unheard of in the 1980’s.
Companies such as Balboa Capital, Irvine, California grew from a “broker” to a “lessor” and their assets were the residuals, as most leases were “discounted” in bundles now called a “portfolio.” Others learned how to do this, many learning this while employed at Balboa Capital.
These companies also brokered leases to other leasing companies that did not fit their parameters for “securitization,” although they preferred to be involved in the servicing for the extra profit from late fees, personal property charges, insurance fees, and the ability to obtain extra payments, or as noted in the First Sound Bank vs. Larasco-Secords public records, alleged “forfeited” security deposits without notifying the lessee and then “Evergreen clauses” or alleged changes in residuals from $1 or 10% to “fair market value.” In addition, documentation fees became profits, as well as fees for “early buy out” quotations. This was all acceptable, laissez-faire, unregulated, as the portfolio’s were securitized down the line. Everyone was doing it. It was a “free for all.”
Those days are gone. 2009 will see more leasing companies folding and more leasing brokers leaving the marketplace. The good old days of leasing being “easy money” will soon be a memory.
Stock position: None.