When Funding is Tight, ‘What’s the Deal” Takes on New Meaning
By Paul Bent
"What's the deal?"
That is the first question a lessor or lender asks when presented with a funding opportunity. And it may be the last, if one does not like the answer.
When funders ask this question they are using industry shorthand generally to mean, among other things:
- What kind of transaction is this? How complex is it? Is it a simple money-over-money loan to a reasonably good credit or an established account? Is it an income tax-oriented lease that must be structured according to certain rules and requirements? Is it a full payout lease without any residual opportunity, or is it an operating lease in which we may realize some long-term upside benefit?
- What is the nature of the underlying funding? What kind of equipment will secure the advance, and is it an asset type that we're familiar with? What business is the lessee/borrower in, and are we familiar with that industry? How essential is the collateral security to the business, operations, and cash flows of the lessee/borrower?
- What are the elements of risk in the transaction? What is the risk/reward balance? Is it a simple deal with an obligor that can readily repay our advance? Or is it a more complicated "story" deal with risk elements that must be thoroughly vetted before we will advance any funding? Are we getting paid adequately for the risk?
With the current limited availability of funding resources in our industry, however, the question of "What's the Deal?" can make or break opportunities which, just a few years ago, would seem easily fundable; and the inherent underlying issues take on special meaning when lessors and lenders grapple with the current difficulties of funding availability. They also may be especially concerned about maintaining the integrity of their portfolios and balance sheet ratios.
Scrutiny is in. Risk is out.
In the current market, lessors and secured lenders are more concerned than ever with understanding their lessees' and borrowers' businesses and intentions. They want to be sure they know enough about the intended uses of their funds so they can fully assess the likelihood of repayment. Just reading a term sheet and some basic due diligence is no longer enough.
Lenders and lessors are often limiting their funding to specific industries, specific business segments (such as SMB), and even specific equipment types, with which they have a successful history of lending (and of repayment). Thus, many funding sources are no longer willing to advance funds against any assets or in any industries which are not already well represented and well performing in their portfolios.
Such limitations have, of course, restricted the avenues available for funding of new deals and for funding of "new" asset classes. As these restrictions are felt further upstream, they have resulted in severely limiting the availability of funding for VARs, third-party originators and small independent leasing companies who have traditionally relied upon their funding relationships (rather than on specific equipment types and industry associations) to provide sufficient volume for a wide range of deals.
Likewise, as lessors and lenders continue to shy away from transactional risk that cannot be readily explained, quickly quantified and easily categorized according to traditional evaluation criteria, their appetites for any but the most risk-free deals will continue to wane. Originators of transactions which include even modest additional risk will have difficulty finding funding. And, unlike from prior times, this will be the case even if potential residual upside, income tax benefits or other yield enhancements would likely offset such risk.
So when lessors and lenders today ask "What's the deal?", what this most likely means is this as close to a plain vanilla, risk-free, slam-dunk deal as I can get?
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