A 10% Solution, 100% Effective
How do you assign a residual value to the ultimate “soft” asset—computer software? And, if that software’s lessee should default, how do you foreclose, and what do you repossess?
These were the questions that led the commercial finance division of a major U.S. captive leasing company to contact The Alta Group for answers. This company knew it needed professional help when its credit team had concerns about the residual value of software that represented 90% of a lease transaction it was financing for a major financial services company’s mortgage origination and management system.
That’s when The Alta Group’s Paul Bent got the call.
“Their credit shop wanted an independent third party to analyze the deal,” Bent explains. In addition to verifying that the software really existed, confirming its current value, and thoroughly vetting the software vendor, the commercial finance client had one other request of The Alta Group: “We were asked to advise them on what to do in the event of a default,” Bent says.
Bent knew that if the software could not be disabled if the lessee defaulted, the deal was dead. An attorney well versed in both corporate contract and software licensing law, Bent also knew that certain statutes limit a lessor’s ability to enforce prior constraints such as the coding that would disable software in the event of default.
But The Alta Group found an innovative way to protect its client’s interests by focusing not on the software but on the hardware that was being leased in the transaction. As Bent explains, “By precluding the lessee from using the IT hardware—the hard asset—you in essence are preventing them from using the software.”
By recognizing the critical role of 10% of the asset being leased, The Alta Group created a solution that was 100% effective in protecting its client’s interest in the remaining 90%.
