Upload
john-deane
View
28
Download
0
Embed Size (px)
Citation preview
EQUIPMENT LEASING AND FINANCE ASSOCIATIONEQUIPMENT LEASING AND FINANCE ASSOCIATION
MANAGED SOLUTIONS: NOT YOUR GRANDFATHER’S LEASING INDUSTRY ANYMORE
ELFA 2017 Equipment Management ConferenceFEBRUARY 28, 2017
Andy Mesches, Director Mike TobakThe Alta Group Kutak Rock LLP
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Terminology Must Be Clarified
• Need one term to describe the concept: Managed Solutions• Deliberate terminology selection to avoid the legal / regulatory / accounting minefield• Must also sharpen the definition or meaning around specific parties, roles and other
elements in a Managed Solutions transaction
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Managed Solutions – Alta’s DefinitionThe service provider enters into an agreement with an end user for a service or ‘solution’. The end user solution can include hardware, software, professional services and operational support. The hardware is not necessarily ‘incidental’ as it can be a heavy component of the service.
Written Agreement Differs From
Traditional Leasing and
Finance Deals
The service provider might have one or more subcontractors providing some of the required services, hardware, software or support. Hardware and/or software is owned by the managed service/solutions provider or one of the sub-contractor providers
The end user payment is structured as a subscription service or might be based on usage
Although some service agreements might incorporate non-cancellable terms, others can be very fluid and cancellable. The trend is towards a ‘pay as you use’ with more cancellation flexibility
Service level agreements are incorporated into the managed services/solutions agreement and govern the performance obligation
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Why is Managed Solutions on the Radar Screen Now?
• The concept of - or market interest in - Managed Solutions is not new
• The industry has reached a “tipping point” due to market factors and client demand
• Managed Solutions is positioned to make up as much as 20% of industry activity
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Test & Measurement Equipment – Keysight
Water Purification
Office Equipment – Xerox, the first
Telecommunications – AT&T Solutions
Aerial Work Platforms - JLG
Technology – Cisco, HP, IBM
Managed Solutions – A 30 Year old+ ConceptSelected Timeline by Equipment Type
2010s2000s1990s
Networking Solutions – Brocade, Juniper
Source: Alta IP Archives5
EQUIPMENT LEASING AND FINANCE ASSOCIATION
The Equipment Financing World Is Changing
Customers demand more
flexibility in structure
1Not just IT / Cloud but across all industry
segments
2Managed Solutions
• Bundled services, maintenance, products
• Payment variability: may include cancellation, usage, up/down –grade, unit based
3
EQUIPMENT LEASING AND FINANCE ASSOCIATION
How the Model is Evolving• Technology sits on customer
premises
• Technology deployed/controlled by customer
• Customer owes payment for entire solution up front
• Customer uses financing to extend payment terms
• Vendor title transfers to customer or lessor, depending on financing structure
• Payment obligation potentially off balance sheet
• Vendor accelerates revenue on products sold
• Technology sits on or off customer premises
• Technology deployed / managed by vendor(s)
• Solution is delivered as a service - customer payments due over time
• Payments may vary based on customer’s rate of use
• Customer may have right to terminate service agreement early, with or without penalty
• Customer does not take title to products
• Vendor’s initial infrastructure investment may be sizeable
• Vendor recognizes revenue for services ratably over contract term
Old Model New Model
Customer Wants• Agility (standardized
apps managed by Service Providers)
• Technology maintenance expertise
• No commitment, pure consumption- Pay-as-you-go
models to match profit models / cash flows
• Value v. commoditization
• Does not want to own any assets- Looking for a way
to keep equipment off balance sheet
• Solution delivered by Vendor or Provider
EQUIPMENT LEASING AND FINANCE ASSOCIATION
How Big a Deal is This?
• OEM profit margins shifting to lower price equipment – especially PCs -> need Managed Solutions will grow the top line
• Double Digit growth in excess of 20%- Mobile Devices:
27%- Private Cloud:
22%- Infrastructure:
40%
• Fleet management leaders expect flexible end-to-end service solutions will become central to competing
• Example: Navistar On Command - bundled approach to service and after sales support- Better
lifecycle value - Lower TCO
38% of companies use some sort of Managed Solutions structure today
80% of companies say they will adopt Managed Solutions offering in the next 12 months
Managed Solutions is positioned to make up as much as 20% of industry activity
• 75% increase in construction rentals from 2013
• New technology integrates equipment with diagnostic, reporting and security features
• Rising full-service, rental based acquisition model
• Global smart grid managed services market growth forecasted at 54% CAGR 2014-2019
• Deployment of smart meters and integration of renewable energy with smart grids
• End-users of smart grid services are power utilities and IPPs
• Key Vendors are Accenture, Capgemini, GE Energy, IBM and Siemens
• Top 20 outsourcing firms realizing double-digit growth annually
• Healthcare companies shifting toward pay-per-use over traditional purchasing of equipment
• Popular among hospitals is integrated radiological floors
EQUIPMENT LEASING AND FINANCE ASSOCIATION
MANAGED SOLUTIONS: METHODOLOGY
Alta used a number of resources, including the
ELFA SEFA report to dimension the MST activity
within the equipment leasing and financing
industry.
QUANTITATIVE QUALITATIVEQUANTITATIVE/ QUALITATIVE
SYNTHESIS
Alta interviewed an extensive and varied group of industry participants to address
the critical aspects of MST. Interviews covered a range of equipment lessors in the information technology, healthcare,
document technology, agriculture, energy, material handling, transportation, lift truck
and general commercial equipment sectors. Interview participants included
captive, independent and bank lessors as well as funders, rating agencies and
service providers.
Alta analyzed the data sources and interview
findings, overlaid with its own knowledge of MSTs, to reach the Study’s findings
and conclusions.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
NOT A ONE-SIZE FITS-ALL ALTERNATIVE The Managed Services Continuum
Source: “Managed Solutions: Evolutionary or Revolutionary?,” Equipment Leasing & Finance Foundation, 2016.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Managed Services Continuum Matrix
Not Bundled Partially Bundled Bundled Appearance
True Service Offering
Asset ManagementFrequent changes to asset composition No No Yes Yes
Significant upgrade/return flexibility No No Yes Yes
Ability to redeploy assets displaced by upgrades – Mid-term No No Yes Yes
EQUIPMENT LEASING AND FINANCE ASSOCIATION
MSTs drive efficiencies for End Users because
they eliminate the need to manage multiple Service
Providers and all the associated capital
expenses.
“One of rthe most significant impacts of MSTs is the ‘quantum changes’ in
equipment churn which requires more rigor around the equipment’s mid-term
lease experience.”
~ CEO, captive lessor
“Lessors need to evaluate not only the credit of the End User but also their integrity, based on the
exposure in MSTs and the possibility of feigning performance issues.”
~ Chief credit officer for captive lessor
“Think very carefully about what is actually
going on with the transaction
structure to be sure it makes
business sense.”
~ CEO, independent
lessor
“MST is a natural fit for captives and independents but less so for banks with a direct sales model and diverse asset
and customer base.”
~ Head of vendor finance bank lessor
Even industries with less
obvious services components
have demonstrated the need for
MSTs.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Industry leaders believe MSTs are viable product for
all leasing company types.
In most MSTs there is no
particularly thorny issue involved in accounting and
booking the contracts.
It is expected that many variations in
documentation will be introduced as
volumes grow and End Users
requirements become more refined.
Depending on the nature of the MST,
revenue recognition may be negatively affected
if an MST arrangement
contains a lease.
In the structuring and documenting of MSTs there has
been notable pushback from
End Users to the inclusion of
HOHW provisions.
The Finance Entity must have a lease
management system that is robust enough to link and process
the multiple elements in an MST.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
In coming years, as MSTs are expected to
represent a growing proportion of volume, alternatives such as
DRB-like dispute resolution must necessarily be developed and
accepted.
“MSTs really reflect a broader shift to access versus
ownership. It is akin to the Netflix model; we want to watch content but no-one wants to own a bunch of
DVD’s.”
~ CEO, independent lessor
“In order for bankers to begin to lend against contracts with upgrade and cancelation provisions, very specific parameters around levels allowed and robust reporting around performance against such parameters will need
to be developed.”
~ Senior lending executive to the industry
“Lessors are asking how do
you transform the market without cannibalizing
sales and have the Street
understand what you are doing
without penalizing you for it?”
~ CEO, captive lessor
As a rule, the more a transaction appears to
resemble a lease or loan, the more likely it is to fall
within the scope of some form of regulation.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
MST STUDY TAKEAWAYS1
2
3
4
MSTs will continue growing as a proportion of all offerings of equipment leasing and finance industry participants.
They will grow organically along a continuum of increasingly “bundled” equipment, financing, and services.
They will present growth opportunities for captive, bank and independent lessors across a wide variety of industries.
They will require a fair amount of rethinking and retooling of many individual industry practices, disciplines, and functions embedded in equipment leasing and financing services today.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
INDUSTRY IMPLICATIONSMSTs will continue growing as a proportion of all offerings of equipment leasing and finance industry participants.
They will grow organically along a continuum of increasingly “bundled” equipment, financing, and services.
They will present growth opportunities for captive, bank and independent lessors across a wide variety of industries.
They will require a fair amount of rethinking and retooling of many individual industry practices, disciplines, and functions embedded in equipment leasing and financing services today.
Alta predicts MSTs will make up more than 20% of industry volumes over the next 3 to 5 years.Asset management becomes more important due to significantly greater equipment churn with End User upgrades and equipment swaps.Additional headcount needed to structure and manage an MST portfolio: credit, asset management, treasury, legal, accounting and systems.Lease management system upgrades are needed to handle MST complexities, especially for reporting and compliance.
Substantial outbound education efforts required with regulators, lenders and rating agencies concerning MSTs.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
The reasons why customers want a Managed Solutions structure are the same reasons why the structure presents heightened risks/challenges
• Customer desire to shift more risk to vendor and/or financing source (e.g., obsolescence and utilization risks)
• Desire for a “turnkey” solution under one agreement with one monthly payment
• Desire for more flexibility (e.g., pay-per-use, mid-term upgrades/substitutions, walkaway options)
Variations in Structures
• Financing source (Finco) buys / takes an assignment of some/all of Vendor bundled paper
• Bundled items (equipment, service, software, consumables, etc.) provided under one 3-party doc
• Hybrid: Agreement between Vendor and Customer, referencing Finco and with separate leases
MST Challenges & Risks
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Risks/Mitigants
Risks Mitigants
Loss of “hell or high water” (HOHW) protection for Finco with a bundled offering with “blurry” lines
HOHW language (caution if using Vendor paper) Disclosure of assignment to Finco and portion of
payment assigned Waiver of defenses provision
Taking an assignment of Vendor paper lacking typical lease provisions (e.g., defaults; remedies; tax and insurance provisions; maintenance and return provisions; security interest grant; etc.)
If possible, work with vendor early to ensure inclusion
of such provisions Reps, warranties and indemnities from vendor (but be
prepared for pushback due to effect on true sale / rev rec)
If assigned payment not broken out, agree on breakout
with Vendor
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Risks/Mitigants
Risks Mitigant(s)
Services being provided are integral to the use of the equipment and/or are available from only a limited number of suppliers/vendors
Agreement from customer that service provider may
be substituted upon default/insolvency of Vendor Identify suitable/available options for substitute
providers upfront If Vendor is only source of service, and service is a
key component of transaction, Vendor credit-quality becomes much more critical (e.g., consider collateralizing indemnities)
Pay-per use, early cancellations/returns and other variable payment structures
Provide for customer SLV, TV or other make-whole
payment to Finco Obtain Vender residual value gap and/or
remarketing support, but be prepared for pushback due to effect on true sale / rev rec
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Risks/Mitigants
Risks Mitigant(s)
Large amount of services/software being financed by Finco (e.g., prepaid services and/or software licenses). Both a credit challenge and a challenge taking competitive residuals
Include “shut-off” rights Obtain remarketing and/or residual support from
Vendor
Finding of agency relationship between Vendor and Finco (e.g., if found, can void enforceability of waiver of defenses provision)
Adequate disclosures / disclaimers regarding agency in
MSA Adequate disclosures regarding roles, responsibilities
and obligations of the parties
How to ensure priority of Finco’s interests over other creditors of Vendor/bankruptcy trustee?
Because MSA may or may not be chattel paper, (i) take possession of the MSA in case it is and (ii) do lien searches and file UCC-1s against the Vendor in case it is not
EQUIPMENT LEASING AND FINANCE ASSOCIATION
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Special Considerations for Captive Fincos
• (-) HOHW may be a longer putt; Greater risk that Vendor and Finco may be lumped together
• (+) Likely easier to get done when Vendor and Finco are affiliates
• (+) Finco more likely to get financial support from Vendor (margin sharing)
Key Challenges/Risks Takeaways• Partner only with established and financially sound vendors with a strong reputation in their market;
the value of vendor due diligence cannot be over-emphasized
• Important to understand the equipment, software and services being offered in order to take smart and competitive residuals (e.g., secondary market, “stickiness” of equipment, services needed and available providers, etc.)
• Very little case law to guide us
• Bad facts make bad law; courts will go out of their way to ensure customer is not left “holding the bag”
• IF YOU DON’T UNDERSTAND THE OFFERING, CUSTOMERS WON’T; CONSIDER TAKING A PASS
EQUIPMENT LEASING AND FINANCE ASSOCIATION
FLEXIBILITYFlexible terms inherent in MST structures demand greater
operational acuity to proactively handle back-end processes such as asset management and billing.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
PRICINGEnd-user flexibility demands premium pricing to compensate for the greater risk in the MST structures – but is the market
willing to support it?
EQUIPMENT LEASING AND FINANCE ASSOCIATION
RISKBecause MSTs give rise to new types of credit risk,
understanding all the players in a MST, their motivations and ability to perform is paramount should a deal go into default.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
GROWTH OPPORTUNITIES
Global demand for Managed Solutions is growing which creates unique logistical and operational challenges in many
regional markets.
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Additional Observations
Pricing to reflect risk – no min. commitment means high price, increasing commitment reduces price.
– Are enterprise clients prepared yet to pay the premium for total flexibility?
Can banks make decisions based on behavior and probabilities – insurance companies can BUT at a price.
– These are risk decisions in the broadest sense – are traditional bank risk departments (balance sheet analysis) skilled to make such decisions?
On whose balance sheet will this financing be recorded?
EQUIPMENT LEASING AND FINANCE ASSOCIATION
Questions?
28