1993 financial guide to equipment leasing - includes leasing resource directory - A Railway Age special section

Railway Age, June, 1993 by Anthony D. Kruglinski, Michael Downey Rice

Answer: Residual values on these modern locomotives ("Dash 2" EMD units and "Dash 8" GE units) are likely to drop like a stone. If a.c. fails to catch on, we have a horse of another color.

Lessors: How not to lose a bid

One of the most frustrating events in the life of most finance lessors is losing a hotly contested bidding contest with one or more other lessors. Yes, you knew that there was competition for the transaction--there always is--and yes, you knew you could "buy" the deal by lowering your standard for profitability or increasing your residual assumptions--and risk--but you took your best shot and you thought you had it! Well, frustrated lessors, Railway Age has researched the matter and in the process talked to the top lessee/lessor advisors in pursuit of helpful hints at winning competitively-bid lease transactions. Here's what they had to say:

Ted Lachowicz (D'Accord)

Ted's emphasis is on early identification of the lessee's method in evaluating competitive lease bids. For instance, is the lessee an "all-in NPV" player (that is, does the lessee focus on the net present value of the lease payments and the probable present value of the future cost of eventually buying the equipment), or does the lessee place more emphasis on the "running rate" (a focus on the lowest rental payment amount and lowest accounting expense for the lessee)? Understanding which camp the lessee is in is of paramount importance in proceeding with the bid. Why? Because you may have the lowest monthly cost in terms of rent and lose because the lessee is assuming it will be exercising its purchase option and will see a higher all-in NPV as being a loser. On the other hand, if your lessee is a running rate player the opposite holds true.

Ted's second point is to quickly identify any major terms and conditions that the lessee feels are critical to it. For instance, are return conditions for the equipment at lease-end 15 or 18 years from now a hot point today? (Yes, for railroad lessees, this is often a big issue.) What about a lessor's need for specific insurance coverage or language, or specific lessor feelings on the right to sublease or use of the equipment outside the U.S. and Canada? These are important issues.

There are other potential lessee problems that can be turned to a bidder's advantage. These include a possible need of a delivery (and financing) of the equipment in the fourth-calendar quarter, constraints on the length of term that is needed for the base lease term, issues relative to the pricing and "average life" of the debt in a leveraged lease.

Where else to get an edge? If timing is critical, a short approval process inside the lessor can be an advantage. Quick appraisal activity for the equipment is also helpful.

Ted also points out that when reviewing a bid, lessees and their advisors will pay particular attention to the term sheet presented by the lessor, or the lessor's mark-up of the term sheet included in the lessee's offering memorandum. Exchanges on term sheet issues are indicators of things to come. (From this writer's experience, a potential lessor that ignores the terms and conditions requested by the lessee and makes no changes is creating not an impression that everything is acceptable, but one of arrogance that non-money terms will be dictated once a lessor wins a bid on the money issues.)