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March 7 , 2001
Headlines: U.S. Capital, Santa Barbara, CA---BK???????????????????????????????? Terminal Leasing, New York, New York--Not a Wonderful Town for Brokers/Discounters Linda P. Kester/Surviving a Recession--featured article Eastern Association of Equipment Lessors Spring Conference Watch out for "Naked Wife" Feds Go after First Capital for Fraud (thank you,Bob Homans) As Reported Here Last Week: Finova Files for BK #11 and Coming This Friday---Whatever Happened to???..... " "**** always has a great positive attitude. He has always been enjoyable to be around. I have know him for a number of years. **** was the manager of ***** when I first met him. Even though we were competitors, I always considered him a good friend." Tom Quilling IDS Group <tquilling@idsgrp.com> International Decision Systems, Business Development N.A. ---------------------------------------------------------------------------------- U.S. Capital, Santa Barbara, California Latest e-mail: "U.S. Capital, in Santa Barbara, is out of business. Call their Ph. #. They are BK. Stick a fork in them, they are done!" ( Name With Held) ( We are notifying the Department of Justice as there may be fraud involved in not returning advance rentals or funding transactions. editor) just before press time, received this: .U.S. Capital files Chapter 7, all transactions after 3/3/01 will not be funded. New message on Ken Nelson's voice mail tells the whole story. I am pissed! He lied to me over and over again. If I think I could win a law suit I would sue the S.O.B. He has cost me a lot of money, plus my credibility with several vendors and lessees. ( name with held ) ( Bankruptcy cannot help if fraud is involved. Metrolease is in limbo and to my knowledge, has not filed bankruptcy. editor ) ---------------------------------------------------------------------------------- Terminal Leasing, New York, New York we are collecting information to post, and this person has asked us not to use their name, so we are not posting until we obtain more verification. "I will be happy to share our Terminal Marketing experience, please withhold my name as our particular transaction does involve other credible people in this industry. "We had a deal approved essentially 4th party (plus).We completed all of the paperwork and was told upon funding that Terminal was in the middle of a portfolio sell off and they did not fund deals during this time due to audits involved with the sell off. Weeks later we were then told that they took 30 days to fund the deal. As we neared the 30 day mark and our vendor was fit to be tied we tried to be pro-active and follow-up. We were then informed we needed to contact an attorney on behalf of Terminal Marketing. After reaching the attorney we were told that the company was under investigation. That the insiders were "processing paper" then immediately selling it off and splitting the proceeds among some of the personnel but never paying the vendor. We are now in a daily battle trying to investigate if our paper was sold off or not and trying to retrieve the lease paperwork. "I have been out of contact for a few days on this deal. As of Friday, nothing had been located on behalf of our Lessee or Vendor. The upside at this point is that a UCC has not been filed either by Terminal. "Hope that sheds some light." Name With Held + + + + We read your newsletter daily and find it an invaluable tool. Thank you for your continuing effort. With regard to Terminal Marketing Company, today was the first I have seen anything about them in the newsletter. I've been waiting for something to come up. Our company does primarily vendor program business and we had a deal come to us in early-February from one of our vendors. The end-user had a long term relationship with Terminal and had approval(s) in place for over $1MM worth of equipment financing. Our vendor brought us their piece. Turns out the transaction(s) had been taken all the way to the Purchase Order stage by Terminal Marketing. After waiting several weeks for funding (it was supposed to be a year end deal), the vendor finally brought us in to "save the day". Terminal had finally admitted that they would not be able to fund the transaction until their internal funding situations had gotten worked out. We were able to close the deal quickly and painlessly (thankfully). Would appreciate any further word you receive with this regard. Name Withheld + + + Terminal Marketing 151 N. Main Street Suite 300 New City, NY 10956 President and 100% stockholder is Mr. Sandy Schneiderman My understanding is that they will continue to bill & collect receivables. Employs approx 12 people at this location, as of a year ago. Formerly ran business out of 10,000 sq foot home, in which he had created a home office at: 5 Waverly Court, New City. Did this for about 10 years. This home office eventually occupied as many as 8 employees on a full time basis. About 5 years ago they were forced to move operations from the home to a legitimate business location (Main Street)after the city zoning commission received complaints from neighbors (and disgruntled leasing brokers)about the home office traffic and the fact that the property was not zoned for an office. Darren A. Gardner, CLP ALLIANCE CAPITAL CORPORATION "Specializing in Equipment Financing" Charlotte * Los Angeles * New York * Phoenix 480-443-0002 ext. 211 * www.alliancecap.com + + + I have more information than I would like to admit. I am spending a tremendous amount on legal...heres the scoop. The Terminal Marketing company is owned 100% by Sandford Schneiderman. The company has utilized securitization to fund their leases. They have been the dominant force in the broadcast and entertainment industries for many years. If they want a deal they WILL win it. Many have wondered for years how they can not only offer such low rates but approvals that are way above and beyond what any traditional lender would extend. Well if it looks too good to be true it typically is. Terminal Marketing had terrible operations, no processes or procedures and no checks and balances. As Terminal grew they did not have a focused business model. They started a bus division about two years ago which was shut down about 6 months ago and rumor has it they lost 10+ million. As they grew they were paying out such a high PV that I believe they started burning cash. They have tens of millions of dollars in payables and the bank has come in and taken over. Lehman and MBIA are rumored to be the lead banks as well as potentially Bank of Tokyo and possibly Wells. We assigned them transactions about 120 days ago totaling 2.8 million and 500k of which has been funded by C2 Capital ourselves the remainder is still un-funded. The documents and other information was sent to them and executed according to specific direction due to the fact that they were undergoing an audit and needed to present to their bank in order to get funding. We sent them everything in trust with the final consideration being payment. In that they have failed to fulfill the assignment we have demanded our contracts back. They have failed to do so and have set clients up for billing and collecting wrongfully. They started to collect lease payments on our leases that they haven't funded as well as they are billing clients on leases that the vendors have not been paid and are waiting now for 120 days. Obviously there are many people suffering from this. We cant fund the leases because we don't hold the physical contracts as of today. We are hoping to get our contracts back that are rightfully ours but it is certainly a messy situation. I have a terrific law firm who we have spent the money and taken the time to educate. I would welcome anyone in this situation to call me directly at 310-288-1700 ext 224 to discuss. David J. Itzikman C2 Capital, LLC 9255 Sunset Blvd. Suite 320 LA, CA 90069 (310) 288-1700 ext 224 (310) 288-0717 fax ------------------------------------------------------------------------------------------ Who We are----- Readers: We are an electronic newspaper for the entire leasing industry, not just one segment. We also are not just for executives, presidents, CEO, but for all the employees. For years, I have been telling the directors of the associations I belong to, we need to get all the employees involved. When I was regional chairman of one, I had meetings, inviting operations and other people to meetings, to mingle, learn from each other, and help each other. It is silly to think an employee is going to remain at the same company for 30 years. There are no more Bob Cratchets. When employees learn more, or have better opportunities, their employer should be doing more to keep them happy, and if not, move on. Presidents do this. Sales managers do this. Why can't everyone do this? We encourage everyone in the leasing industry to read our electronic newspaper and hope we are serving the entire spectrum. editor. ---------------------------------------------------------------------------------------------- Eastern Association of Equipment Lessors Spring Conference 2001
April 26 to the 29th Hyatt Dorado Dorado, Puerto Rico Our spring conference is being held at the Hyatt Dorado Beach Resort in Dorado, Puerto Rico from April 26 to the 29. The event kicks off with our golf tournament Thursday, and the opening night is the EAEL Legal Committee Presentation and opening reception. Workshops include an "Historical, Legal and Economical Aspect of Puerto Rico", "The Changing Marketplace", "How to Grow Your Business", "Marketing on the Internet" and "An Additional Income Source for Equipment Lessors Utilizing Your Existing Vendor and Lessee Base", as well as our infamous legal breakfast round tables. Social Activities include a Beach Olympics, Beach Volleyball Competition and Sand Sculpture Contest and Saturday evenings "Island Adventure Party". This is our fourth trip to this venue and we look forward to greeting as many of our friends as possible. Amfnyc@aol.com Alison Pryor, EAEL Executive Director
-------------------------------------------------------------------------------------------- LINDA P.KESTER This article is also "on line" at: http://www.leasingnews.org/articles.doc/newsletter5.htm Surviving A Recession By: Linda P. Kester Diversification, how funders tighten credit selectively, and how to take advantage of select opportunities. Many of today's brokers and lessors have never experienced a recession, because of that they may get caught up in the negativity created by the media and feel helpless. The world is not coming to an end, the economy as a whole has just stopped growing for a brief period. A few areas will be hit significantly, most will not be affected that dramatically. There are ways that you can make sure that you are not dragged down with the unfortunate minority. In my opinion there are three key themes you need to focus on to make the best of market conditions we haven't experienced in ten years. Prepare for tough times when you feel they are coming, react quickly and appropriately to what is happening and return to a focus on the fundamentals you may have strayed from during the easier times. Okay, you like the rest of the business community expect tough times are ahead. Accepting that, what do you do next? One of the basic strategies is also one that people stray away from during the "good" times. Whether you are a broker or a funding source you should strive to diversify as many aspects of your business as practical. Different sectors, geographical areas, lines of equipment, etc. are impacted differently during a recession. The less concentration you have in any one area leaves you less vulnerable if that area is impacted more than others. We all know what has happened to the Dot Com sector and if you had concentrated in that business you probably are already feeling the sting of not diversifying your business by now. Another example would be the trucking business. Spurred by the high cost of fuel, many in that business are struggling and if you are in that business you may have felt this through higher losses or lower volume. Even if you think you can buck the odds and still get volume from your core businesses in spite of a recession, remember, during tougher times funding sources tighten selectively. Instead of tightening across the board they tend to select areas that they perceive to be struggling and tighten aggressively in those. Look to see how many aspects of your business need more diversification. What would happen if one or two of your best vendors shut their doors? What if your best sales rep quit? Are you concentrated in one sector that will feel a credit squeeze more than others? There are a lot of changes happening with funding sources. Are you relying heavily on one or two? A recession is defined as a period when the economy is shrinking, albeit slightly. In reality, though, what happens is some sectors shrink dramatically while others actually continue to thrive. Diversifying you business will help keep you in the latter group. Another way to prepare yourself for a slowdown is to know your funding sources and manage the relationship properly. Are the lessors you saw last year with the lowest rates and largest credit appetite still there? If not then maybe those with the same strategies will not be around next year. Try to find out which of your sources is healthy enough and has the right strategies to stay in the business for the long haul. Once you have selected those, manage the relationship so that you will both keep it going through tougher times. Send them a good mix of credits, not just the tougher ones and when possible help them out with problem accounts. While this is basic stuff, the brokers who do this properly with the right sources will be the ones who continue to get their business underwritten during tougher times. Remember, when funding sources tighten they do so selectively and this applies to their sources of business as well as the credits. In a recession as in any time of change there are select opportunities. If you have prepared yourself properly so that you business remains healthy you can take advantage of them. Many of your competitors will not prepare themselves properly and will either pull back or even exit certain markets or customers. This is the time to take advantage and get additional business from those customers. It won't be easy but vendors remember who was there for them when they needed it. Vendors tend to lose trust in sources that are in then out of the business, they like consistency. Another way to take advantage of competitors that are shrinking is to hire displaced or frustrated employees. Sometimes this is the best way to take business away from the competition. In a declining economy the government tends to lower key interest rates, take advantage of this. A funding source with whom you have a good relationship with will generally pass on all or most of their lower cost of funds. Use this selectively to either keep vendors that aren't getting as many credits approved happy or to get in the door with some of those customers who are disappointed with your competitors. Of course if you don't have to lower rates to keep some of your business use the increased margins to help offset the lower approval rates you may be experiencing. Get back to the fundamentals of your business. This is probably what helped you grow your business and will definitely get you through more challenging times. During periods of prolonged prosperity people tend to get lazy. Sales people tend to get away from prospecting and funding sources and credit approval are easier to come by. The time to prospect is when you still have business, not when you wake up one morning and realize you have nothing coming in the door. You know how long it takes to develop a new account properly. Returning to the fundamentals of your business also requires training. Don't let your employees stumble during these uncertain times. Some areas that may need fine tuning are discipline, motivation and overcoming objections. Refresher courses in these areas will pay off if some of your existing customers slow down or simply go away. Give your employees these tools and they can take control to ensure that you hold on to your existing vendors and lessees. In addition, if approvals are tougher to come by then maybe courses in credit presentations are needed. When credit is looser people tend to get the bare minimum in applicant information. Now may be the time to educate your staff on understanding credit and working the tougher transactions. There is a possible recession looming out there. If and when it happens some people will be harmed. They will inevitably blame the economy. They are probably right now maintaining the states quo and simply hoping it doesn't happen. Prepare now and you will find that you will not be affected very dramatically. This will leave you in a stronger position and enable you to react to changing times and take advantage of select opportunities. Returning to the fundamentals of your business will help you take advantage of weaker competitors, develop new and varied sources of business and create the opportunities for success that will actually make the next couple of years very profitable. ------------------------------------------------------------------------------------------ This Day in History Controvery?: I still contend that your today in history continues to be one day stale. With the e-mail filters, I did not receive this until 8 PM tonight. Note your date / time stamp of 5:54 PM Eastern Time. ( Name With Held--writer needs permission from his company to write to Leasing News. editor ) I was late today. It went out at 2:24pm, California time, as I took at twenty year vendor to lunch ( he even paid, Chinese food ). You know, I am also an active lessor/discounter and have many things going on at leasing news, too. I am looking for an intern, interviewing, to get some help for Leasing News, plus I need a lease contract/documentation person for American Leasing. I have been doing today in history for maybe five years at American Leasing. I have a routine and I do it first thing in the morning, right after I feed the ferral cats. You are asking me to do it a day in advance for the East Coast. Often I get the news out at 1pm, California time,or 4pm East Coast time. I don't think I can change, because to me it would be "This Day Tomorrow..." You also don't get them on Saturday or Sunday, if I am in and write one, which does happen, or on days that I don't issue Leasing News ( sometimes we are only four times a week ). Plus it is the "signature" part of my e-mail. Linda Kester tells me it is her husband's favorite part of the newsletter, and I have another reader who tells me he has them all in a folder in his computer. Plus readers catch me with typo's, so I know they read them. I want to please our readers, but I have a definite mind set that it is "today in history..." I would like more feedback. This gives me an idea, let me see if we can get a meeting at the NAELB conference in New Orleans to meet the editor and advisory board and get some direct feedback. -------------------------------------------------------------------------------- Watch out for "Naked Wife" Troj_NakedWife This destructive Trojan deletes all DLL, INI, EXE, BMP, and COM files in the Windows and system directories. It propagates via email as an attachment called NakedWife.exe and subject line: "FW: Naked Wife." Don't Open it!!! This destructive Trojan was written in Visual Basic Script and requires the presence of MSVBVM60.DLL in the infected computer's System directory to run. Upon execution, this Trojan deletes all DLL, INI, EXE, BMP, LOG and COM files in the Windows and system directories. Due to this, it is impossible to reboot an infected system. It propagates via MS Outlook and Outlook Express, by sending out an email to every email address listed in the infected user's address book. This email has the subject line "FW: Naked Wife" and the attachment "NakedWife.EXE." For more information, go to: http://www.antivirus.com/vinfo/ Never open an attachment from someone you don't know. Also be leery from anyone you don't receive attachments from on a regular basis. And as important, most anti-virus programs have weekly up-dates. But if you don't take advantage of this, you could make the accident of opening up "Naked Wife". ----------------------------------------------------------------------------------------- Feds Call it Fraud!!!! New York Times article ( thank you: Bob Homans;rhomans@nordencapital.com ) First Capital, one of the nation's largest consumer lenders, was charged by federal regulators yesterday with routinely deceiving and lying to customers, tricking them into costly loan refinancing and purchases of expensive "credit insurance" that generated fees for the company but often were of little benefit to borrowers. Acting against what it called predatory lending, the Federal Trade Commission sued Associates and its owner, Citigroup, in Federal District Court in Atlanta, after F.T.C. and Citigroup officials could not agree on a settlement. The agency's five commissioners — three Democrats and two Republicans — voted unanimously to file the suit. The commission wants a ruling that will prohibit Associates from misleading borrowers, and it is also seeking to force the companies to pay hundreds of millions of dollars in compensation to consumers hurt by the company's suspected wrongdoing. Citigroup and its Citifinancial Credit Company subsidiary were named as defendants because Citigroup acquired Associates last year and assumed its liabilities. The lawsuit does not address lending practices at branches unrelated to Associates, according to F.T.C. officials. Associates' practices primarily victimized poor and unsophisticated borrowers, commission officials said. Associates customers "tend to be low-income, often in minority communities and really on the fringes of the economy, and this may have been the only way they could get much- needed credit," said Jodie Bernstein, director of the F.T.C.'s bureau of consumer protection. "Unfortunately, it was offered in a way that ended up injuring many of them." The most recent figures available indicate that Associates has nearly half a million home-equity loans and about three million personal loans outstanding. Citigroup says it has changed lending practices at Associates since it acquired the company. Associates is the 15th lender the F.T.C. has sued over charges of predatory lending, and investigations are continuing into other companies. In a statement, Citigroup did not dispute the specific charges of predatory lending, and senior Citigroup officers, in past interviews, have voiced concern about Associates' conduct as an independent company. However, Citigroup officials, who did not learn the suit would be filed until late Monday, called the legal action "counterproductive." A person close to the negotiations between Citigroup and F.T.C. officials also said Citigroup officials had made clear that they felt that any potential liability from the Associates practices addressed in the F.T.C. complaint was far less than the hundreds of millions of dollars the F.T.C. said it was seeking. F.T.C. officials disagreed, saying the amount they ultimately would seek would bear close relation to the profits Associates made from sales of single-premium credit insurance. Citigroup said: "From the time we announced our intent to acquire Associates, we indicated our full commitment to resolve concerns that had been raised about their business. We have fulfilled that commitment by implementing Citifinancial operations and compliance systems throughout the former Associates' branches and establishing processes by which customers of the former Associates can have any issues addressed." Typically, credit insurance is meant to cover monthly payments if a borrower is seriously injured or dies. When it is sold in one single premium, as opposed to month-to- month premiums, the cost is financed and rolled into the loan balance. A joint report last year by the Treasury Department and Department of Housing and Urban Development sharply criticized single-premium credit insurance as "unfair, abusive and deceptive." During the last five years, F.T.C. officials say, Associates earned more than $800 million in premiums from single-premium credit insurance while paying out less than $300 million in benefits — leaving more than $500 million as profit. Instead of properly disclosing the terms of the insurance during discussions with customers, Associates' employees often referred to it as "total payment protection," and, at least until mid-1998, were trained to quote the monthly payment with the insurance included automatically, according to the F.T.C. complaint. Employees typically rushed customers through the loan closings, and if a customer objected to the insurance, in many cases "the Associates employees told the customer that changing the amount of the loan to eliminate these products would require rescheduling the closing, knowing this posed a great hardship for the customer," the complaint said. Moreover, Associates employees often encouraged customers to take on debts that had high fees and other charges, even though they often told customers falsely that they would save money, according to the F.T.C.'s complaint. The company also improperly tried to collect on delinquent loans by disclosing customers' debts to others without permission, calling customers at work after being told not to do so, and making repeated telephone calls "with intent to annoy, abuse, or harass," the commission charged. The lawsuit was hailed by consumer advocates who have campaigned for years against Associates. They charge that much of Associates' profits came at the expense of homeowners who lost much of the equity in their houses — or lost the houses altogether — from having high fees, points and credit insurance packed into their loans. "Those of us who have worked on the community level have seen the abuses outlined in the F.T.C. complaint, and many of us believe that Associates is a rogue company and may alone account for 20 percent of all abusive home loans in the nation," said Martin Eakes, the founder of Self-Help Credit Union, a nonprofit community lender in Durham, N.C., and a longtime critic of Associates. Mr. Eakes challenged Citigroup's assertions that it had made significant efforts to change Associates. "The reforms announced by Citigroup have been very cosmetic to date, and in no way address the significant problems that the F.T.C. complaint outlines," Mr. Eakes said. "Citigroup can repeat a thousand times that they have cleaned up Associates' practices and that they are now the best in the industry, but that will not make it true." Citigroup said in a statement that was wrong, and that the company was dedicated "to implementing enhanced practices, procedures and compliance not only within former Associates operations but throughout our entire consumer finance business." The changes Citigroup has said it will make include establishing programs to "refer up" customers who have good credit into lower-interest loans; limiting broker and lender fees to 8 percent of a loan; limiting prepayment penalties to the first three years of the loan, instead of five years; and promising not to refinance no-interest or low-interest loans from certain low-income housing groups. --------------------------------------------------------------------------------------------- Finova Group, Units File For Chapter 11 Bankruptcy By Deborah Eckert, Dow Jones Newswires Finova Group filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court in Wilmington, DE, marking the beginning of one of the largest bankruptcy cases in a decade. Scottsdale, AZ-based Finova filed Chapter 11 petitions for itself and several of its units, including its principal operating subsidiary Finova Capital Corp. Through Finova Capital, Finova provides financial services to midsize businesses. Finova's Chapter 11 petition cites consolidated assets of $12.46 billion and debts of $11.38 billion. The financial information includes assets and debts of the company's direct and indirect subsidiaries, some of which have begun Chapter 11 cases along with the parent. In addition to Finova and Finova Capital, Finova Capital PLC, Finova Loan Administration, Finova Mezzanine Capital, Finova Portfolio Services, Finova Technology Finance, Finova Finance Trust, and Finova (Canada) Capital also filed petitions. As reported, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce petitioned the Ontario Superior Court of Justice and Bankruptcy to judge the Canadian unit bankrupt. The banks have sought a receiving order for the property of Finova (Canada) Capital, according to Dow Jones Newswires. Finova's petition discloses that the company has 61,218,037 shares of common stock outstanding held by 19,176 holders. Those owning 5% or more of the voting shares are James D. Bennett Management, Franklin Mutual and Legg Mason and affiliates. The company has 2.3 million shares of preferred stock that are authorized but unissued. Finova's only debt securities are convertible subordinated debentures held by its Finova Finance Trust subsidiary. Finova names State Street Bank, as trustee for debt securities, as its largest unsecured creditor, with a $115 million claim. State Street also holds a $5.1 million claim for annual trustee fees. Deutsche Capital Markets is listed as holding a claim of between $8 million and $9 million against Finova in connection with a swap counterparty. Finova says the claim is contingent and related to a guarantee of hedge breakage costs related to a securitization. Finova's wholly owned Finova Capital's Chapter 11 petition lists eight groups of unsecured debt securities held by more than 500 holders. The amounts of the debt securities, which total more than $6 billion, are: $305.7 million, $230 million, $980 million, $1.9 billion, $250 million, $225 million, $2.01 billion and $481.7 million. The petition says the information about the unsecured debt securities is provided on an indenture basis, that more than one shelf registration was made under some of the indentures, and that more than one series of debt securities was issued under some of the shelf registrations. Finova Capital says that while it believes there are less than 500 record holders of debt securities under each indenture, it doesn't know the number of beneficial holders under any series, shelf registration or indenture. Finova Capital identifies its largest unsecured creditor as Wilmington Trust, with a $4.38 billion claim in connection with debt securities issued under multiple indentures. Following Wilmington Trust is The Bank of New York, with a $980 million debt securities claim, and Chase Manhattan Bank (Lon don), with a $481.7 million debt securities claim. Finova previously said it would use the bankruptcy filings to implement a pre-negotiated restructuring agreement that, if approved, would leave Warren E. Buffett's Berkshire Hathaway and Leucadia National with a 51% stake in the company. As reported, in late February Berkshire and Leucadia agreed to provide Finova with a $6 billion loan in connection with restructuring all the outstanding bank debt and publicly traded debt securities of Finova Capital. Berkadia, a joint venture formed for this purpose and owned jointly by Berkshir e and Leucadia, will make the loan, according to a Feb. 27 press release. According to a report by The Wall Street Journal, an individual close to the deal said Berkshire owns $1.4 billion of Finova's debt, including $300 million of its $4.7 billion in bank debt and $1.1 billion of its $6.3 million public bond debt. In consideration for the new loan, Berkadia got a $60 million commitment fee and, in addition to certain other fees, it'll receive another $60 million fee upon funding the loan. In connection with the agreement, Finova and Leucadia entered into a 10-year management agreement under which Leucadia would provide general management services in exchange for an $8 million annual fee. Leucadia executive Lawrence S. Hershfield was appointed chief restructuring officer of Finova a nd will work closely with a special committee of Finova's board to complete the restructuring. As reported, in January Finova terminated an investment agreement with Leucadia under which Leucadia would have invested as much as $350 million in Finova after the agreement was unable to attract sufficient creditor support. The Wall Street Journal also reported that Goldman Sachs Group and GE Capital recently proposed taking effective control of Finova by purchasing about $2 billion in Finova debt and receiving a management contract to run the commercial lender. Under the deal with Berkshire and Leucadia, subject to creditor and bankruptcy court approval, Finova Capital would use proceeds of the $6 billion senior secured five-year term loan to pay down, at par value, its existing $11 billion in bank debt and publicly traded bonds - which translates to about 55 cents on the dollar. The remaining $5 billion would be restructured into $5 billion of new 10-year senior notes of Finova Group. In addition to Berkshire and Leucadia assuming a 51% stake in Finova, Berkadia would be entitled to select a majority of Finova's board. Notably, the parties said in the press release last month that the public would keep its existing shares. However, in light of Berkshire and Leucadia's 51% interest, existing interests would likely be substantially diluted. The company didn't say in the press release how unsecured creditors would be treated under the plan. However, the Bankruptcy Code generally provides for full payment to creditors before interest holders receive anything. Because interest holders are slated to keep their shares, Finova could be planning to pay unsecured creditors in full. The term loan will be secured by all assets of Finova Capital and will bear interest, payable quarterly, at an annual rate equal to the greater of 9% or the London interbank offered rate plus 3%. In addition, an annual facility fee will be payable at the rate of 25 basis points on the outstanding principal amount of the term loan. After paying accrued interest on the term loan and operating and other corporate expenses, providing for reserves and paying accrued interest on the Finova Group senior notes, all excess cash flow and net proceeds from asset sales would be used to make mandatory prepayments of principal on the term loan. Any remaining principal and accrued and unpaid interest on the term loan would be due at maturity. The term loan would be guaranteed on a secured basis by Finova and substantially all its subsidiaries, along with the subsidiaries of Finova Capital. The senior notes would bear interest, payable semi-annually out of available cash, at the weighted average rate of Finova Capital's currently outstanding bank and bond debt and would be secured by a second priority security interest in the stock of Finova Capital and Finova Group's other assets. Enforcement of the senior note security interests wouldn't be allowed until the term loan is fully paid. Available cash from Finova Capital, after paying accrued interest on the term loan and operating and other corporate expenses and providing for reserves, would be used to pay accrued interest on the senior notes. No payments of principal would be made on the senior notes until the term loan is fully paid. After payment in full of the term loan, available cash flow from Finova Capital, after paying operating and other corporate expenses, providing for reserves and paying accrued interest on the senior notes, would be used first to fund a reserve to pay dividends on Finova Group's outstanding trust originated preferred securities and then to make semi-annual prepayments of principal on the senior notes and distributions to Finova Group common stockholders. All but 5% of the remaining available cash would be used for principal payments on the senior notes, with the 5% being used for stockholder distributions. After payment in full of the outstanding principal of the senior notes, 95% of any available cash of Finova Capital would be used to pay up to $100 million in additional interest to senior noteholders. Finova said in the Feb. 27 press release that it had $1 billion in cash, which would be available in the Chapter 11 case to take care of customer commitments, operating expenses and bankruptcy and restructuring expenses. Last March, Finova announced a big loan write-off and the unexpected departure of its longtime chairman and chief executive, Samuel Eichenfield. Following credit-ratings downgrades, the company was unable to roll over all of its revolving credit lines, and was forced to draw down those credit lines so that it could repay maturing commercial paper. In November, the company reported a third-quarter net loss of $274.1 million, or $4.49 a share, compared with a year-earlier profit of $54.9 million, or 86 cents a diluted share. In accordance with its announced moratorium on principal repayments, Finova Capital then didn't make a $50 million principal payment due Feb. 27 on its 5.98% notes due 2001, although it did pay accrued interest on them. The company has about $350 million of other bond repayments due before May, with an additional $2.1 billion in bank debt due in May. Finova Group said that Matthew M. Breyne resigned as its president and chief executive and John W. Teets stepped down as chairman but will remain on the board. The board elected G. Robert "Bull" Durham as chairman and promoted general counsel William J. Hallinan to the additional post of president and chief executive. Counsel for Finova and its bankrupt units are: Jonathan M. Landers Gibson Dunn & Crutcher LLP MetLife Building 200 Park Avenue New York, NY 10166 (212) 351-4000 and Mark D. Collins Richard Layton & Finger P.A. One Rodney Square P.O. Box 551 Wilmington, DE 19899 (302) 658-6541 Finova's case has been assigned to number 01-697 and Finova Capital's to 01-698. |
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