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Kit Menkin’s Leasing News Thursday, March 14, 2002 www.leasingnews.org Independent, unbiased and fair news about the Leasing Industry -------------------------------------------------------------------------- Headlines---- Inter-Leasing Association Committee—Barry Marks, Esq. Speaks Out Tyco Files with SEC to Spin Off CIT; Exec Comp Revealed “Sit, Dog, Sit” “Now Lay Down” “Roll Over” Commercial Money Center, Escondido, California—Last Word? Fitch Ratings Releases Guidelines/Synthetic Leases Enron's shadow falls on Idec's off-books lease plan NextCard fires 546, requests stock delisting Tax Laws—Changes Retroactive to 2001—Nancy Geary, CPL, CLP ### Denotes Press Release -------------------------------------------------------------------------------------------- Inter-Leasing Association Committee—Barry Marks, Esq. Speaks Out I want to get in my two cents on the inter-association committee proposed by Mike Meacher (president of the National Association of Equipment Leasing --NAELB). I hope that United Association of Equipment Leasing, Eastern Association of Equipment Leasing, and Equipment Leasing Association all see this as a way to address several issues we have all identified over the past few years: overlap in mission, duplication of expenses of attending conferences (especially for funders), inconsistent ethical rules and application of rules and the fact that, together, these 4 associations have the clout to make a real difference in the industry and fend off bad public perception and possible government interference. This is NOT NAELB's "baby" or any sort of proprietary proposal. Mike just formalized what a number of your readers have said before - the first step will be to drop pride of authorship and just sit down and talk. The two NAELB nominees to the committee are ready to meet anywhere, anytime, in face or by email or conference call or whatever. I hope we hear something soon. Barry Marks ------------------------------------------------------------------------------------------------- Tyco Files with SEC to Spin Off CIT; Exec Comp Revealed By Rachel Layne, Bloomberg Tyco International will spin off its entire CIT Group finance unit, accelerating a plan to split into four companies to quell investor concerns about accounting transparency. The company, which had considered retaining a stake in the finance unit, filed with the Securities and Exchange Commission to spin off the division by July. Tyco is still pursuing a sale of all or part of CIT, Chief Financial Officer Mark Swartz said on a conference call with investors. Tyco also received bids in what Swartz called the first phase of the auction for its plastics unit. It expects proceeds of as much as $3 billion. Tyco's shares have dropped 41 percent this year amid concern the company used acquisitions to masked slowing sales growth. Separating the finance unit will help the credit ratings and lower borrowing costs, investors said. "I feel the rating agencies were clear that they wanted a total separation," said Marcy Yeamans, an analyst at Banc One Investment Advisors, which manages about $142 billion in assets and owns Tyco shares. CIT will likely be hampered from making loans at competitive rates because of Tyco's exit last month from the commercial-paper market, analysts have said. Standard & Poor's and Fitch Ratings downgraded Tyco's debt in part because of the decreased financial flexibility. All of the CIT directors except for Albert Gamper, chief executive of the division, will resign from the board. The filing named five independent directors and said one or two more would be tapped after the transaction is complete. Gamper and Joseph Leone, chief financial officer of CIT, will receive retention agreements through June 1, 2004, the filing said. Actual amounts would be filed once the SEC has reviewed the filing, Tyco spokeswoman Maryanne Kane said. Gamper would get a salary of at least $1 million and a minimum cash bonus of $1 million if CIT hits certain financial targets. If CIT's profit rises 15 percent through the year ended Sept. 30, 2002, he would get a $3 million bonus. The finance unit has been distancing itself from its parent company by dropping the Tyco name and selling asset- backed securities to pay off debt. CIT sold $2.2 billion in securities backed by home equity loans and customer bills in the past month. Tyco tapped $14.4 billion in bank loans to repay short- term corporate IOUs. Its borrowing costs were climbing as investors questioned the accounting practices of Tyco and other companies after the collapse of Enron Corp. Tyco acquired CIT in June for about $9.2 billion to offer financing to customers of its industrial businesses. Analysts have estimated a sale would fetch at least $6 billion, the proceeds of which Tyco would use to help pay off debt at its industrial units. Shares of Tyco, based in Bermuda and run from Exeter, New Hampshire, fell 62 cents to $35. The sale of the plastics division is in addition to the break up of Tyco into electronics and security, finance, fire- protection and medical products companies. Tyco will use the money to repay debt. A sale of the plastics business is expected by April, Swartz said. Kohlberg Kravis & Roberts Co. made a bid with Blackstone Group LP, and Clayton, Dubilier & Rice Inc., while Carlyle Group Inc. and Madison Dearborn Partners Inc. made an offer, according to people familiar with the situation. KKR and Clayton Dubilier officials declined to comments. Officials at the other private equity firms weren't immediately available to comment. Analysts estimate sales at Tyco's plastics unit, which the company has reported as part of the health care business, at about $1.7 billion. The unit is the biggest maker of plastic hangers used in retail outlets and Ruffles trash bags sold in places like Wal-Mart Stores Inc. Bids "did fall in the range of expectations," Swartz said. "We continue to be pleased with the timing of disposition." ------------------------------------------------- “Sit, Dog, Sit” “Now Lay Down” “Roll Over” Here is what I've heard about the Tyco/CIT situation. Tyco is in the process of spinning off the CIT operation via a 15.3:1 CIT:Tyco stock issuance, currently set for May 1st. There is question as to what Tyco will do with the shares that it owns (approximately 20%), but essentially Tyco is going to keep its options open... whatever generates the most cash. So the current plan is not to sell it in a fire sale... although if someone makes the right offer Tyco is reserving the right to change its mind. This is what I've heard from a friend within the organization, so from your standpoint it is basically here-say... but I appreciate your newsletter and wanted to share my little bit of insight. James A. Kamradt Senior Vice President ATEL Capital Group tel. 415.616.3413 fax.415.989.3796 Here is what I hear: CIT has cut employees e-mail to and from Leasing News. I am told that even e-mail forwarded with our name is filtered out. I personally test sending e-mail from several other e-mail addresses, and they were received and responded, but not via Leasing News. If you work for CIT and receive this e-mail, it must not be going through their main computer, if it is, then they have cut certain people then rather than blocking the name. It is a company owned mail server and e-mail addresses. GE has told their employees not to talk to Leasing News. Not to send any e-mail and to clear anything first with them, which is there prerogative. Employees have told me over the telephone they are afraid to tell me anything, and I assure them that I keep everything confidential. Attorneys work on me all the time. They put their pants on the same way I do every morning, so I am really not afraid of them. I respect their powers, but bluffing does not work on me. Now CIT readers can receive and send from the home computers, plus can view Leasing News daily or in archive edition at www.leasingnews.org I also can talk to my sources on the telephone. For the SEC Form10 that CIT filed with the SEC, you can get it at Tyco's web page - Tyco Capital - Financials - SEC Filings. What I have heard is that my news my be “premature,” and “involved”, plus my sources do not want to jeopardize the sale of their division or their employment. One reliable source told me it is the Commercial Service Division that was sold off to General Electric, pending the Securities Exchange Commission paperwork. There originally were five divisions here, according to the Edgar Report. Equipment Finance is the largest, 30%, and all I can say is “C’iest la Vie” It is true that all the “i”’s have not been dotted or “t”’s crossed, and until it is blessed perhaps even by the FTC besides the SEC rules abided, it is not a “done deal.” According to one insider, this was moved into four divisions, then six divisions and combinations of corporate finance, structure finance, venture technology, and it appears they are being further divided, not sold as one unit, and you can bet this is Ford tough. Another was quite annoyed, saying “When this is done, the top executive get their bonuses, and maybe a job out of it, should they require this. Everyone here is a “commissioned salesman” in reality, looking out for themselves. It is just like Enron.” Morale has been affected by this, according to several CIT employees I spoke with, from what I consider top-management to middle management. “ It is a good thing some of the people who moved to Tempe, Arizona did not buy a house, “ one told me. Kit Menkin, editor
Commercial Money Center, Escondido, California—Last Word? According to a very high realizable source, a stolen computer in Florida where the insurance company would not pay started the avalanche way before September 11th. It came to the point that no insurance underwriter would cover Commercial Money Center paper. The expulsion from the National Association of Equipment Leasing Brokers was the final blow to marketing. Not paying the $5,000 advance rental payment back became very expensive indeed. -------------------------------------------------------------------------------------- ### ########################### ################## Fitch Ratings Releases Guidelines On Corporations' Synthetic Leases
NEW YORK-- --Fitch Ratings has published a special criteria report on the rating impact of synthetic leases when used by corporations to finance investments in fixed assets. The report addresses a form of off-balance sheet financing that is used to finance corporate offices and real estate and has been widely used by power companies to fund development of power plants, pipelines, and similar investments. Synthetic leases are an intermediate-term funding vehicle that generally does not appear on the financial statements of the lessee, but are treated as debt of the lessee for tax purposes. When evaluating the credit of the lessee of a synthetic lease, Fitch Ratings consolidates the structure back onto the balance sheet and incorporates income effects back into the income statement. The adjusted credit ratios are comparable to those resulting from using debt financing. The report details these adjustments and gives examples of the impact of using synthetic lease vs. debt financing. The 5-page report, 'Synthetic Leasing,' is available on Fitch Ratings' web site at 'www.fitchratings.com' or by contacting Market Services at 800/853-4824. CONTACT: Fitch, New York Hugh Welton, 212/908-0746 Ellen Lapson, 212/908-0504 James Jockle, 212/908-0547 (Media Relations) ######### ######################################## ______________________________________________________ Enron's shadow falls on Idec's off-books lease plan By Mike Freeman SAN DIEGO UNION-TRIBUNE STAFF WRITER To build its proposed $500 million manufacturing plant in Oceanside, Idec Pharmaceuticals Corp. planned to use a complex financing vehicle known as a synthetic lease – a method favored by many high-tech companies to pay for new corporate real estate. But these days, synthetic leases have become controversial – in part because they're off-balance-sheet transactions. Amid Enron's accounting shenanigans, rule makers and regulators are looking hard at anything that's off-balance-sheet and are considering tougher requirements. So Idec may wind up shelving synthetic-lease financing, which it hoped would save the company millions in interest expenses. "We ultimately believe that a synthetic lease, if we can do one, will be the most cost-beneficial to our shareholders," said Phillip Schneider, Idec's chief financial officer. But with the leases under the microscope, "nobody knows what's going to happen," Schneider said. "It's just an extremely confusing time right now." Idec's problem highlights just how widespread the fallout from Enron's collapse is likely to be. Used for years to finance equipment and aircraft, synthetic leases made the leap to real estate during the credit crunch of the early '90s, when financing for new buildings was hard to come by and expensive after the savings-and-loan debacle. While perfectly legal, synthetic leases are uncommon in San Diego. To qualify, companies must have top-rate corporate credit. Since many of San Diego's public companies are relatively small, few can meet the strict credit targets. But synthetic leases are popular among the high-tech elite in Silicon Valley and elsewhere. They allow companies to get the tax benefits of owning real estate without having the lease obligation or financing debt appear on the balance sheet. Under current accounting rules, synthetic leases can be reported in financial filings as "operating leases" – like payroll or other monthly expenses. But on tax returns, they're reported as "capital leases," where the tenant controls the building. That gives companies the best of both worlds. They get to deduct interest payments for tax purposes, but avoid writing off the depreciation of the property on the books, which would result in a hit on earnings. To critics, synthetic leases keep millions of dollars' worth of what's essentially mortgage debt below the radar of investors. While the leases must be reported in the financial filings of the company occupying the building, usually in the footnotes, critics say the disclosures sometimes are murky. "If the details are there, I'm fine with them," said Stuart Saft, a lawyer with Wolf Haldenstein Adler Freeman & Herz in New York. "The problem for me is often there isn't the detail." Last month, Krispy Kreme Doughnuts' shares took a hit after Forbes magazine called the company's synthetic lease for a doughnut mixing plant in Illinois "an off-balance-sheet trick in which a corporation has all the practical effects of a heavily mortgaged piece of real estate but tells its shareholders that it neither owns the property nor owes debt on it." Remec Inc., a San Diego defense contractor and telecommunications company, used a synthetic lease for a $17 million division headquarters in Kearny Mesa a couple of years ago. Synthetic leases "have gotten so much bad press that I hate to say we have it," said David Morash, Remec's chief financial officer. Remec is selling the building – on the market for $24 million – with plans to lease it back. The move is part of a shift in the company's strategy to make cash available for acquisitions, Morash said. He said it has nothing to do with the synthetic lease, which he says benefited the company and was disclosed in financial filings. "I think it's certainly a legitimate transaction that continues to give us tax benefits while giving us (operating lease) accounting treatment," he said. Todd Anson, a lawyer and co-founder of Cisterra Partners LLC in San Diego, has worked on dozens of synthetic lease deals. He said he thinks Forbes and other financial magazines have been too quick to sneer at the practice. According to Anson, financing charges using a synthetic lease – currently as little as 4 percent – can be as much as two-thirds less than those in a build-to-suit lease deal. "You can see from a cash-flow standpoint and a money-management standpoint the appeal of that structure," said Anson, who works with Idec and has developed millions of square feet of corporate space for technology giant Cisco Systems, another user of synthetic leases. Companies tapping synthetic leases, though, accept the risk of using short-term financing on a long-term asset. Synthetic leases typically run three to seven years. A balloon payment for the entire cost of the building comes due when the lease expires. In theory, the expiring lease can be rolled over into a new synthetic lease. That assumes, however, that interest rates are still low, real estate values are still appreciating and the company's corporate credit is still good. But if the business climate changes, lenders may be unwilling to roll over synthetic leases. That would force the company to come up with the cash, or sell the building to meet the balloon payment. In San Diego's hot real estate market, that wouldn't be a problem. But in the Silicon Valley, for example, real estate values have been hammered by the tech downturn. So a company with a synthetic lease could be forced to sell at the worst possible time. In addition, when the company leases the building back from its new owner after a sale, the lease rate is likely to be much higher than the synthetic lease payment. The Financial Accounting Standards Board, which makes rules for the accounting industry, is figuring out how to tackle off-the-books partnerships that make up the foundation of synthetic leases. Discussions include boosting the amount of equity from the parent company – usually the lender in a synthetic lease – from 3 percent to 10 percent. Proposals also outline methods for making sure that the 10 percent equity provided by the lender is truly at risk. Today, lender equity is sometimes guaranteed by the company in a side agreement, which the company will disclose as "restricted cash" in its financial filings. Drafts of the new accounting rules are expected in April, with a final decision in late summer. For Idec, the uncertainty means it will wait before deciding how to finance its manufacturing plant. "I can incur soft costs like engineering, but I can't order the steel tanks or other critical long-lead-time items until I have a lease line set up," said Schneider, the company's CFO. He expects to make a decision on which financing method to use in the next few months. Mike Freeman: (760) 476-8209; mike.freeman@uniontrib.com ----------------------------------------------------------------------------------------------------------
Please send to a colleague, as we are trying to build our readership. Please send classified ads to a friend looking for work in the leasing industry -------------------------------------------------------------------------------------- Governmental/Municipal Leasing is Up Here is the organization and their conference to learn more 21st Annual Spring Conference Back to Business May 1-3 * Renaissance Harborplace * Baltimore, Maryland The AGL&F is pleased to announce that the program for the Spring Conference is out and should be in your mailboxes shortly. In the meantime, you can download a copy of the registration brochure from the Events/Meetings section of the association's website, www.aglf.org - available as a PDF. ( Or http://www.leasingnews.org/PDFFiles/aglfspring.pdf http://www.leasingnews.org/PDFFiles/AGLFSPONSOR.pdf ) The AGL&F is holding this very important conference in Baltimore, Maryland and with the excellent location of the hotel in downtown Baltimore, we are expecting one of the largest conferences for AGL&F in some years. The theme of the conference is titled, Back to Business, and we think it is very appropriate for this meeting. With the tragic events of last fall, many of us had to re-evaluate attendance plans in Tucson for the Fall Conference and many of our companies suffered financially as a result of the attacks as well. Thankfully, for all of us, while the world has changed a little, the mission and importance of our industry has not. In fact, municipal leasing has never been so important to the communities and cities where we live. Budgets in many areas of the country are tight and revenues are the smallest they have been in years. Municipalities are looking for was in which to keep projects funded - whether it be to build new building and infrastructure to bringing the classrooms of America into the 21st century with new computers. The continued financing of these projects is our responsibility. Baltimore has many activities and May in Baltimore is a spectacular time to walk around the harbor, check out the National Aquarium or watch the Orioles. We have a great dinner and networking event at Oriole Park at Camden Yards on the evening of Thursday, May 2. The AGL&F has two suites at the park, and will serve dinner and have a reception beginning prior to the baseball game and continuing through the evening as the Baltimore Orioles take on the Kansas City Royals at 7:00 PM. -- Graham Hauck Executive Director Association for Governmental Leasing and Finance 1255 23rd Street, NW Washington, DC 20037 202.742.AGLF (2453) fax: 202.833.3636 email: gsh@aglf.org Next AGLF Conference: 2002 Annual Fall Conference November 20-22, 2002 / Disney's Yacht & Club Resort / Orlando, FL NextCard fires 546, requests stock delisting Christian Berthelsen, San Francisco Chronicle Staff Writer NextCard Inc., the failed San Francisco Internet credit card company, has laid off 90 percent of its remaining staff and filed papers seeking to delist its stock. In a filing with the Securities and Exchange Commission, NextCard said it will lay off 546 workers, leaving 65 with the firm. Of those leaving, 465 have been offered employment with a third party that is contracting with the Federal Deposit Insurance Corp., which has taken control of the firm's operations and is seeking to sell the card portfolio to an established company. In January, NextCard laid off 170 employees, or 19 percent of its workforce at the time. NextCard also said it will file an official request to delist its stock from Nasdaq. The move is mostly a formality because the stock has not traded since Feb. 7, when it traded at 14 cents per share. At its peak, NextCard shares reached $53.12 on Nov. 10, 1999. The company began to run into trouble as loss rates mounted from customers who had signed up through the Internet and ceased paying their bills. The company was put up for sale in November after concluding that it could not afford to set aside $140 million in additional loan loss reserves, and federal banking regulators ordered it to stop accepting new customers. New
Tax Laws—Changes Retroactive to 2001—Nancy Geary, CPL, CLP There was a new tax law act passed this week. Below are changes that are RETROACTIVE TO 2001.
1. DEPRECIATION BONUS: Taxpayers are now entitled to an additional first year depreciation deduction equal to 30% of the adjusted basis of qualified property, for both AMT and Regular Tax.
Property Eligible for the special treatment includes: - Property with a recovery period of 20 years or less - Non-IRC 197 computer software - Qualified leasehold improvements
Property must be acquired after 9/11/01 and before 9/11/04
Applies to luxury autos, with some limitations;
2. NOL - can be carried back 5 years instead of 2
3. New York Liberty Zone, clients in lower Manhattan have special tax breaks; > 4. Personal Credits on 1040's, credits now allowed against AMT, adoption, disability, child, and education credits. If a client is in AMT you need to review the credits.
Even if you've already filed for 2001, you may want to consider the benefits of amending your return for these changes.
Nancy A. Geary, CPA, CLP Edwin C. Sigel, Ltd. Certified Public Accountants and Portfolio Management Services 800-826-7070 ( You may contact her for specific questions. Sigel also provides other services for leasing associations regarding management of portfolio’s an | ||||||||||||||||||||