Collections, Asset, and Portfolio Management

Question 1

Definition of Portfolio Management

Answer 1

The continuous process of evaluating the nature and performance of the portfolio of leases to allow management to determine future underwriting adjustments, current loss reserves, and strategic planning.

Question 2

Cross-Functional Consideration

Answer 2

Origination
~Proper due diligence and data validation to ensure accurate
sourcing

Credit
~Complete and accurate information for proper risk analysis

Documentation
~Complete and accurate document inputs to maximize collection ability

Question 3

**Portfolio Segmentation

Answer 3

Division of the portfolio and market data into subsets or groupings consisting of specific characteristics and concentrations for further analysis

6 Important Portfolio Segments

1. Origination Source 2. Credit Evaluation Method
2. Special Credit Program 4. Lease Type
3. Lease Term 6. Industry

**(Test nugget – know definition of portfolio segmentation)
**(Test nugget – the 6 segments will be on the test, probably as a matching question)

Question 4

Portfolio Reporting Performance Indicators

Answer 4

Credit Risk Indicators
Financial Risk Indicators
Business Risk Factors

Question 5

Credit Risk Indicators

Answer 5

Frequency of delinquencies or defaults
Delinquency % = 30-60-90 Day Delinquencies/Total Receivables
30, 60, 90-day receivables aging
Amount of charge-offs of defaulted leases
Timing of defaults relative to origination date
Collection/Recovery costs on defaulted leases
Amount of recovery dollars net of costs

**(Test nugget – Know the formulas (will probably be given the numerator and denominator)

Question 6

Financial Risk Indicators

Answer 6

Gross interest yield (interest return on assets)
Net interest yield (Gross Yield – IDC or Origination Cost)
Interest Margin (Gross Yield – Cost of Debt)
Interest rate risk
Weighted average yields
Term and rate of runoff
Residual value performance %
(Total Residual Value Collected/Estimated Booked Residual Value at Inception)

Interest rate risk = risk due to variable rates funding fixed-rate contracts

Question 7

Business Risk Indicators

Answer 7

Market competition
Concentration by lessee industry, equipment, source, geography
Economic trends impacting origination volume or credit performance
Availability and cost of capital and debt
Availability and expertise of personnel to underwrite, fund, service and collect leases
Documentation thoroughness

Can anyone name a concentration risk at FAEF?
A: Amazon

Question 8

Primary Responsibilities of a Collections Department

Answer 8

Collection of lease contracts, residuals, taxes, insurance premiums, late charges, all other amounts due
Recognizing the signals of possible delinquencies
Knowing which collection practices are lawful and efficient
Keeping losses to a minimum

Question 9

Primary Responsibilities of a Collections Department

Answer 9

Maintaining customer goodwill while protecting the company
~e.g., Lessee wants to return the equipment prior to termination of lease. Collector reminds that the lease is non-cancelable.

~e.g., Lessee refuses to make payment due to faulty equipment. Collector reminds that the lessor makes no warranty and any issues should be brought to the vendor’s attention.

**(Test nugget – pay special attention to the examples)

Question 10

Secondary Responsibilities of a Collections Department

Answer 10

Interfacing with attorneys on litigation matters
Repossession
Remarketing repossessed equipment
Bankruptcy

Question 11

Bankruptcy

Answer 11

Chapter 7 – Personal or Business
~Personal or business liquidation of assets

Chapter 11 – Business
~Business reorganization of debts
Or individuals with a net worth greater than $150,000

Chapter 12 – Agriculture/Farmers
Reorganization of Assets

Chapter 13 – Individual
Individual reorganization

**(Test nugget – be able to match these “chapters” to their “definitions”_

Question 12

Bankruptcy Terminology

Answer 12

Automatic Stay
~In all cases, when a bankruptcy is filed, this is in effect as of the date of filing
~Prevents collections activity

Relief of Stay
~Lessor asks court for relief of the automatic stay to pick up the equipment
~Filed by attorney

Proof of Claim
~Creditors must file this affidavit stating the amount and nature of the debt in order to participate in the distribution of assets

**(Test nugget – Relief of stay allows the lessor to repossess is equipment)

Other presenter’s notes:
Relief of Stay - Lessor asks court for relief of the automatic stay to pick up the equipment; filed by attorney
Proof of Claim – does not need to be filed by attorney. Time limit is stated on bankruptcy filing

Question 13

Bankruptcy Terminology

Answer 13

Bar Date
The last date on which a creditor may take action (file proof of claim, etc.)

Cram Down
Creditor is forced to take the value of the equipment, not the amount they were promised to be paid

Summons and Complaint
Once litigation has been initiated against a lessee, the lessee is served this by an independent process server

(Other presenter’s notes: Cram down – particularly applicable when not a true lease)

Question 14

Items to Consider Upon Receipt of a Bankruptcy Notice

Answer 14

Who is the filing petitioner (Corp./Guarantors/DBA)

When was the last payment received versus the petition date

If the last payment from the lessee was received within 90 days of the petition date, the lessor may have to pay it back

Type of equipment (essential to the business?)

**(Test nugget – note that payments received with 90 days of the petition date may have to be returned)

Question 15

Items to Consider Upon Receipt of a Bankruptcy Notice

Answer 15

What type of bankruptcy

Chapter 7 – cease all direct communications with lessee and contact the lessee’s attorney when there are no guarantees (personal or corporate)

Chapter 7 – demand should be made of the PGs to bring the account current when there is a personal guarantee

(You can only go after PGs on a corporate Chapter 7, not a personal)

Question 16

Signs of Delinquency

Answer 16

Broken promises
Equipment returned
Ignored communications
Payment not received
Sudden change in pay habits
Changes in company management
Adverse economic trends in lessee’s industry
Labor disputes
Property taxes not paid promptly
Insurance cancellation

Question 17

Reasons for Delinquency

Answer 17

Overlooked due date
Lease terms misunderstood
Equipment problems
Payment priorities
Seasonal slow downs
Catastrophic occurrence
Internal accounting issues
Personal financial difficulties
Failing business
Fraud
Bankruptcy

Question 18

Who to Discuss the Delinquency With

Answer 18

Personal guarantors
Point of contact on lease application
Accounts payable
CFO/COO/Controller
Other officers

Question 19

Repossession

Answer 19

Can be Voluntary, Involuntary, or by Writ of Possession

“Self-Help,” the repossessing of equipment by the lessor is legal, but lessor may be liable if:

It occurs over lessee’s protest
Causes a disturbance of the peace
Causes physical injury or property damage
Occurs in absence of expressed consent
Occurs unsupervised on lessee’s property

Question 20

Alternatives to Repossession

Answer 20

Offer partial payments – partial is better than none
Extension agreement – rewrite lease to make up for missed payments later
Change due dates – take monthly cash flow into account
Recovery agreements – vendor remarketing

Question 21

Alternatives to Repossession

Answer 21

Forbearance agreements – higher rate, more collateral, more guarantors, more security

Transfer and assumption – third-party steps in to make the payments while original lessee is secondarily liable

Obtain judgment and enforce against Personal Guarantor – Federally Guaranteed Assets exempt (IRA, Retirement Accounts, 401k)

**(Test nugget – IRA and Retirement Accounts cannot be garnished)

Question 22

Commercially Reasonable Sale

Answer 22

Lessor must provide written notice to lessee, guarantors and junior secured creditors

May be by public auction

Notice of sale must be published in a paper in the county where sale is held at least 5 days prior to sale

If not deemed “Commercially Reasonable” the lessor forfeits their rights to pursue the lessee for any deficiency balance

**(Test nugget – know bullets one and three
In regards to the Notice, it must have date, time and location)

Question 23

Asset Management Responsibilities

Answer 23

Equipment valuation
Equipment appraisal
Residual valuation
Equipment recovery
Inventory Management
Secondary remarketing

(Asset managers collaborate cross-functionally throughout the entire equipment finance lifecycle)

Question 24

**Asset Management Involvement by Lease Stage

Answer 24

1. Pre-Funding
   Assign FMV, OLV and FLV of the equipment
   Determine the estimated residual value
   Ensure the lease term aligns with the asset value and useful life
2. Post-Funding
   Profitability monitoring
   Residual value review
   Asset remarketing at the end of lease
   Asset disposal at the end of lease
3. Default Scenarios
   Asset repossession
   Determine liquidation value
   Determine cost of asset recovery
   Determine whether asset recovery makes sense

Prefunding: also advises on lease payment structuring and return options

**(Test nugget – know that FMV, OLV and FLV are done pre-booking)

Question 25

Equipment Valuation Types

Answer 25

Fair Market Value (FMV)
The amount for which the asset could be bought or sold, in a transaction between a willing buyer and a willing seller in an open market

Orderly Liquidation Value (OLV)
An estimate of the gross amount that the tangible assets would fetch in an auction-style liquidation

Forced Liquidation Value (FLV)
The amount of money that a company will receive if it sold its assets in an auction immediately

**(Test Nugget- Know these!!)

Fair Market Value (FMV)
The amount for which the asset could be bought or sold, in a transaction between a willing buyer and a willing seller in an open market

OLV: ..with the seller needing to sell the equipment on an “as-is-where-is” basis. The term orderly implies that liquidation would allow for a reasonable time to identify all available buyers and the seller would have control of the sale process.

FLV: The idea behind flv is to get an estimate of the financial position of the company in the worst possible situation and circumstance
Residual: usually determined through an FMV analysis
Test nugget: Know the FLV definition

Question 26

Equipment Valuation Types Cont..

Answer 26

Absolute Value
A valuation method that looks only at the asset’s intrinsic value and does not compare to other assets

Residual Value
The value of the equipment at the end of the lease term

Repossession Value
A valuation method to determine if there is enough value in the equipment to warrant repossession

Relative Value (RV)
A method for determining an asset’s value that takes into account the value of similar assets

Question 27

Data Considered in Equipment Valuation

Answer 27

Equipment type
Age of the equipment
Manufacturer, make, model
Servicing requirements
Intended utilization
Maintenance
Depreciable life of the asset
Leasing scenario

(Intended utilization: how will it be used, where will it be used, who will operate it
Maintenance: who will perform the maintenance
Depreciable life: 3-5-10-15-20 years
Leasing scenario: restructure, refinance, residual)

Question 28

Residual Value Review

Answer 28

In prefunding stage, the first residual review is the initial assignment of residual value for small- to medium-ticket deals

During an annual review, credit may request a residual value review to ensure the initial residual value remains valid

For large-ticket deals, a periodic residual review and appraisal may be planned

Write-down: A reduction in the value of an asset carried on a firm’s financial statements.

Periodic residual reviews may be a type of covenant for some large-ticket deals and in some cases, originators will require residual value write-downs

Write-down: Unlike a write-off, a write-down does not result in the elimination of the asset.

Question 29

**Default Considerations

Answer 29

Increase in Bad Debt Reserves
Deficiencies in equipment values, especially those related to defaults, may cause the bank or lessor to have to reserve larger amounts for future charge-offs

Tripping of Financial Covenants
Write-offs affect cash flow and can cause the lender to fall outside of financial covenants

Loss of Funding Sources
Funding sources will be reluctant to lend to those who do not properly manage asset risk

(Lessors must establish acceptable reserve/losses that a portfolio can handle for the company to remain profitable

A write-off should be made if there is a deficiency in the value of the defaulted equipment vs the outstanding receivable

The write-off will come from the allowance for bad debt account on the balance sheet, which is funded by the bad debt expense on the income statement

**(Test nugget – know that bad debt reserves is the amount a lessor/bank has reserved for charge-offs)

Question 30

Default Considerations

Answer 30

Increase in Bad Debt Reserves
Deficiencies in equipment values, especially those related to defaults, may cause the bank or lessor to have to reserve larger amounts for future charge-offs

Tripping of Financial Covenants
Write-offs affect cash flow and can cause the lender to fall outside of financial covenants

Loss of Funding Sources
Funding sources will be reluctant to lend to those who do not properly manage asset risk