Six Flashcards
Stages of the Asset finance process?
1) New business origination - Marketing, business development,, deal negotiation, quotation and sales follow up activity, credit applications and submission for approval
2) New Business process - Anti-money laundering due diligence, deal documentation, deal fulfilment and supplier payment, deal encoding and payment process
3) In-life account management - Customer service as needed, audit and in-life reviews, early settlement
4) Collections and recoveries - Collections and arrears, specialist relationship management, default and arrears
5) End of lease - end of lease and contract termination, asset disposal
Stages of arrears?
1) New account default (missed first payment)
2) Early arrears (up to 60 days in arrears)
3) Worsening arrears (over 60 days in arrears)
4) Late-stage arrears (over 90 days in arrears)
5) Notice of default
Noticing the timing of default is critical
If not selling or disposal of the asset may be the best route for lessor to minimise the losses
Can be avoided through customer relationships and noticing early
What are the 3 stages of arrears and their signals?
1) Early stage Slowdown in sales growth Reduces working capital Trade creditors increase Trade losses Late filing accounts late payment to the suppliers Repeated settlement requests
2)Worsening stage Sales reducing and stock increasing Reducing market share Returned direct debits Moratorium request = payment postponement Hardcore bank overdraft Convenant breaches Supplier credit terms shortened
3) Late stage
Over 3 months in arrears
Attempted to refinance assets
Lapsed insurance policies
HMRC penalties and fines
Qualified auditor opinion of on-going concern statement
Defaults or recovery with other asset funders
Attempted conversion of assets without prior settlement
What are the turnaround options for a business? CRAB FC
Cost efficiencies Asset retrenchment A focus on firms core activities Building for the future Reinvigoration of firm leadership Corporate culture change
What is liquidation and the process? 3 points
Similar to bankruptcy for an individual and can be voluntary or compulsory
They can trade to complete progress but in time they will cease to trade
Any actions for recovery of debts are restricted, except orders of the courts (lessor can’t get payment but can get the asset to sell)
What is insolvency?
A situation in which liabilities exceed assets or an organisation or individual cannot meet their liabilities within a reasonable period of their falling due
What is receivership? 4 points
- When a company fails to meet its obligations
- Holder of the charge over the company assets can appoint administrative receiver to run the company
- Receiver acts in the interest of the debenture holder rather than the creditors of the business
- Receiver may prefer to retain the business assets to get payments for the debenture holder
What is the margin of safety in relation to residual value and why is it important?
When the lessor sets the residual value at slightly less than expected realisation value.
It protects profitability of the transaction as it takes into account the lessors interest costs as well
What is the residual value?
The lessors estimate of how much an asset will realise at the end of the lease
Why does the lessor take risk based on the residual value?
With operating lease, lessee places the risk of the asset obsolescence with the lessor (lessee avoids depreciation risk)
- Value of the asset unknown bu experience in asset and recovery and prudent approach to setting residual value
- Lessor expects to sell the asset
Assets suitable for residual value risk?
DIMS test similar to asset suitability but for the residual value it is the emphasis on saleability and amount it expects to realise when disposing of the asset.
What are the different asset valuation types?
Open market value - asset being sold in the open market
Open market value ex-situ - where the valuation assumes the asset is removed from the lessee premises and delivered to the lessor in the condition ready for disposal and sale (most common)
Equitable value - Assets to be sold to a identified party for an agreed sale price at the end of the lease
Fair value - Applying IFRS and UK GAAP accounting standards, a lessor expresses holding value of an asset on its balance sheet
What is asset secure point?
Where the value of the asset exceeds the outstanding lessee balance. Covers the lessor in the event of early termination.
Asset managers responsibilities?
AA SEAMER
Equipment inspections
Asset conditions report in-life and at the end of the lease
Annual reassessment of asset residual values
Risk assessment of emerging legislation and regulation in terms of impact on asset values
Management of portfolio concentration risks (asset, industry, etc)
End of lease recharges for excess wear and tear
Asset re-marketing
Secondary lease negotiations
What is IFRS 16 and its impact when did it start?
All leases on balance sheet
- Some external accountants may not have reported it correctly yet
- Higher gearing as more debt visible on balance sheet
- More towards larger corporates may not make much of a difference (Low value except hence smaller SMEs doesn’t apply to)
- Less popularity towards operating lease
- More managed service components to op leases to get exception
- 12 month operating leases except - shorter leases
