Womble Bond Dickinson (US) LLP, Baltimore
Equipment Financing Strategies Keep Industry Moving
By Elizabeth Schuman
Feb 01, 2018
The CEO of a successful chain of fast food eateries travels by private aircraft from Park City, Utah to Greensboro, North Carolina. The berries you had with your breakfast came by way of a vessel a few days ago from South America. The orange you ate at lunch came by way of a truck one week ago from an orange grove in Florida. Likely, the raw materials a manufacturer used to produce the shirt you are wearing were brought by railcar. Nationally, the logistics of moving goods from Point A to Point B involve railway transportation 80 percent of the time; however, vessels, trucks and aircraft (commercial and private) play a key role in facilitating the growth of the U.S. economy.
Financing the equipment that keeps businesses producing and moving – transportation assets as well as manufacturing and energy-generating facilities – falls within the purview of transatlantic law firm Womble Bond Dickinson (US) LLP. Its Baltimore office is known for its Capital Markets team’s experience in complex financial transactions that involve primarily representing lenders and lessors in all aspects of equipment finance, with emphasis on transportation assets. From its vantage point in the Inner Harbor, the Baltimore office manages deals across the country, working closely with the equipment finance arms of financial institutions and law firms in New York, Chicago, Washington, D.C., Baltimore, Boston, San Francisco and other cities nationwide.
“Our practice is not about the cookie cutter, standard check the box equipment financings,” says Merrick Benn, Partner. “We handle the cool stories: planes, trains, boats and custom, one-of-a-kind equipment and facilities.” What makes equipment financing such a dynamic area of practice is that it goes beyond requiring an investor or lender to purchase equipment and provide it to the user. In fact, the sophisticated transactions require understanding nuances of a range of assets: corporate and commercial aircraft; vessels such as barges and tankers; rail equipment and locomotives; and renewable energy facilities. Working with the client, the legal team seeks to minimize risk, maximize tax benefits and meet business objectives.
Reflecting Needs of Industry and Economy
“Clients who finance equipment need counsel to determine what is important and not important when negotiating the terms of the subject transaction, whether that means agreeing to modify the terms of an event of default or self-insurance, or limiting a parent guaranty. These decisions are often driven by the customer’s credit and the nature of the subject equipment,” says Shari Bacsardi, Of Counsel, who represents lenders and lessors in all aspects of equipment finance, with an emphasis on transportation assets, as well as financing energy generators, storage tanks and construction equipment.
“Financing packages must consider future needs. For example, rail car lease financing includes repair and maintenance to protect the value of equipment throughout the lease term and afterward, since the useful life of equipment is often measured in decades,” she says. “There is very little obsolescence and this is factored into the pricing provided to the customer by financial institutions.”
Equipment financing sits at the juncture of law and business. The U.S. Equipment Finance Market Study 2016-2017, conducted for the Equipment Leasing and Financing Association (ELFA), which reports economic activity from 25 companies representing a cross-section of the equipment finance sector, announced that 78 percent of respondents used at least one form of financing when acquiring equipment in FY 2015, up 5 percent from the 2012 study.
The industry report noted that by 2020, total investment in equipment and software is expected to reach $1.8 trillion, of which $1.24 trillion is projected to be financed. Further, in December 2017, the ELFA reported that new business volume, year-to-date, was up 5 percent over the previous year. Projections for 2018 are optimistic.
“The size and value of these equipment financing deals can move the needle in a particular quarter. It can help hit revenue targets and banks and equipment finance companies often depend on these transactions to hit their numbers,” says Benn, who has represented some of the most active bank-affiliated and large, independent equipment financing companies in the United States in developing standard lease and syndication documentation.
Benn adds that his firm has a keen grasp of federal regulations related to railways, aviation, surface transportation and space. “There is no one size fits all in train, rail, air and other industries,” he says. While long-lived assets such as rail cars, vessels and aircraft are vital to keep the economy going, they are also vulnerable to the effects of an economic downturn.
“In 2007, corporations all wanted private planes and banks were bending over backwards to finance them, especially with leasing products,” says Benn. When the market plunged, corporations eliminated the costs of leasing aircraft. They defaulted and banks repossessed the planes, which did not hold their value because maintenance was neglected by cash-strapped lessees.
“The silver lining is that businesses adapted and recharged,” says Benn. “Banks no longer leased aircraft but offered loan money so the customer had some skin in the game.” The inventory of previously-leased planes also created room in the market to create additional financing packages. For example, a company could upgrade by financing a returned leased aircraft.
The financing of renewable energy equipment and projects has increased in importance as rising energy costs, energy security and climate concerns have become more prominent in the industry and the consumer market. This sector depends on technological advances and governmental support for renewable energy technologies, such as solar, wind and biomass energy.
In the renewable energy space, recognizing the growing importance of their predictable source of supply, proven technology and lower maintenance costs, solar energy projects continue to be a strong market sector. Michael Dow, Partner, structures and negotiates energy efficiency and other renewable energy project financings, including state and local government-sponsored programs and federal agency savings performance contract programs.
“Many energy projects depend on tax incentives and are financed based on the strength of the project,” says Dow. Dow and the firm represent lenders in purchasing or otherwise investing in such projects. The lender/investor may realize tax benefits such as investment tax credits (ITCs).
Womble Bond Dickinson (UK) LLP also brings experience in wind projects. “We have expertise in offshore wind development, which is a burgeoning market in the U.S., with a number of projects in development,” says Dow.
Structuring the Deal
Tax issues drive the discussion about equipment financing. “One of the principal considerations in structuring a deal is who gets the tax benefits of equipment financing,” says Marina Andrews, Associate, who focuses on financial transactions for aircraft, rail, vehicles, mining equipment and chemical manufacturing. “Whether a loan or lease, what kind of financing terms are most suitable for all parties? Often, it depends on the needs within that transaction.”
Contracts are tailored to the needs of each individual user and contain provisions dealing with the use, operation and maintenance of equipment. “In a leasing scenario, another issue to be considered is whether the user will buy the equipment or return it at the end of the lease term,” says Andrews. “Often banks or equipment financing companies do not want the asset returned because hands-on asset management is not their area of expertise.” As such, the firm develops terms that preserve
the highest market value for their clients, such as stringent return conditions.
Attending to details in contracts benefits clients. For example, several years ago, when regulations changed for railway cars, requiring retrofitting with new safety features, who covered the costs? “The Department of Transportation said that cars must be retrofitted in order to be used,” explains Benn. “Though lessees protested, claiming that retrofitting was the owners’ – banks’ – responsibility, we had coverage in our contracts to cover questions like these.” Ultimately, the onus was placed on the customer, not the bank.
The legal team helps clients differentiate what is really being asked by its customer’s comments to a security agreement, says Bacsardi. “We will review the security agreement and other related documentation securing the equipment assets.
“The customer can negotiate. People want a deal, even when financing. They may want to feel like they have won. Equipment financing has repeat players. Over time, as you represent lessors and lenders, you develop a sense of trust for institutions, specialty counsel and opposing counsel that are repeatedly involved in deals.”
Bringing a Deep Bench
Chip Sturm, Of Counsel, represents banks, finance companies and borrowers in structuring, negotiating and documenting equipment finance, public finance and commercial lending transactions. Previously, he was in-house counsel at one of the nation’s largest financial institutions.
“What sets us apart is our perspective,” says Sturm, who joined the firm because of Womble’s client-based philosophy. “We understand and recognize the delicate balance between lessees who want few restrictions on their operations and lessors who must satisfy risk and regulatory requirements. Womble and our equipment finance team are growing along with our clients. Our equipment finance team is on the younger end, and we continue to add top-end talent to it. We will be here for our clients for the next 25 to 30 years and beyond.”
That breadth and scope of industry knowledge and expertise benefits clients, whether on the lender or lessor side of the fence.
“Lawyers traditionally start with ‘no’ – being defensive is an occupational hazard,” says Benn. “Our group, however, is made up of people with J.D. degrees who are also trained to think like business people. We try hard to wear that business cap with each decision we make. We are in the trenches with our clients. We are not here to say ‘no.’ We are here to explain the ramifications of doing x over y while helping clients achieve their objectives. Our clients’ business is our business.” I95 Content Marketing