Shoringup The Credits
In the multibillion-dollar equipment-finance industry, giants with names like Citicorp and General Electric Credit Corp. compete head-to-head to write leases on jumbo jets and mainframe computers. The winners of these megadeals are often selected on nothing more complex than fractions of percentage points on the interest rates they quote. But even as the battles among the heavyweights continue, Uniwest Financial Corp. of Denver is finding that there are plenty of other ways to play the leasing game.
Over the past two and a half years, Uniwest Financial has built a portfolio of $12 million in equipment leases by promoting its leasing services to smaIl and medium-size businesses -- a market the heavyweights have tended to neglect. According to chairman Mark Perlmutter, many of Uniwest's customers have sales of $10 million or less, and some, he concedes, might be viewed as risky start-ups by a lot of financial professionals. "But if the numbers show us that a conventional deal shouldn't be done, we don't like to stop there," explains Perlmutter, a former commercial and residential real estate developer. "If there's another mechanism we can identify for shoring up the credit, we'll take a good hard look at it."
Assembling a lease portfolio composed of everything from machine tools to computerized video equipment isn't exactly what Perlmutter and his partner, Gary McGill, had in mind when they founded their leasing business as a public company in early 1981. At the time, it was known as Resources Equipment Capital Corp., or RECAP, and the founders, both now age 40, intended to specialize in oil field equipment deals throughout the West. But the sudden softening in the energy market that year forced them to rethink their plans even before any major oil deals were completed.
What they came up with was a clever approach to oil well equipment financing, which they applied to a handful of deals in 1982. Over and above five years of lease payments at a fixed interest rate of about 20% (three to five percentage points above the prime rate of the time), Uniwest took a share of production from the oil wells. This kind of "sweetener" is seldom seen outside of commercial property leases, where landlords often receive a percentage of tenant revenues, and it is certainly uncharacteristic for a secured lender. "Instead of betting solely on the strength of the drilling operator's ability o pay, we were betting on the well," notes McGill, who once owned a string of Burger King franchises that operated under such "percentage leases." "If the operator defaulted, reserve reports indicated we could recover our investment, plus interest." On a more mundane level, the company retained the investment tax credits and depreciation benefits from the equipment it purchased for its deals.
This willingness to hunt down support mechanisms to make deals work has eriabled Uniwest to pursue financings for other sorts of shaky credits. Last November, for example, an Oklahoma City manufacturer and distributor of oil field service equipment approached the company in hopes of arranging a vendor leasing program to help its customers acquire its $20,000 to $150,000 products. "Our analysis of the situation revealed that the manufacturer needed financing at least as badly as its customers," says Perlmutter.
Normally, a vendor program would have been out of the question, given the manufacturer's soaring debts and excessive inventory, but Uniwest proposed -- and helped implement -- a plan that made it possible. As a way of generating working capital for the equipment maker, Uniwest arranged a sale-leaseback deal that allowed the Oklahoma company to refinance $1.1 million of its real estate and manufacturing equipment. Although Uniwest wasn't able to finance a commercial mortgage itself, it found a Denver savings and loan association that would. "This restructuring made it a much sounder credit," says Perlmutter. The new vendor program, he says, will add upwards of $1 million a year to Uniwest's portfolio of equipment leases.
Such efforts have paid off in other situations as well. Last spring, for example, a Houston contractor came to Uniwest with a proposal for a five-year lease on a $250,000 concrete pump. The deal looked promising. According to McGill, the eight-year-old private construction company, which had revenues of $7 million in 1982, had plenty of future projects scheduled. But the lease was still too risky to approve, even-with the owner's personal guarantee. "We had some real doubts about whether the construction industry could remain healthy enough for the next five years to enable them to meet their payments," McGill explains.
That wasn't the end of it, however. In an effort to make the deal fly, Uniwest introduced the contractor to a Houston-based casualty insurance company. Following an appraisal of the business assets, including its upcoming jobs, the insurer agreed to write a surety bond covering the equipment payments for about two percentage points above the 17% lease rate. "With this guarantee," McGill explains, "the company gets its concrete pump, and we don't have to worry about the orderbook."
A recent Uniwest deal, however, demonstrates a trait that even the founders admit is a bit bold for a secured lender -- even an aggressive one. To obtain vital working capital for his 18-month-old video information company, Brian Shaw, chairman of Info-Touch Systems Inc. of Laguna Hills, Calif., pitched several different finance companies on the idea of underwriting sale-leasebacks on his fleet of about 300 video terminals, valued at about $3,500 apiece. According to Shaw's business plan, the terminals, programmed with paid advertising material, would be placed in airports and hotel lobbies in major U.S. and Canadian cities. In exchange for cash, Info-Touch wanted to arrange monthly payments on a three-year lease, which would be guaranteed by both the company and Shaw. "But none of the more established lease companies wanted to touch the deal," says Shaw. "They said they liked $50,000 pieces of equipment, and ours were only $3,500 units."
Uniwest's McGill, who once owned an outdoor advertising company, considered the risks in the business plan and determined that Info-Touch had lined up some key advertising contracts. But he did not feel comfortable with Shaw's proposal of fixed-rate financing at several points over the prime. As an alternative, Uniwest offered to provide three-year leases on about $1 million of terminals at about 15%. And it proposed to be further compensated by a 5% share of Infotouch's advertising revenues -- a feature resembling previous oil-well dealsIf Info-Touch meets its revenue goals, McGill figures that Uniwest may be able to earn several times what it would make by writing a flat-rate lease at the market rate. In addition, the leasing company gets the tax benefits from owning the equipment, as it does on its other deals. Info-Touch is pleased at the way things turned out. "They listened to the whole plan and took a long, hard look at what we were trying to accomplish," says Shaw, who has personally guaranteed the arrangement.
By the billion-dollar standards of the equipment leasing business, Uniwest, with lease assets of $12 million, is small. But its eagerness for growth is obvious by just looking at what it has been doing. During 1982, the company bought three small leasing companies with equipment totaling about $6 million. In little more than a year, moreover, it has begun leasefinance programs for five manufacturers -- including Bankmatic Systems Inc. of Portland, Ore.; a supplier of data processing equipment for banks; and Universal Gym Equipment Inc., of Cedar Rapids, Iowa, which makes exercise machines. Through the Universal Gym deal alone, the company expects to boost its portfolio by as much as $8 million on equipment leases ranging from $5,000 to $150,000. According to Joe Pettit, Universal Gym's credit manager, "At least 25% of the health spas and clubs that want our equipment need to finance it.
These programs hold possibilities for big payoffs down the road. But putting the company in business hasn't been a painless process by any means. During its first two fiscal years, Uniwest saw losses totaling $237,000, and the first black ink did not appear until the second quarter of 1983. "It costs money to establish yourself and generate the long-term deals," says Perlmutter.
The company's investments in the future haven't ceased. In June, Uniwest signed the final papers on what may be the most far-reaching deal it has ever done. After several months of scouting out prospects in the West, the company purchased United Savings of Wyoming, the state's largest chartered savings and loan association, for $5 million. By owning the $170 million -- asset S&L, Perlmutter says, Uniwest will no longer have to rely exclusively on market-rate borrowings from banks to finance the leases it underwrites, as it has in the past.
Under new federal regulations adopted by Congrcss in 1982, the nation's S&Ls are entitled to invest up to 10% of their assets in equipment leases. "We now have access to $17 million or $18 million at a lower cost of funds than we could get from a bank, explains Perlmutter. "And we'll be able to get involved in all types of commercial financing." To leverage its equipment leasing expertise even more, Uniwest has been discussing the idea of arranging co-ventures with a group of other S&Ls interested in entering the equipment leasing market. The company would manage and administer the transactions for a fee.
Uniwest has so far established a strong record of innovation, and Perlmutter believes that growing competition in the financial markets will require the young company to keep looking for ways to set itself apart. Access to funds from the S&L, he notes, will enable the company to price some of its deals at more competitive rates. "But when you come right down to it, our basic product -- money -- is the same as anybody else s, and so are a lot of our products," Perlmutter concedes. "Unless we provide some additional level of service, there's not a lot of reaon for us to exist."