Principles of Syndication A presentation made to The Lessors Network Equipment Leasing and Finance R

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Principles of SyndicationA presentation made
toThe Lessors Network Equipment Leasing and
Finance Resources National Funding Syndication
Showcase March 30-31, 2005 The Ritz-Carlton,
BuckheadAtlanta, GA
Edward K. Gross Ober, Kaler, Grimes Shriver
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Syndication Issues

• Certain Syndication Issues
• Specific Structures
• Document Issues

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Syndication IssuesCertain Syndication Issues

• True Sale versus Financing
• Recourse
• Fiscal Agents and Lead Participants
• Fraud Avoidance

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Syndication IssuesCertain Syndication Issues

• True Sale versus Financing
• True Sale generally, sale of all rights and
  obligations with respect to the lease and/or
  related equipment, including rent
• Financing usually a discounting transaction
  documented as a limited recourse loan, secured by
  (and paid with) the rents under the lease

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Syndication IssuesCertain Syndication Issues

• True Sale versus Financing
• Chattel Paper (U.C.C. sec. 9-105(b)) means a
  writing which evidences both a monetary
  obligation and a security interest in or a lease
  of specific goods

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Syndication IssuesCertain Syndication Issues

• True Sale versus Financing
• Art. 9 coverage of sales and financings of
  chattel paper (U.C.C. sec. 9-102(1)(b))
• Assignee must perfect the sale of or, if a
  financing, perfect its security interest against
  the chattel paper by filing (sec. 9-304) or
  possession (sec. 9-305), but possession beats
  filing (sec. 9-308)

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Syndication IssuesCertain Syndication Issues

• True Sale versus Financing
• If not perfected, subject to attack by assignor,
  as debtor-in-possession, or by trustee in
  bankruptcy (Bankr. Code sec. 544(a))
• If true sale, the acquisition by assignee would
  be deemed unperfected and lease remains part of
  assignors estate
• If financing, security interest against lease and
  rents are unperfected and assignee is treated
  like unsecured creditor of assignor

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Syndication IssuesCertain Syndication Issues

• True Sale-Financing preconditions
• Get chattel paper original copy of equipment
  schedule/ lease and/or file UCC-1 financing
  statement
• Get confirmation from lessee of chattel paper
  status
• File UCC-3 notice of assignment
• Do lien search and obtain any necessary release

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Syndication IssuesCertain Syndication Issues

• Recourse
• Full Recourse
• Non-recourse
• Limited Recourse

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Syndication IssuesCertain Syndication Issues

• Recourse
• Full Recourse assignor retains collection risk
  with respect to underlying lease transaction
  (including lessee/guarantors credit risk)
• Non-Recourse assignee assumes the collection
  risk without condition

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Syndication IssuesCertain Syndication Issues

• Recourse
• Limited Recourse
• Lessees credit risk assumed by assignee
• Assignor is responsible to assignee for breaches
  of Assignors representations, warranties and
  agreements in the syndication documents
• Representations may relate to, among other
  things, the enforceability of the lease documents
  against lessee/guarantor

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Syndication IssuesCertain Syndication Issues

• Recourse
• Indemnity versus Repurchase

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Syndication IssuesCertain Syndication Issues

• Recourse
• Indemnity (limited recourse) assignor
  indemnifies assignee against actual harms
  suffered by assignee as a result of inducement
  misrepresentations

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Syndication IssuesCertain Syndication Issues

• Recourse
• Repurchase (full recourse or limited recourse)
  assignee agrees to repurchase the lease
  transaction for an amount equal to assignees
  unrecovered investment upon
• (Full recourse) typically, defaults under the
  lease
• (Limited recourse) typically, misrepresentations
  by assignor with respect to underlying lease

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Syndication IssuesCertain Syndication Issues

• Fiscal Agents or Lead Participants
• Purpose
• Notification versus Non-Notification
• Control

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Syndication IssuesCertain Syndication Issues

• Fiscal Agents or Lead Participants
• Purpose
• Typically customer retention issue, retention of
  control or economic benefit, or because assignee
  does not have good back room capabilities
• If a participation, lead participant might want
  to coordinate intercreditor relations among
  participants and control default response

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Syndication IssuesCertain Syndication Issues

• Fiscal Agents and Lead Participants
• Notification lessee/guarantor informed that
  lease transaction was assigned and assignor is
  merely assignees fiscal agent
• Non-Notification (blind assignment) no notice
  to lessee/guarantor until lease default or fiscal
  agency terminated

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Syndication IssuesCertain Syndication Issues

• Fiscal Agents and Lead Participants
• Non-Notification only with reputable, financially
  sound assignors

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Syndication IssuesCertain Syndication Issues

• Fiscal Agents Duties
• Billing, collecting, receipt and distribution of
  payments
• Maintaining records of payments
• Responding to lessees billing inquiries/
  requests for waivers and consents
• Lease enforcement (sometimes)

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Syndication IssuesCertain Syndication Issues

• Fiscal Agents Liabilities
• Actual breaches of agreement to perform duties,
  especially timely distribution of payments
• Otherwise limited to gross negligence or willfull
  misconduct

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Syndication IssuesCertain Syndication Issues

• Fraud Avoidance
• Estoppel/notice and acknowledgement by lessee
  and/or guarantor as to status of lease documents
  and rents
• Inspection of equipment and records and of
  lessees facility (and officers)
• Lien search

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Syndication IssuesSpecific Structures

• Discountings (financings)
• Sale and assignments (true sales)
• Participations

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Syndication IssuesSpecific Structures

• Discounting
• Assignor retains tax benefits and residual
  risks/benefits
• Sale of the rental stream (only) under a lease
• Typically documented as a non-recourse or limited
  recourse loan

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Syndication IssuesSpecific Structures

• Discounting
• Concurrent with or after lease funding
• Price aggregate rentals discounted to present
  value at a discount rate that may or may not be
  same as implicit rate
• Debt/equity issues retentions of certain
  payment rights and control

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Syndication IssuesSpecific Structures

• Sale and Assignments
• Assignment of lease and sale of related equipment
  (true sale)
• Assignee gets rents, control over lease
  administration, tax benefits and residual value
• Assignee also assumes all obligations under the
  lease documents and lessor ownership risks
• Retention by assignor of certain rights and
  responsibilities relating to pre-sale period

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Syndication IssuesSpecific Structures

• Sale and Assignment
• Funded already documented in assignors name,
  using assignors documents assignor purchased
  and paid for the equipment and lessee already
  executed lease documents
• Unfunded usually documented (negotiated) using
  assignors documents but in assignees name
  (assignor has not yet purchased the equipment nor
  received executed documents)

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Syndication IssuesSpecific Structures

• Sale and Assignment
• Documents typically assignment agreement, bill
  of sale, UCC-3, estoppel/notice of assignment and
  delivery of original lease documents

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Syndication IssuesSpecific Structures

• Participations sale of an undivided
  proportionate share in rent payment stream and
  other payments and proceeds of equipment

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Syndication IssuesSpecific Structures

• Participations
• Not for true leases (tax issues)
• Typically for loans, synthetic leases and other
  non-true leases

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Syndication IssuesSpecific Structures

• Participations
• Flexibility can differentiate participants
  interests in payment stream and residual proceeds
• Intercreditor issues majority interest holder
  usually controls decision-making process with
  respect to administration and enforcement (versus
  unanimous consent)
• Repurchase right lead participant will often
  reserve this right to control enforcement

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Syndication IssuesSpecific Structures

• Participations
• Scrape original lessor as lead participant
  sells right to receive (i) principal portion of
  rent or other payment (SLV, TV, EBO price, etc.)
  plus (ii) portion of remainder of rent or other
  payments allocable to interest, but at a lesser,
  negotiated rate

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Syndication IssuesSpecific Structures

• Payments
• Timing of disbursements (float)
• Advances/perfect pay payments by lead
  participant in anticipation of receipt from
  lessee, with lead participant having all rights
  to collect rents and related late charges

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Syndication IssuesDocument Issues

• Representations and Warranties
• Security Acknowledgements
• Conditions Precedent and Delivery of Documents
• Remarketing Agreements

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Syndication IssuesDocument Issues

• Representations and Warranties
• Source of recourse back to Assignor, if breached,
  or default trigger if
• non-recourse

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Syndication IssuesDocument Issues

• Representations and Warranties
• Types
• Assignment agreement and transaction documents to
  which assignor is a party were duly authorized,
  executed and delivered
• Legal, valid and binding obligations of assignor
• True and correct information provided in
  assignment agreement
• No pending litigation

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Syndication IssuesDocument Issues

• Representations and Warranties
• No prior assignment or pledge of interest by
  assignor
• Assignor is lawful owner of the equipment
• Good title or first-priority, perfected
  security interest negotiable
• Confirmation by Assignor of number, amount and
  timing of unpaid rentals deposits and unpaid
  rentals

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Syndication IssuesDocument Issues

• Representations and Warranties
• Assigned Lease/to assignors knowledge(?)
• no default
• equipment accepted under lease/ no casualty
• enforceability/not subject to any defense, claim,
  etc.
• other facts that impair value of assigned lease
  or equipment
• Assignors knowledge means

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Syndication IssuesDocument Issues

• Representations and Warranties
• Disclaimer of warranties by Assignor
• Condition, title or status of equipment (except
  as mentioned above)
• Financial statements or condition of lessee or
  guarantor
• Express or implied and all other warranties

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Syndication IssuesDocument Issues

• Security Acknowledgements
• Address any concerns regarding federal or state
  laws pertaining to a sale of a security
• Mutual acknowledgement that assignment is exempt
  from registration
• Acquired for assignees own account and not for
  resale
• Sophisticated Investor and by other Big Boy
  acknowledgements by assignee

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Syndication IssuesDocument Issues

• Conditions Precedent
• Payment of purchase price to assignor and
  delivery of assumption agreements
• Execution and delivery by assignee of
• good standing certificates, corporate resolutions
  and/or opinions, if requested

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Syndication IssuesDocument Issues

• Conditions Precedent
• Delivery to assignee of
• invoices, evidence of payment of acquisition
  cost, transferable warranties and evidence of
  assignors ownership
• bill of sale, UCC assignments
• notification/estoppel letters
• original leases and related documents
• insurance policies
• financing statements (assignee as secured party,
  assignor as debtor, syndicated lease as
  collateral)

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Syndication IssuesRemarketing Agreements

• Nature of support right versus obligation
• What obligations are assumed? Who makes
  decisions?
• Compensation to remarketing party
• Reimbursement of out-of-pocket expenditures
• Sharing net proceeds
• Residual value support by assignor (typically
  vendor programs)

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Edward K. Gross, Esq. Ober, Kaler, Grimes
Shriver A Professional Corporation 120 E.
Baltimore Street Baltimore, MD 21202-1643 410-685-
1120 Fax [phone] ekgross_at_ober.com www.ober.
com