Repayment Discussion – Cash Flow
Repayment Discussion – Cash Flow:
Collection of lease payments and earnings from the sale of equipment are the primary source of repayment. Management Case Discussion:
Management does not and is not required to prepare projections. However, profits are expected to remain stable or increase since the Investment in Direct Financing Leases asset on the balance sheet continues to increase. This asset is a proxy for future performance since it is the PV of all future minimum Direct Finance lease payments. Many of these Direct Finance leases also convert to lucrative operating leases at the end of the initial term.
Bank Case Discussion:
N/A
Downside or Breakeven Case Discussion:
Assuming DSC does not initiate another lease and all cancelable leases were cancelled, the existing lease portfolio would pay off the revolver in < 1 year. See the table below. • The revolver is secured by the following collateral pari-passu with Wells Fargo: o All business assets of DSC, which is primarily leases. o 65% stock pledge of both Data Sales Canada and Data Sales Netherlands, two wholly-owned foreign subsidiaries of DSC. • The revolver is governed by a monthly borrowing base with supporting documents including: o Unfunded Lease Report by customer for all leases including the original term, remaining term, payment, etc. …show more content…
o Lease A/R Aging Report by customer o International Lease A/R Aging Report by customer o Parts and Sales A/R Aging Report by customer o Security Interest Pledge Certificate
• The borrowing base is calculated based on the items in the table below. See the collateral tables above and the 9/30/17 borrowing base documentation attached for additional detail, and the additional commentary throughout this section on ineligible items. o The total availability at 9/30/17 was $123MM and the outstanding loan balance was $102.5MM, resulting in net availability of $20.5MM.
• Wells Fargo is identified as Lender Loss Payee on the property insurance. Collateral Exam (4/3/17)
• A field exam is conducted annually by Wells Fargo (the latest of which is attached) and all advance rates are supported.
• A lease file review was completed on ten files for adherence to the company's credit policies. Overall, the results were deemed satisfactory with qualifications, but the following findings were noted: o Four of the ten applicable files did not contain a signed and dated landlord waiver. Peter Johnson (VP - Credit and Lease Operations) stated he would be following up with stronger efforts to obtain all required landlord waivers. • Other findings/recommendations were as follows: o In the most recent BBC, dated 2/28/17, the borrower had assigned $370M of monthly lease payments that related to leases that had zero terms left and were paying on a month to month basis. This amount was considered ineligible. o The borrower neither reports past due credit balances nor any contra accounts as ineligible. The borrower should be required to report these standard AR ineligibles on its monthly BBCs. The difference to the borrowing base was immaterial at $200M. o It is recommended that an Availability Reserve be established for the existence of future Canadian tax liabilities, and that these be reported on the monthly BBC. DSC Canada is required to remit multiple Canadian sales taxes, and payments for these sales taxes would take priority over the revolver in the event of a liquidation. Therefore, it was recommended that any liabilities relating to Canadian sales taxes should be reserved against availability. However, there was no liability outstanding for these sales taxes at the time of the exam. Current amount is $17M USD • USB CEG reviewed the exam and noted that the exam is presented more as an ABL field exam than as a finance exam, and lacks the elements of a finance review. Additionally, they noted that the presentation of and the testing against DSC's Lease Underwriting and Credit and Collections policies was minimal and not very specific. o Any weakness in the exam is mitigated by the fact that USB would conduct its own exam if USB became the agent and USB's exam would be more robust. Leases: • Direct Finance and Operating leases account for > 98.7% of collateral in the BBC (as of 9/30/17). The
Repayment Discussion – Cash Flow:
Collection of lease payments and earnings from the sale of equipment are the primary source of repayment. Management Case Discussion:
Management does not and is not required to prepare projections. However, profits are expected to remain stable or increase since the Investment in Direct Financing Leases asset on the balance sheet continues to increase. This asset is a proxy for future performance since it is the PV of all future minimum Direct Finance lease payments. Many of these Direct Finance leases also convert to lucrative operating leases at the end of the initial term.
Bank Case Discussion:
N/A
Downside or Breakeven Case Discussion:
Assuming DSC does not initiate another lease and all cancelable leases were cancelled, the existing lease portfolio would pay off the revolver in < 1 year. See the table below. • The revolver is secured by the following collateral pari-passu with Wells Fargo: o All business assets of DSC, which is primarily leases. o 65% stock pledge of both Data Sales Canada and Data Sales Netherlands, two wholly-owned foreign subsidiaries of DSC. • The revolver is governed by a monthly borrowing base with supporting documents including: o Unfunded Lease Report by customer for all leases including the original term, remaining term, payment, etc. …show more content…
o Lease A/R Aging Report by customer o International Lease A/R Aging Report by customer o Parts and Sales A/R Aging Report by customer o Security Interest Pledge Certificate
• The borrowing base is calculated based on the items in the table below. See the collateral tables above and the 9/30/17 borrowing base documentation attached for additional detail, and the additional commentary throughout this section on ineligible items. o The total availability at 9/30/17 was $123MM and the outstanding loan balance was $102.5MM, resulting in net availability of $20.5MM.
• Wells Fargo is identified as Lender Loss Payee on the property insurance. Collateral Exam (4/3/17)
• A field exam is conducted annually by Wells Fargo (the latest of which is attached) and all advance rates are supported.
• A lease file review was completed on ten files for adherence to the company's credit policies. Overall, the results were deemed satisfactory with qualifications, but the following findings were noted: o Four of the ten applicable files did not contain a signed and dated landlord waiver. Peter Johnson (VP - Credit and Lease Operations) stated he would be following up with stronger efforts to obtain all required landlord waivers. • Other findings/recommendations were as follows: o In the most recent BBC, dated 2/28/17, the borrower had assigned $370M of monthly lease payments that related to leases that had zero terms left and were paying on a month to month basis. This amount was considered ineligible. o The borrower neither reports past due credit balances nor any contra accounts as ineligible. The borrower should be required to report these standard AR ineligibles on its monthly BBCs. The difference to the borrowing base was immaterial at $200M. o It is recommended that an Availability Reserve be established for the existence of future Canadian tax liabilities, and that these be reported on the monthly BBC. DSC Canada is required to remit multiple Canadian sales taxes, and payments for these sales taxes would take priority over the revolver in the event of a liquidation. Therefore, it was recommended that any liabilities relating to Canadian sales taxes should be reserved against availability. However, there was no liability outstanding for these sales taxes at the time of the exam. Current amount is $17M USD • USB CEG reviewed the exam and noted that the exam is presented more as an ABL field exam than as a finance exam, and lacks the elements of a finance review. Additionally, they noted that the presentation of and the testing against DSC's Lease Underwriting and Credit and Collections policies was minimal and not very specific. o Any weakness in the exam is mitigated by the fact that USB would conduct its own exam if USB became the agent and USB's exam would be more robust. Leases: • Direct Finance and Operating leases account for > 98.7% of collateral in the BBC (as of 9/30/17). The