The Monitor always looks for different opinions and perspectives on matters affecting the equipment leasing and finance industry. In this article, we will explore opinions of attorneys throughout the country as to what they believe will happen in the equipment leasing and finance industries in 2011.

Contributors to this article are: Anthony L. Lamm of Lamm Rubenstone, LLC located in Philadelphia, PA; Lewis Cohn of Cohn & Dussi in Woburn, MA; Howard Toland of Mitrani, Rynor, Adamsky & Toland, P.A. in Fort Lauderdale, FL; Alex Darcy and Thomas Askounis of Askounis & Darcy, P.C. in Chicago; Christopher Arisco and Mark Stout of Padfield & Stout, LLP in Fort Worth, TX; John Sinodis of Jennings, Haug & Cunningham, LLP in Phoenix, AZ; and Andrew K. Alper of Frandzel Robins Bloom & Csato, L.C. in Los Angeles, CA.

All of the contributors represent banks, equipment lessors and funding sources, and are active in various banking and leasing associations. Just like economists and politicians, attorneys have different views on the economy, litigation, and where they see the lending and equipment leasing industries going in 2011.

MONITOR: What will be the state of the economy in 2011, and what affect will it have on litigation and bankruptcy?

Christopher Arisco and Mark Stout (CA, MS): The economy will remain stagnant in the short term. Small banks and private finance companies will spur economic growth by investing the appropriate resources in riskier markets. Large financial institutions will remain conservative. Lease default rates will eventually decline, bankruptcy filings will generally decrease, but as the economy tends to grow, lenders will pursue repossession of equipment or foreclosure of real property in litigation and bankruptcy instead of waiting to work out deals or enter into forbearance agreements.

Howard Toland (HT): With continued economic contraction in affected regions, bankruptcy filings will continue to increase as debtors will seek to shed unprofitable obligations. State court litigation will continue to show an increase in residential foreclosures and restructured commercial strip center loans may come due with no lenders willing to absorb the loans on centers with vacancy rates continuing to rise.

John Sinodis (JS): I agree with Howard Toland. However, in Arizona, residential real estate has been devastated, with many homeowners having experienced a decrease in home values in excess of 50% from the peak in 2007. The decline in commercial real estate is not as dramatic, but is continuing. As a result, struggling small business owners have no alternative source of liquidity to sustain them during down cycles in their businesses. Arizona’s commercial sector is just now seeing the decline in the last six months, and most believe that Arizona will not see a recovery in the commercial real estate sector until 2014 or later. I expect litigation and bankruptcy filings to continue to increase as a result of these market factors. I have seen commercial transactions begin to increase as lenders cautiously increase their lending activity, but with very conservative underwriting.

Alex Darcy and Thomas Askounis (AD, TA): While we believe the economy, especially in the Midwest, is showing signs of recovery, the slow pace and conservative mindset will continue to keep pressure on small business owners. The primary areas of concern continue to be in the real estate segments with commercial loans being the most at risk.

Lewis Cohn (LC): I agree with both John and Howard but, in Massachusetts, although the real estate market has slowed, there have not been as many foreclosures as in other states throughout the country. Values have been holding their own with slight decreases. With the lowering of interest rates, we have seen a lot of refinancings, which have generated payoff requests where clients have recorded liens against the real estate on defaulted obligations.

Andrew K. Alper (AA): We see a flat economy for 2011. The commercial real estate market has not hit bottom yet, and there will be more bankruptcy filings with respect to loans that have been extended and modified once the regulators put pressure on the lenders to charge them off and pursue enforcement of the loans. There is little funding available for construction and take out loans because of pressure from regulators. Transactional lawyers are still not doing new transactions, but instead occupy their time with workouts, forbearances, loan document reviews and preparing the documentation to sell property foreclosed on by lenders and lessors.

MONITOR: How do you see litigation for equipment lessors and lenders for the next year?

Anthony L. Lamm (AL): I believe that we will continue to see equipment lessors and lenders being very cautious and judicious with the use of their legal budgets. I do not think lenders or lessors will voluntarily engage in litigation without a strong likelihood of success and enough collateral to satisfy the debt including legal fees.

HT: Due to the challenging economy, I foresee continued need for enforcement actions to seize on an involuntary basis as borrowers continue to face shrinking profit margins and lack of savings to overcome unexpected defaults.

LC: I also believe that lenders and lessors need to be aggressive and should pursue enforcement actions. It is important for lessors to obtain as much pre-judgment and post-judgment collateral or security as possible through real estate and bank attachments. Chances are that if the lessee or debtor owes one creditor, then it owes multiple creditors, and it is therefore important to be the first creditor obtaining liens on the assets of the lessee or debtor.

JS: Another problem we face in Arizona is that there is a large volume of used and repossessed equipment. The excess supply results in a lower return on the sale of that equipment. Based on current trends, we do not expect an uptick in defaulted accounts and/or litigation. We believe that equipment lessors and lenders are more inclined to structure “workout” settlements, if feasible, as opposed to recovering collateral based on the relatively weak market for used equipment and the still depressed real estate market.

CA, MS: Over the course of the next year, equipment lessors and lenders will face increased scrutiny from regulators, lawmakers and the courts to accommodate lessees that are unable to make payments. Increased standards of proof, along with increasingly hostile lessees, will increase the cost of litigation, especially in the metropolitan areas in Texas such as Dallas and Houston. Accordingly, many larger financial institutions will choose to forego repossession or foreclosure as a first option and will instead make a business decision to work with lessees to refinance their obligations.

AD, TA: Based on current trends, we do not expect an uptick in defaulted accounts and/or litigation. We agree that equipment lessors and lenders are more inclined to structure workout settlements as opposed to recovering collateral based on the relatively weak market for used equipment.

AA: Litigation is not providing a good return for financial institutions for a number of reasons. First, what we see in California is a budgetary crisis where courts are understaffed, there are substantial delays in the litigation process, and more judges who are ill-prepared to handle cases properly because they are overworked and understaffed. We also find that courts are giving the debtor or lessee the benefit of the doubt rather than necessarily following the letter of the law given the challenging economy. We see that consumer laws are creeping into commercial transactions giving the debtors and lessees new defenses and claims that should be promptly disposed of by the courts but are not so easily dismissed. In the past, we used pre-judgment remedies such as writs of attachment, writs of possession and receiverships not only to preserve property values and get liens on the debtor’s assets but also as a catalyst to settling litigation or driving a debtor or lessee into bankruptcy earlier rather than later. With plummeting real estate and personal property values, the pre-judgment remedy is less effective because debtors and lessees have no equity to preserve in their assets. Therefore, so long as other creditors are not picking apart the assets of a debtor or lessee like vultures at a carcass, workouts to get money and additional collateral from the debtor or the lessee should be more prevalent and and litigation avoided.

MONITOR: What do you predict for the equipment leasing industry in 2011?

HT: There is tremendous demand for equipment finance leases but little willingness of lenders to provide the funds needed. Few funding sources and the lack of ability to bundle leases and securitize them has robbed the market of capital sources and resulted in less competition for existing leasing companies still in the marketplace.

CA, MS: There are substantial growth opportunities in the equipment finance lease sector. In the face of the previous asset bubble price bust, banks will hesitate to finance equipment directly to new or smaller businesses, paving the way for leasing companies to establish new connections and gain new customers in medium- and high-risk markets. One area of particular growth in Texas for equipment lessees will be for oil and gas equipment in the Barnett Shale region, which has shown consistent growth over the past couple of years.

JS: I expect to continue to see contraction in the equipment leasing industry. At the end of the economic downturn, I expect to see fewer funding sources and those that remain will have a more conservative underwriting philosophy. Eventually, the cycle with turn and credit will become more available. It will be many years, however, before we see the less stringent lending philosophy that we witnessed in the mid-2000s.

LC: I believe that there is still a need for equipment leasing. The challenge will be the availability of funds. A turnaround in volume leases will not happen until the leasing companies are willing to take the risk in funding the B and C credits. Everyone remains willing to fund the A credits.

AL: There will be more selling of portfolios and repositioning asset quality among different lessors and lenders to find the right mix for their credit culture. Some areas, like alternative energy, will be very popular and municipal leasing will be an obvious player in that field as well. Over the road tractors and trailers appear to be making a respectable comeback, and so there are opportunities for lessors in this industry as well.

AD, TA: Based on our experience at the 2010 Equipment Leasing and Finance Association National Convention held in October 2010, we witnessed a sense of optimism that contrasts substantially from 2009. Attendance increased over 40%, and the interest of equipment lessors and funding sources to consider new transactions is noteworthy. Issues such as lease accounting changes may also impact business going forward.

AA: After a couple of really bad years in the equipment leasing industry, there are signs of optimism once again. In representing some independent equipment leasing companies, I am now able to find funding sources willing to lend to independent lessors that hold their own paper. This was not the case during the last two years where there was no funding available for the independent lessor. Banks that were never involved in funding equipment lessors or leases are now entering the picture because they are staying away from traditional real estate lending and looking for other industries in which to make money. Since independent lessors can now find funding sources willing to lend, this is a very good trend for the industry. On the other hand, I also see problems with borrowers and lessees being able to find financing for particular types of equipment. For example, the aircraft market is flooded with used aircraft and the value of aircraft has plummeted. The printing press that used to be “gold” as collateral has little value today. Therefore, the lessor or lender still needs to be cautious with respect to leasing or lending on certain types of equipment if the credit decision is based upon the collateral value of the equipment rather than a credit decision.

MONITOR: What do you predict for the banking industry in 2011?

HT: The money center banks will continue to show strength and focus on core clients, but smaller regional banks will be subject to increased pressure from regulators and profit margin shrinkage caused by increased fees, and regulation oversight will result in the merger or failure of smaller banks.

JS: Regulators are certainly putting pressure on regional banks to increase liquidity. I do believe, however, that with adversity comes opportunity. I expect to see contraction in the number of regional lenders, followed by expansion once the market begins to turn around.

LC: I agree with Howard and John and echo their sentiments. In addition, the big banks are beginning to ease lending standards for small businesses and individuals. It appears that banks have begun to stop cutting existing lines of credit for commercial businesses as well.

AL: There will not be much lending to new customers of a bank in 2011. Government programs like the SBA will continue to take the risk for the banks.

CA, MS: Instead of banks adjusting their lending practices to allow for additional lending during times of economic growth, banks may tuck away more money in order to stabilize the availability of credit and in order to appease government regulators. Thus, the availability of credit to commercial businesses will tighten in an effort by banks and regulators to discourage the sort of asset price bubbles that are typically followed by sharp downturns. However, in this effort by banks to cautiously avoid catastrophe, this approach may thwart potential lending and growth for the next five years.

AD, TA: Much of the liquidity problems experienced by lending institutions today relate to real estate portfolios with issues pertaining to equipment financing transactions being secondary. Equipment financing has historically been a source of greater returns to these institutions. As such, assuming institutional stability, we would expect these lenders to again re-enter the equipment financing market.

AA: Smaller regional banks will continue to be closed down by the FDIC and their assets sold to larger banks. Thus, there will be a contraction in the banking industry resulting in larger money center banks taking a greater share. Banks will, in the short term, move away from real estate lending and look for other sources such as equipment leasing and finance and trade finance. As long as politicians continue to put pressure on banks, the regulators will continue to scrutinize credit quality and require greater capital coverage and reserves. This, in turn, will mean that banks, afraid of being criticized by regulators or having defaulted loans, will be very careful with respect to making new loans and will pass on potentially profitable transactions because of the fear of regulatory criticism for making the loan.

Attorneys representing financial institutions see loan and lease transactions from cradle to grave. These are the views of some attorneys throughout the country as to what they believe will happen in the year 2011 in their particular region of the country based on their experience. The Monitor thanks the contributors to this article for sharing their views and perspective on these topics.

The Monitor also wishes to thank Andrew Alper for the compilation of this roundtable.