Asset Management Associates
by Michelle Vervaeke
It is quite amazing the amount of industry knowledge that the lending professional must possess in order to be proficient and successful. From pricing, credit analysis, lease laws and accounting rules, there is an enormous amount of information to comprehend. In addition, there should be some basic knowledge of the collateral, its current value, future value and disposition alternatives. However, the lending professional cannot be expected to also be an equipment expert.
To follow are a few tips from the equipment experts on things to consider before booking your next deal. Although we work with all asset categories, for the purposes of this article, we have focused on non-titled construction and material handling type equipment.
There are many different purposes for an asset appraisal such as origination, refinance, and bankruptcy. When we are asked to provide a desktop type appraisal, an inspection of the equipment is not executed. Therefore, a re-creation of what the equipment is and what it was from the beginning of the transaction must be based upon the information that the client provides and our past experience.
It is surprising how many inaccurate vendor invoices that we see. Either the vendor doesn’t exist or the serial number is not correct and consequently it is not easy to verify the true age of the equipment. When underwriting your next deal, we might suggest attempting to have a conversation directly with the vendor. This way the vendor is verified and it provides an opportunity to obtain valuable information about the equipment for your file.
It is wise to order an inspection and appraisal of the equipment prior to lending, especially on collateral based loans and sale lease backs. We have seen a number of cases where real estate and other equipment is held as collateral for a loan, but the lender failed to verify the condition of the equipment or that it even exists. In the event of a default, many dollars can be spent searching to recover collateral that is nonexistent or has little value due to poor condition.
It is not illegal for a vendor to change an hour meter or data tag on a piece of equipment. This has been known to occur with some of the less reputable vendors. The equipment may appear to be in good condition due to a fresh coat of paint and new tires. If the hour meter has been changed, it will suggest the engine has fewer hours that it truly does. Upon the return of the equipment, when this is realized, the value of the equipment is far less than it was presumed to be.
Another thing to be aware of when lending on pre-owned equipment is what we in the equipment industry refer to as “gray market” equipment. This is equipment that has been illegally imported into the United States. Although this is not uncommon, it negatively affects the value of the equipment due to poor parts availability and serviceability. Without an inspection, a lender may not be aware they are lending on a gray market machine until it is time to remarket it and the value is not there. Example of a gray market data tag:
Equipment attachments is an area that we commonly see overlooked. A bucket for a loader or a carton clamp for a forklift are two of many examples of equipment attachments that are designed to mechanically or hydraulically attach to the equipment allowing the equipment to perform a specific job. These attachments can cost upwards of $10,000 and in some cases, can account for over 25% of the total cost of the equipment! It is very important to consider attachments when lending for valuing and pricing purposes, but also from a resale standpoint.
When vendors are utilized for lease returns and remarketing bank owned assets, it becomes increasingly important to make sure the attachment serial number matches what is in your file. It is not uncommon for a vendor to inadvertently or intentionally swap one of their less desirable attachments with the newer or more valuable one that may be installed on the bank owned asset.
A similar situation can occur when the borrower operates a fleet of like equipment. At the end of the lease, when the equipment is being returned, it is important to make sure the correct attachment is on the correct asset. Be sure to retain serial numbers on attachments and make certain that your attachment stays with your asset.
Best practices might include an annual equipment inspection of certain assets in your portfolio. This might help ensure the location of the equipment and that the borrower is following the maintenance and use guidelines outlined in the contract. Inspections such as these can be done for a nominal fee by an equipment management partner or one of the many national inspection firms. It might be wise to consider an equipment expert for the more comprehensive pieces.
When originating a new deal, we presume the main goal to be margin or the rate of return the asset will provide over the term. Spending some time understanding the collateral and incorporating a verification process will prove to be priceless and is equally as important as the points earned upon origination.