Though equipment spending has been drying up in the weak economy, a

few optimists in the equipment leasing business see reason to cheer. Businesses facing temporary cash-flow constraints are looking to lease

rather than buy as old equipment dies, they say.

Vendor financing also may be bound for an upturn. Despite the

well-publicized credit catastrophes among vendors who financed equipment sales to now bankrupt customers, many equipment distributors say they are

seeing increased demand for leasing and a willingness by finance companies to supply credit.

First-quarter sales financed by leases are up 100% from the year-earlier

period at Tech Data, a Clearwater, Fla., company that distributed $20.4 billion of computer products last year. The company has added lease

programs from Deutsche Financial Services and Heller Financial Services over the past 12 months to meet the new demand, says Mike

Zava, vice president of U.S. credit services at Tech Data. It was already providing a

OneLease private-label service through Fidelity Leasing.

“Our intention is obvious here,” Zava says. “We want to support the sale

of more of our product.”

Two Outlooks

Similar demand compelled SYNNEX Information Technologies in Fremont,

Calif., late last year to restructure its existing financing programs.

“We added a person to our staff to focus on alternative financing

programs,” says Thomas Harbin, director of credit and collections at the $3.7 billion-revenue manufacturer and distributor of computer systems and

components. “That has been a big help to us in being able to help [customers] work through deals.”

Deutsche Financial Services restructured its existing floor planning, or

inventory financing, program for SYNNEX’s resellers by reducing or eliminating some of the upfront fees it was charging. SYNNEX also added

a floor- planning program from Textron Financial for its larger resellers, even as it continues to offer floor planning programs from Transamerica

and IBM Commercial Credit.

The Equipment Leasing Association (ELA) estimates that leases provided

directly by vendors and through third parties totaled $260 billion in 2000, or 2.6% of U.S. GDP. That’s up 11% from $234 billion in 1999.

Despite increased demand at companies such as Tech Data, however, the

ELA is projecting only an 8% increase this year. The reduced outlook reflects expectations that slower growth in business equipment spending

will curb leasing growth.

Meanwhile, many telecom equipment companies that offered aggressive

financing during the boom years are now suffering the consequences. Cisco Systems made $103 million of equipment loans to Convergent

Communications, which filed for bankruptcy in April.

Lucent Technologies announced a $340 million reserve this year for

expected losses in customer financing. One of its customers, Winstar, owed the Murray Hill, N.J.-based telecom $700 million when it filed for

bankruptcy in April. (Winstar has sued Lucent for $10 billion, claiming it forced the bankruptcy when it didn’t fulfill a 1998 commitment of $1 billion

of vendor financing.)

In May, Motorola announced that Telsim, a Turkish wireless carrier, failed

to make a $728 million payment due on $2 billion of vendor financing provided by the Schaumburg, Ill.-based telecommunications company.

Nevertheless, observers say that the direct customer financing debacle has

largely been limited to telecoms.

“I haven’t seen these sorts of loans made by other industries,” says Cecilia

Ricci, a finance professor at New Jersey’s Montclair State University, who had warned of reckless vendor financing practices in the telecom industry

in the summer of 2000, before the trouble began. Companies were granting repayment schedules of as long as nine years to customers of dubious

credit quality, she argued at the time.

Telecom Tragedies

The losses among telecom companies mark “the first time [vendor

financing] has ever turned into a really big issue in credit-quality land,” says

Carol Levenson, an analyst at Gimme Credit, a corporate bond research firm.

William Wetreich, managing director of corporate and government ratings

at Standard & Poor’s, says that finance companies and vendors themselves generally have far more diversified portfolios than those of

telecom equipment companies, which tended to finance start-up ventures. “I don’t anticipate this being a widespread problem,” he says of the

faltering high-tech equipment finance loans.

Nevertheless, both borrowers and vendor financiers have been taking the

deteriorating economy and the credit lessons of the telecoms to heart.

Frances O’Brien, research director for information technology assets at the

Gartner Group, says she has seen “some organizations using leasing, or looking at leasing more now, because they can’t get financing internally for

additional equipment purchases.” But, on balance, she adds, “more companies are just delaying purchases altogether” and are questioning

whether they need to automatically replace IT equipment every few years.

Mark Kelly, president of Deutsche Financial Services’ technology leasing

group, agrees, adding that more rigorous credit standards are slowing loan growth.

Bank losses on commercial and industrial loans have hit about 1% after

getting as low as 0.25% in the mid-1990s, according to Federal Reserve data, and bank lending has contracted. That 1% loss rate compares with

the 2% peak seen during the1990-91 U.S. recession.

In the leasing trenches, equipment suppliers are taking advance action.

Credit experience at SYNNEX has remained good, says Harbin, in part

because the company has been “proactive.” A year ago it began cutting its credit exposure to firms in southern California and southern Florida, where

the economy seemed to be weakening, he says.

On the other hand, SYNNEX now provides in-house financing in the form

of joint purchase orders, open net-terms accounts and credit card purchases, for 55% of its sales, up from 50% in recent years. “We’ve

actually taken more risk from that angle,” Harbin says.

Some of the biggest commercial credit players also hope to finesse the tight

credit situation to their advantage.

The CIT Group sees “an opportunity to increase the margins in our

business because competition is lessening,” says Donal Ratigan, president of CIT’s national equipment-financing division.

Lease Financing Online

Equipment leasing is starting to move online, but it’s not clear whether

exchanges that offer access to a number of lenders will induce large leasing companies to participate.

Leasing requires creativity that online exchanges cannot provide, asserts

Rick Wolfert, president and chief operating officer of Heller Financial, which has a lease portfolio of $20 billion.

Donal Ratigan, president of The CIT Group’s national equipment financing

division, says exchanges will have a hard time hosting negotiations since transactions usually require customized structures and terms. “Ours is not a

homogeneous product offering,” he notes.

Neither CIT, which has a lease portfolio of more than $55 billion, nor

Heller are participating in the exchanges. “The CITs of the world refused to lend our brand value to their site,” says Ratigan, adding that the

exchanges “are going out of business as we speak.”

Craig White, who heads LENDX, which went live in November 2000,

vehemently disagrees. He estimates that 10% to 20% of leasing transactions have already moved online, and predicts that will grow to 40%

to 50% in the next 36 months.

Last month, Alcoa signed a three-year contract to use LENDX’s Lifecycle

Suite. Judy Schrecker, treasurer of Alcoa North America, says she expects to realize significant savings from standardizing financing

guidelines and from better managing hundreds of financing schedules.

Jay Fudemberg, the chief executive of Pure Markets, says his online

exchange is gaining a following as companies realize the front- and back-end efficiencies of shopping for financing online.

What’s more, he insists, most large finance companies and banks have

participated in transactions on Pure Markets, even if they are reluctant to discuss it.

“If you look at the list of funding institutions that are our largest players, it

would be very similar to the list of the top 20″ leasing companies, says

Fudemberg.

Pure Markets last month trumpeted a deal to arrange equipment finance

transactions for Mitsui, Japan’s largest trading company, and its U.S. subsidiary.

Pure Markets has listed $900 million in proposed deals since its launch in April 2000. It won’t say how many of those actually closed.