"Joe"
wants to buy the equipment needed to become an Internet service
provider. He has customers signed up and knows he'll have a
predictable revenue stream. But Joe has no credit history and no
track record.
In the event that he can't get a business loan or venture
capital, there's another financing option that could work for Joe:
structured financing, which is a way of borrowing money against an
asset or a projected asset without consideration of the
creditworthiness of the borrower.
"If you had a fairly stable stream of revenues coming in once you
built out the infrastructure, that's a very likely candidate for
structured financing," says Todd Eyler, an analyst at Cambridge,
Mass.-based Forrester Research Inc.
For example, a good candidate for structured financing, he says,
is a company or government agency that's building a bridge - an
asset with a lasting and fixed value. If anything happened to the
borrower, the bridge would still be there.
 |
|
|
Financing Firm Launches
Online 'Deal Room'
General Electric Capital's Structured Finance Group handles
complex financing deals that can take up to six months to
process.
But there might be a way to cut that time by 10% to 20%,
says Kevin Walsh, the group's managing director of e-business.
Two months ago, the company launched an "e-deal" room,
which is currently being used to manage 35 deals across
various industries.
"We think this is a terrific way to transform a complex and
cumbersome deal-making process," Walsh says. According to
Walsh, 10 to 12 people are usually involved in a deal. A
telecommunications equipment build-out, for example, can take
months of assessment, evaluation, contract development, lease
structuring and pricing. Once a deal is struck, large amounts
of data continue to move between the customer and the
financing group.
The Structured Finance Group Web site (www.ge.com/capital/sfg) also hosts tools, such
as an oil and gas reserve calculator that can be used to
estimate the worth of an oil or gas property.
Currently, the project collaboration tools are provided by
an outside vendor. However, Walsh says his group is in the
process of building its own tools, which are expected to be
online by the fourth quarter.
About one month ago, one of GE Capital's oil and gas
industry customers began piloting an automated reporting
package that's expected to remove 10% to 20% of the costs of
monitoring and complying with loan documents. Additional
customers are expected to join in the next few weeks.
- Maria Trombly |
|
This kind of financing is ideal for a start-up company that needs
a lot of capital to get going but doesn't have a good credit
history, Eyler says.
Structured financing isn't intended for small-scale projects: The
average size of a structured financing deal is $25 million, and it
can top $300 million or more, according to Kevin Walsh, managing
director of the Structured Finance Group at General Electric Capital
Corp. in Stamford, Conn.
"If I have to buy equipment or machinery, an efficient way to
finance that would be through structured finance," Eyler says. An
existing company would be more likely to use structured financing to
smooth out its cash flow, he adds.
For example, a movie studio that hires Mel Gibson to star in a
film has a huge up-front expense - namely, his salary. But there's
also an almost guaranteed revenue stream from theater tickets,
foreign distribution, video sales and television rights.
Eyler warns that most technology investments don't readily lend
themselves to structured financing because they tend to depreciate
too quickly. Plus, the revenue stream for many information
technology projects, including e-commerce, is too uncertain, he
says.
"Purely lending against IT infrastructure itself - that's a
recipe for disaster," Eyler says. "If I were a bank, I wouldn't
focus a lot of my balance sheet on that."
Like Rent-to-Own
Ironically, one of the very first instances of asset-backed
borrowing was when Sperry Rand Corp., now part of Blue Bell,
Pa.-based Unisys Corp., used structured financing for its computer
equipment in the mid-1980s, according to David Warren, an analyst at
New York-based Morgan Stanley Dean Witter & Co.
Equipment leasing is a form of structured financing that's
similar to the "rent-to-own" financing model used by some furniture
stores. In this instance, the finance firm buys the equipment and
leases it to the company that needs it.
GE's Structured Finance Group does a lot of this, according to
Walsh.
"We are the tax and legal owners, and the ownership would revert
back to [the user of the facility] at the end of the lease
agreement," Walsh says.
Why would a company adopt this type of structured financing? One
reason is the tax advantages, Walsh says.
For example, if a company has an asset that represents a tax
credit, the credit is unrealized if the company is losing money. By
transferring the asset to a firm that can take advantage of the
credit, everyone comes out ahead - except that Uncle Sam has to give
the credit earlier than otherwise might have been true.
Another reason to lease equipment instead of owning it outright
is to make the company look more attractive to Wall Street. Although
equipment and facility leases must be mentioned on corporate
financial statements - usually in footnotes - they wouldn't show up
in things like leverage ratios, which is the amount of debt vs.
equity, according to Eyler.
"The bottom line is that companies are trying to optimize their
capital structure," Walsh says. "Depending on where it is in its
growth curve, [the company] may need more equity or more debt."
Another type of structured financing involves equity, or partial
ownership of a company.
For example, Walsh says, his group would lean toward taking an
equity investment in a telecommunications company that wants to
expand. Why? Because a company may want to have less debt and more
equity and because GE Capital likes to invest in growing companies.
"We want to grow with the company as it grows," Walsh says.
Say that a telecommunications company secures a license for a new
region and needs to build its infrastructure, he says.
Usually, Walsh will deal with a company's CEO and chief financial
officer, and a chief technology officer is integrally involved as
well, he says.
"We have on our staff a whole cadre of engineers and so forth
that help us assess projects like that and help us assess the risks
and the valuations," he says. "They would be talking directly to the
CTO to discuss these issues."
Sites 
