Tight Credit Squeezes IT Equipment Leases

Published: November 10, 2008

by Dan Burger

IT equipment leasing, a favorite method used by hardware suppliers that garner revenue from places they never could crack otherwise, is feeling the woozy effects of the stormy economic seas. It's not just IT equipment leases that are taking on water. All types of equipment leasing are in the same boat. The name on that boat is the S.S. Default. It's much too early, however, to say the boat is sinking.

When the living is good and the credit is easy, there seems to be no brakes on who can finance equipment or how they can pay it off. Just don't ever say the words "I don't think I can afford that." And even if you do, the guy with the fountain pen and the smile pasted on his face will pretend he never heard it. He's got a big rubber stamp with the word "APPROVED" on it and he's going through ink pads like they were hot dogs and potato chips.

That went on for quite a while, but now the ink pads are stacking up a bit as the number of deals crashing on the rocks increases.

IBM, which isn't known as a lending institution but due to its Global Financing business certainly qualifies, has tasted some bad deals in all of this. Global Financing is no bit player, but if you're thinking in terms of home loans or car loans or debt consolidation loans, don't even knock on the door. No consumers need apply. About 97 percent of the Global Financing portfolio is related to IT gear.

Based on Big Blue's financial results for the third quarter of 2008, the Global Financing unit rang up $600 million in revenues. Stacked up against $25.3 billion in sales for the quarter it may not look like much, but it depends how you look at it. Global Financing has $32.4 billion in assets, and that's a lot of chips. But it also has $23.8 billion in the game.

And now the game has changed.

At least the rules that apply to credit have changed and continue to change. Plenty of IBM's customers (you may actually know one or several) and all of its resellers will almost certainly take note of credit opportunities or the lack of them.

At least some eyebrows were raised when IBM's chief financial officer, Mark Loughridge, said in discussing IBM's third quarter financial results a few weeks ago that loss rates on financing skittered from 1.1 percent in the third quarter of 2007 to 1.3 percent in the third quarter of 2008. He also said that the company nudged its anticipated loss rate from 0.3 per cent to 0.5 per cent in that same time frame. Hardly a panic situation, but if this is a trend, it won't be a welcomed one.

To get a glimpse of the bigger leasing picture, the Equipment Leasing and Financing Association, an industry trade organization that monitors equipment financing in the United States, put out its monthly report recently. And according to ELFA's index for September, new leasing and financing volume jumped 22.3 percent to reach $6.5 billion. At the same time, average losses as a percent of net receivables rose to 0.86 per cent, an uptick from 0.48 per cent, the mark set in September 2007. While the ELFA tracks all kinds of capital equipment, not just IT gear, clearly IBM is in the same boat as the rest of the industry, and has a much lower anticipated loss rate, too.

Loughridge doesn't want anyone to panic, of course, and he certainly doesn't want to see people selling IBM's stock short because of its large credit portfolio.

"It's important to remember that the majority of the assets we are talking about are in support of critical IT operations and have substantial value," Loughridge explained on a call with Wall Street analysts a few weeks ago. "The assets we finance are critical to major financial institutions. In the event of bankruptcy, leases are often reaffirmed by the bankruptcy courts sustaining our expected lease payments. If necessary, the financed assets can be recovered and resold through our highly refined marketing operations, which extract significant value in the event we have to repossess the equipment. So we have the ability to manage our risks."

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