As UK general counsel at GE Capital, Simon Ramage knows more than most lessors about how to handle a vast asset portfolio during troubled times. Here he discusses administration, risk and fraud.
In a recessionary environment, there is an increased risk of businesses breaching covenants, requesting waivers or becoming insolvent.
It is at this stage that the ‘devil in the detail’ reveals itself. The need for having a well-structured deal, with clear legal plans and actions in place should a customer default or go into administration, has never been starker.
This is the approach GE takes to every deal structure – how to create a solution that meets the customer needs, but clearly outlines the legal steps and procedures should a business get into trouble.
It is a fine balance. We have around 10 legal and compliance experts in our UK platform, many with experience of previous economic downturns, supported by a panel of external legal providers, to ensure that deal documentation clearly outlines how assets will be recovered if required.
This also includes dispute resolution – good documentation in contracts will restrict any need for litigation.
Also, our in-house legal counsel involved in restructuring deals are also involved in the initial deals. This increases the likelihood that a solution can be identified which allows customers to maintain the use of essential equipment.
It is in no one’s interest to see a customer become insolvent, so the primary legal goal is to see if we can work out a successful conclusion.
Unfortunately, not every situation can be resolved. We have an experienced collections team familiar with legal requirements, supported by a long-standing legal partner, which will evaluate the best course of action for asset recovery. We want to ensure our processes do not alienate customers, particularly in tough market conditions.
Experience matters in collections, and strong expertise and knowledge of key assets helps when structuring a deal and also when recovering assets.
Naturally, repossession strategies depend on the assets in question – our course of action will differ for a corporate aircraft versus office equipment, for example, and we would typically use specialist agents that we have worked with for years to act on our behalf to recover assets.
A close relationship with customers and external partners pays off – it makes any ‘work out’ situation easier and more efficient for all parties.
Insolvency is not the only threat in a down market. Incidents of fraud tend to increase, too. Good practice and experience will serve lenders well when markets turn. We have dedicated personnel in the risk teams whose sole function is to identify red flags, and we have invested in electronic and manual processes to identify deals, customers, assets and structures that are most susceptible to fraud.
Experience counts – you can never tell exactly how and when fraud will occur. If we identify a fraudulent request, we will immediately report it to the relevant authorities for further action.
In our experience, it tends to be the smaller ticket items – such as laptops and office equipment – that are most commonly targeted and need to be most keenly observed.
Funding applications from start-up companies, ‘shell’ organisations or through PO Box addresses are other warning signals.
There are enhanced AML responsibilities and insolvency laws to protect lenders in terms of legislation, but there is no better protection than having detailed documentation at the start of a relationship.
The author is UK general counsel at GE Capital