At one time I was employed in the asset management departments of both a nationally known bank and a major leasing company. Both institutions, on a yearly basis, commissioned a value analysis of their tangible assets serving as collateral on various lending arrangements. The end purpose of this analysis was to determine whether the current value of the collateral was in line with the debt balance. If a negative result occurred, then the institutions began a workout process with their debtor to either drop the credit line or take on additional collateral sufficient to cover the debt.
The "stress test" analysis currently being performed by the US Treasury Department of some of the largest US banks is nearly similar in nature although the cure for the end results has yet to be determined. There is a great deal of speculation about "nationalization" which may be one result but one which will not eventually resolve the difference in lost collateral value. Perhaps someone remembers "Resolution Trust" which was the federal governments cure for inequity in collateral value.
Regardless of how this all turns out, Lessors and Lenders should keep the process of annual assessments of collateral value firmly planted in the forefront of their mindset. This process seems to have been lost in the heady days of not so long ago and it is well past the time for its resurrection. I can't think of any other method a lender can employ to confirm its equity lending position.
A field appraisal of a debtor's assets can do much more than ascertain the current value of collateral. It can confirm the quality of a debtor's maintenance program in order to insure that the collateral remains in good operating condition. Remember, when in financial distress, one of the most common debtor actions is a drop in the quality of the maintenance program. Frequently, cannibalism (stripping one or more machines to repair another) is a frequent occurrence which a qualified appraiser will notice.
As for value, it never ceases to amaze me that lenders continue to request Fair Market Value under these conditions. In the event of a default, Fair Market Value is useless as the lender can not sell equipment under the same conditions as an arms-length transaction. Forced Liquidation Value should be strictly applied in most cases since collateral is commonly resold at public auctions. Therefore Forced Liquidation Value will provide a lender with an indication of the amount of exposure in a default or workout situation.
Any qualified and experienced appraiser can provide ample expertise in loan workout value analysis or stress tests. I recommend any valuation professional holding the designation of Accredited Senior Appraiser from the American Society of Appraisers since they possess an appraisal certification from an independent and experienced source.
