NorVergence “Application Only” Quagmire 

   by Christopher Menkin

It should have been no surprise when Qwest postponed their turn-off for NorVergence users. No firm date has not been made, although many believe it will be in two weeks.

While this may be considered benevolent in postponing cutting off current NorVergence users, the move may be viewed as lacking the technical ability of actually “turning off”  7,000 accounts, plus covering all legal bases, and business wise: the opportunity to obtain “new” customers.

What will happen to the alleged 7,000 NorVergence Qwest customers or the reported other 3,000 to 4,000 users serviced by other “telephone” companies is yet to be seen.  Remember, users mean “companies,” not individuals.

Telecom Agent Associations states there  are “11,000 Norvergence customers.... who need new long distance, T-1s, 800 numbers and cell phones.”

The Chapter 7 first creditor's committee meeting will be held on August 27,2004.   The form for creditors to fill out may not be complete, meaning all the claims and creditors may not be able to report actual facts for the first meeting.

 http://www.two.leasingnews.org/loose_files/NorVengence_court_docs.pdf

Third party contract holders may take up to sixty days to realize they are involved in a “credit dispute” that may or may not involve NorVergence (depends on which side you are on---lessor, lessee, creditor, employee, insurance, government(s), and this more than likely will be much larger than recent bankruptcies such as Commercial Money Center, or alleged fraud, such as RW Professional Leasing. It appears that these dollar amounts are small in comparison to Enron, Worldcom, and others, to the media, but perhaps when this gets to the $100 million mark it will be more than a local New York-New Jersey television news story.

Deborah Monosson, president of Boston Financial & Equity sent an e-mail that we will include in our next group, but her first comments on NorVergence were” Collateral. Collateral. Collateral.”  Her company has a long term history of “high risk” transactions.  Not that they are an equipment “hock shop,” but simply Boston Financial understands the full spectrum of the transaction. 

“Collateral, collateral, collateral, “she said. “ If leasing companies had actually looked at the collateral perhaps this would not have gone as far as it did.”

The facts are readers have been informing Leasing News for almost two years about the value and the structure of what NorVergence was doing.  Leasing News printed this, but third party lessors paid no heed as they felt they are not involved in the choice of equipment or any representations, as per their contract.

I personally received many calls from bankers, some in charge of large banks, but mostly, smaller community banks across the country, who thought these leases were “good credit” situations to purchase.  They did not understand the situation.

The  trend has been toward “scoring” and “application only.” It has been said by many leasing companies, “ If the credit is very good, we will lease them ice.”  Allowing high “soft costs” has become common, following the trend of the value of what is being leasing in the technology field.  The question regarding these transactions were rarely personal or business credit.

Several of the banks who were mentioned in NorVergence press releases, as lenders, and as customers, were contacted, including those who gave endorsements in advertisements, such as on ELT News for the Equipment Leasing Association. None wanted to talk about their lending, or even if they were using the telecommunication equipment.

There certainly will be major repercussions in the financial community when the reality of NorVergence hits the desk of many banking and financial institution president's desks. The zeal for new business may be more costly than originally assumed. The actual bankruptcy filings will list the claims. The full repercussions may not be available until the first of the year.

One thing can be learned now, which is commonly practiced in by Municipal credit desks: the value and use of the equipment by the lessee.  In their decisions, the annual cancellation of the contract exists.  Will the debtor need the equipment to keep for the three years of the contract, or five years? Will the equipment become so obsolescent it is cheaper and easier to cancel the contract?

Instead of giving a text book on municipal loan decisions, as most credit officers know, the decision really is in asset control or loan quality, not the credit department.  The decision of accepting equipment, seller, manufacturer, should not be made with the view of putting more business on the books to meet or exceed quota's, but what will come back to bite us before the end of the term.

Leasing companies have a long history of booking business because it came from a so-called “trusted source” or one-dimensional credit decision.  In my thirty-three years in the leasing business, my major problems came from vendors I had known for years, trusted sources who had changed direction, taken on a new partner, gone in a new direction, or just became “desperate.”

Any of the experienced loan or credit officers realized the problems of the NorVergence leases, but their guidelines were both this company and situation were acceptable as long as the credit was good.  Those with experience with information technology, or items such as ATM machines, vending machines, and types of equipment heavily dependent on maintenance or service to function.

“Application Only” has not been good for the equipment leasing industry as it has grown from the original concept of making a “good consumer credit decision” to a business decision.  It has made the industry lazy, soft, and an easy target for sellers of equipment and salesmen after their commission.