LEASING LAW By Dominic A. Liberatore The Nuts and Bolts of Bundled Transactions F MS deals are inherently riskier and more complex than direct leases between a funder and its lessee. Making ‘MS’ Transactions Less Messy INANCING BUNDLED AGREEMENTS involving equipment, services, supplies and/or software (“MS deals”) is a very hot topic. As a companion piece to one of the MS sessions at ELFA’s 2015 Annual Convention, this article explores the most common nuts and bolts issues funders can expect to encounter. The golden rule of equipment finance has long been the absolute and unconditional nature of payments owing to a “passive” equipment lessor. The tide is changing. Nearly everyone is familiar with the “pay as you go,” “use what you need” model overtaking the consumer world. People are now bringing this mindset to work. Vendors and custom-ers alike are asking funders to reflect this construct in their financings. For example, consider a healthcare manufacturer entering into a bundled agreement to provide a hospital with equipment, services, supplies and/or software and seeking to sell the payment stream to a funder. While this product was primarily seen only in the captive space a few years ago, many now predict it will soon be commonplace. ELFA and a growing group of industry leaders have been forward-looking, have embraced the future of MS deals and have taken a proactive approach to help lead the way into this new reality. The topic of MS deals was a core theme at ELFA’s 2015 Annual Convention. Further, ELFA created an MS Spe-cial Task force comprised of industry experts from a variety of disciplines to help guide the way as the industry begins this tectonic shift in approach that was unimaginable 10 years ago. Every funder will go to market with its own proprietary approach: its own “secret sauce.” However, certain central themes (albeit heavily customized ones) will need to be thor-oughly vetted by every funder choosing to offer this product. The following is a list of eight of the most common issues: 1. CONTRACT ENFORCEABILITY . To date, many courts have not commercially acceptable. Often the customer is simply unwilling to accept an unconditional payment commitment in the event of service problems. 2. STANDARD TEMPLATES. Given the labor-intensive and time-consuming nature of MS deals, can a “one size fits all” approach be developed to decrease negotiation and documen-tation time? Experience has shown that because MS deals are so heavily service related, they generally do not look much like leases and ultimately do not lend themselves to standard tem-plates. However, having an arsenal available of standard claus-es would help. Unfortunately, because MS deals are primarily agreements between the vendor and customer, the addition of standard financing language will likely be opposed by many customers. This is a key reason why MS deals are inherently riskier and more complex than direct leases between a funder and its lessee. This area requires a vastly different mindset and risk appetite. MS deals are not for the weak-hearted. 3. VENDOR PERFORMANCE REPRESENTATIONS AND RE-LATED INDEMNIFICATION. Given the inherent risk that the been slow to accord hell or high water (HOHW) treatment to MS deals, notwithstanding UCC 9-403, which contemplates absolute payment obligations to assignees because such treat-ment originally evolved around the concept that passive les-sors not involved with the equipment or service should be entitled to be paid regardless of equipment or service issues. This is not the case for MS deals that involve bundled equip-ment and service. This raises the issue whether funders, in reliance on UCC 9-403, should attempt to achieve HOHW treatment by including HOHW language and related waiver of defense language (i.e., for assignments). The argument for inclusion is that it confirms the party’s mutual intentions if later needed in court. The arguments against are the forego-ing judicial reluctance and the fact that MS deals are quintes-sentially service-related and thus HOHW language is often customer will not pay if the vendor does not perform, select-ing the right vendor is crucial. Even so, service and equip-ment complaints occur. Funders need to rely heavily on the vendor. The first step is including clear representations in the vendor program or assignment agreement regarding the ven-dor’s agreement to fully and timely perform all of its agreed-upon obligations in the underlying MS agreement. Failure to do so should then trigger an indemnity or repurchase obliga-tion. For either remedy, when the funder is entitled to make demand on the vendor becomes critical. The mere allegation of a service default is often not commercially acceptable to the vendor. Requiring funders to conduct a lengthy, expen-sive collection action to determine if performance issues ex-ist is equally problematic for funders. There is no simple solution. Each funder needs to care-fully consider what it is willing to accept and to which ven-dors it is willing to offer this product. Then the funder will need to work with such vendors to find mutually acceptable terms. This is not quick or simple—almost nothing regarding MS Deals is. However, as funders work through their own requirements and processes and begin to align with their vendors for a mutually acceptable approach, funders should 46 JANUARY/FEBRUARY 2016 EQUIPMENT LEASING & FINANCE MAGAZINE