Page 23: of Marine News Magazine (December 2010)

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www.marinelink.com rules for reporting will affect both lessor and lessee.

Their goal is to create a more realistic picture of the financial condition of a company by providing a more accurate assessment of a company’s assets and liabili- ties.

Credit quality, timing of expenses, changes to EBIT-

DA and continued compliance with existing covenants will be affected. Higher debt-to-equity ratios and lower interest coverage ratios will force credit ratings down a notch or two and will roil the credit waters for the fore- seeable future. Not good, especially in the turbulent wake of the most recent credit and banking industry tsunamis. Lessors and lenders may find it very difficult to underwrite and approve transactions to the same client as their credit, after these accounting changes take effect, may decline significantly.

It is important to note that current operating leases will not be grandfathered into the new reporting scheme. Your operating leases will become capital leas- es virtually overnight and the previously unreported long term debt they reflect will land on your balance sheet just as quickly. The new rules will, when imple- mented, immediately impact all FASB/GAAP report- ing companies with leases on or off their books.

Expect fewer leases with shorter lease terms, more uncertain valuation of assets, weakened balance sheet strength, and overall a more difficult credit environ- ment. Although the changes may result in simpler and more accurate reporting they will create financial tur- moil. On the upside, however, real financial trans- parency should enable investors to match revenue and expenses including all future commitments and enable them to make better investment decisions. Ultimately, it may be worth some of the pain. We’ll see.

MN

Richard J. Paine, Sr. is the President of Marine-

Finance.Com, a maritime consulting firm specializing in the financing and leasing of commercial marine vessels and other equipment. He can be reached at [email protected] or 516-431-9285.