2011 ANNUAL INFORMATION FORM
– March 21, 2012 –
TABLE OF CONTENTS Page ELEMENT FINANCIAL CORPORATION FORWARD‐LOOKING INFORMATION... 1 CORPORATE STRUCTURE... 3 GENERAL DEVELOPMENT OF THE BUSINESS ... 4 Development of the business over the last three years ... 4 Business overview... 5 NARRATIVE DESCRIPTION OF THE BUSINESS ... 7 Overview of the Asset‐based finance industry... 7 Element Finance... 8 Element Capital...10 Element services ...11 Acquisitions and Joint Ventures ...16 Capital Structure ...24 Competition...26 Employees...27 RISK FACTORS...28 Risks Relating to Element’s Business...28 Risks Relating to Ownership of Element Common Shares...35 DESCRIPTION OF SHARE CAPITAL...38 General ...38 Element Common Shares ...38 Preferred Shares ...38 MARKET FOR SECURITIES ...39 SECURITIES SUBJECT TO RESTRICTION ON TRANSFER ...40 DIRECTORS AND OFFICERS...41 Directors ...41 Officers Other Than Those Referred to Above ...42 Voting Securities ...42 COMMITTEES...43 Audit Committee ...43 Compensation and Corporate Governance Committee...45 Credit Committee...45 Advisory Committee...46 TRANSFER AGENT AND REGISTRAR ...47 EXPERTS...47 ‐i‐
Page MATERIAL CONTRACTS...47 Amalgamation Agreement ...47 Agency Agreement – October 2011 Private Placement...47 Subscription Receipt Indenture...48 Agency Agreement – April 2011 Private Placement...48 Asset Purchase Agreement ...48 Securitization Agreement...48 ADDITIONAL INFORMATION ...49 APPENDIX A ...A1 Element Financial Corporation Audit Committee Mandate ... A1
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FORWARD‐LOOKING INFORMATION
Certain statements in this Annual Information Form, other than statements of historical fact, are forward‐looking statements based on certain assumptions and reflect current expectations of Element Financial Corporation (“Element” or “the Company”). Forward‐looking statements are provided for the purposes of assisting the reader in understanding Element’s financial performance, financial position and cash flows as at and for the periods ended on certain dates and to present information about management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes. In some cases, these forward‐looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “anticipate”, “aim”, “estimate”, “intend”, “plan”, “seek”, “believe”, “potential”, “continue”, “is/are likely to” or the negative of these terms, or other similar expressions intended to identify forward‐ looking statements. Element has based these forward‐looking statements on its current expectations and projections about future events and financial trends that it believes may affect Element’s financial condition, results of operations, business strategy and financial needs, as the case may be.
Forward‐looking statements are based on certain assumptions and analysis made by Element in light of its experience and perception of historical trends, current conditions and expected future developments and other factors it believes are appropriate, and are subject to risks and uncertainties. Such assumptions include, among others, those relating to general economic conditions, the legislative and regulatory environment, the impact of increasing competition and the ability to obtain regulatory and shareholder approvals. Although Element believes that the assumptions underlying the forward‐looking statements are reasonable, they may prove to be incorrect. The reader is cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward‐looking statements.
The forward‐looking statements made in this Annual Information Form relate only to events or information as of the date on which the statements are made in this Annual Information Form. Other than as specifically required by applicable Canadian law, Element undertakes no obligation to update any forward‐ looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.
Additional information about the risks and uncertainties of Element’s business and material factors or assumptions on which information contained in forward-looking statements is based is provided in its disclosure materials, including this Annual Information Form and its most recent Management’s Discussion and Analysis, filed with the applicable securities regulatory authorities in Canada, available at www.sedar.com.
Forward‐looking statements relating to Element include, among other things, statements relating to: Element’s expectations regarding its revenue, expenses and operations; Element’s anticipated cash needs and its needs for additional financing; fro Element’s plans for and timing of expansion of its services;
Element’s future growth plans (including growth resultingElement’s expectations regarding its origination volumes; m acquisitions);
Element’s ability to attract new customers and vendor relationships and develop and maintain relationships with existing customers; Element’s anticipated delinquency rates and credit losses; riginations; Element’s ability to attract and retain personnel; o Element’s expectations regarding its reduced reliance on third‐party brokers for Element’s expectations regarding growth in certain verticals in which it operates; Element’s competitive position and its expectations regarding competition; and anticipated trends and challenges in Element’s business and the markets in which it operates.
Whether actual results, performance or achievements will conform to Element’s expectations and predictions is subject to a number of known and unknown risks, uncertainties, assumptions and other factors, including those listed under Risk Factors, which include: credit risks may lead to unexpected losses; concentration of leases and loans to small and mid‐sized companies may carry more inherent risks; ustry or region may negatively impact the concentration of leases and loans within a particular ind Element’s financial condition; Element’s provision for credit losses may prove inadequate; the collateral securing a loan or a lease may not be sufficient; lack of funding may limit Element’s ability to originate leases; ent’s funding risks; ffect Element’s results; the concentration of debt financing sources may increase Elem global financial markets and general economic conditions may adversely a Element’s credit facilities may limit its operational flexibility; changes in interest rates may adversely affect Element’s financial results; an unexpected increase in Element’s borrowing costs may adversely affect its earnings; ent’s business; a competitive business environment may limit the growth of Elem competition for vendor equipment finance may affect Element’s relationships with vendors; loss of key personnel may significantly harm Element’s business;
inability to realize benefits from growth (including growth related to acquisitions) may harm Element’s financial condition; complications in managing acquisitions may negatively affect Element’s operating results;
Element has a brief operating history and Element has incurred losses in the past and may not achieve profitability in future periods;
the market for Element Common Shares (as defined in the General Development of the Business section below) may be volatile and subject to wide fluctuations in response to numerous factors; Element’s quarterly net finance income and results of operations are difficult to forecast and may
fluctuate substantially; and
. litigation may negatively impact Element’s financial condition
The above risks, uncertainties, assumptions and other factors could cause Element’s actual results, performance, achievements and experience to differ materially from Element’s expectations, future results, performances or achievements expressed or implied by the forward‐looking statements.
An investor should read this Annual Information Form with the understanding that Element’s actual future results may be materially different from what is expected.
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CORPORATE STRUCTURE
Element Financial Corporation was incorporated on May 11, 2007 under the Business Corporations Act (Ontario) (“OBCA”). Its head and registered office is located at 41 Lesmill Road, Toronto, Ontario, Canada M3B 2T3. On August 23, 2011, Element restated its articles of incorporation. On December 15, 2011, Element filed Articles of Amalgamation under the OBCA, giving effect to the amalgamation of Element and Mira II Acquisition Corp., a capital pool company listed on the TSXV Venture Exchange. The entity continuing from the amalgamation was “Element Financial Corporation”. On December 16, 2011, the common shares of Element Financial Corporation were listed and posted for trading on the Toronto Stock Exchange (“TSX”) under the trading symbol “EFN”.All references to Element in this Annual Information Form are to the predecessor Element Financial Corporation and to the entity continuing as Element Financial Corporation pursuant to the amalgamation of Element and Mira II Acquisition Corp.
Element has only one subsidiary, Element Financial (US) Corp. (“Element US”), a corporation incorporated under the laws of the State of Delaware in 2011, which entity is wholly‐owned by Element. Element Financial Corporation OBCA Element Financial (US) Corp. Delaware
GENERAL DEVELOPMENT OF THE BUSINESS
D E V E L O P M E N T O F T H E B U S I N E S S O V E R T H E L A S T T H R E E Y E A R S
Element was founded in 2007 by Steve Sands, Element’s Chief Credit Officer, as an Ontario‐based equipment finance company. Element began originating equipment leases through small debt commitments from a number of life insurance companies. Element originated its first lease in 2008 and, from 2008 until 2010, grew its portfolio to approximately $5,000,000 of leases and loans.
In April 2010, Element was recapitalized and expanded nationally under the leadership of Steven Hudson, Element’s Chairman and Chief Executive Officer, assisted by James More, Element’s Senior Executive Vice President, in order to seize on the opportunities provided by the market disruption in the Canadian equipment finance industry due to the global economic crisis. Messrs. Hudson and More became directors of Element on April 12, 2010, and spearheaded the creation of a strong senior management team and the assembly of an experienced and talented origination, credit and administrative staff. As a result, Element has been able to attract equity investment from a combination of institutional and high net worth investors and arrange significant debt commitments from leading life insurance companies, including The Canada Life Assurance Company (“Canada Life”) and Sun Life Assurance Company of Canada (“Sun Life”).
As at March 31, 2011, Element had assets of $47,073,000 and shareholders’ equity of $8,001,000.
On April 5, 2011, Element raised $75,000,000 from the issuance of 18,750,000 Element units at a price of $4.00 per unit, which consisted of Element common shares and rights to acquire Element common shares. In connection with such financing, Element was able to secure an additional debt commitment from The Manufacturers Life Insurance Company (“Manulife”) and a new revolving credit facility from a Schedule 1 Canadian bank.
As of August 1, 2011, Element acquired substantially all of the assets and assumed certain liabilities of the Alter Moneta Group L.P. (“AM”) for approximately $160,180,000 pursuant to the Asset Purchase Agreement (as defined below) (the “Alter Moneta Acquisition”). In addition to a mature finance asset portfolio of leases and loans, the Alter Moneta Acquisition provided Element with an established back‐office staff and systems with the capability to manage and process a large North American equipment finance portfolio and handle significant growth in business originations. The Alter Moneta Acquisition also provided Element with an experienced Québec–based management team and proven origination and asset management experience in the Province of Québec. In addition, the Alter Moneta Acquisition further enabled Element to expand its existing sales force into Québec to establish a national origination team. See Narrative Description of the Business – Acquisitions and Joint
Ventures – Significant Acquisitions – Alter Moneta Acquisition.
On October 28, 2011, Element completed a private placement of 41,700,000 subscription receipts (the “Subscription Receipts”) at a price of $4.20 per Subscription Receipt for $175,140,000 (the “October Private Placement”). Each Subscription Receipt entitled the holder to receive, for no additional consideration, one Element common share (the “Pre‐Amalgamation Element Common Shares”) immediately prior to the completion of the Amalgamation. Holders of Pre‐Amalgamation Element Common Shares issued pursuant to the October Private Placement were entitled to receive, pursuant to the terms of the Amalgamation Agreement (defined below), one common share of the amalgamated Element (the “Element Common Shares”) for each Pre‐ Amalgamation Element Common Share so held.
On October 28, 2011, Element and Mira II Acquisition Corp. (“Mira”) entered into an Amalgamation Agreement (the “Amalgamation Agreement”), pursuant to which Element and Mira would merge by way of an amalgamation (the “Amalgamation”) and, among other things, the shareholders of Element would hold the
majority of the outstanding Element Common Shares and the name of the resulting issuer would be “Element Financial Corporation”. Mira was a capital pool company (a “CPC”) for the purposes of the policies of the TSX Venture Exchange Inc. (the “TSXV”), incorporated under the OBCA on February 4, 2011, and a reporting issuer under applicable securities laws in Ontario, Alberta and British Columbia. Mira’s common shares were listed on the TSXV under the symbol “MIA.P”. As a CPC, Mira’s principal business since its existence was to identify and evaluate assets or businesses with a view to completing a transaction where a CPC acquires significant assets, other than cash, by way of purchase, amalgamation, merger or arrangement with another company or by other means ( a 5 a “Qualifying Trans ction”) in accordance with the policies of the TSXV.
On December 15, 2011, Element and Mira amalgamated under the OBCA pursuant to Articles of Amalgamation, with Element Financial Corporation being the continuing entity. Pursuant to the Amalgamation Agreement, the predecessor Element’s by‐laws became the amalgamated entity’s by‐laws and the directors of the predecessor Element became the directors of the amalgamated continuing entity. The Amalgamation constituted Mira’s Qualifying Transaction under the TSXV’s rules and policies. Mira’s common shares were de‐ listed from the TSXV concurrent with the completion of the Amalgamation.
Upon completion of the Amalgamation, Element’s shareholders held approximately 99% of the issued and outstanding common shares in the combined company that resulted from the Amalgamation. The Amalgamation constituted a reverse take‐over of Mira by Element.
Concurrent with the completion of the Amalgamation, on December 16, 2011, Element Common Shares were listed for trading n the TSX under the symbol “EFN”. o
At December 31, 2011, Element had total assets of $416,715,000 and shareholders’ equity of $238,341,000. As set out under Narrative Description of the Business, Element has experienced substantial growth in its lease origination business, subsequent to Mr. Hudson assuming leadership of the Company.
B U S I N E S S O V E R V I E W
Element is an independent financial services company that originates, co‐invests in and manages asset‐ based financings. The Company originates the financing of a broad range of equipment and capital assets by way of secured loans, conditional sales contracts and financial leases. Element originates its equipment financings through its employee sales force, who focus on equipment vendors and direct equipment users. Element distinguishes itself from traditional lenders such as banks and finance companies in that it:
offers select, asset‐based financing services rather than providing full‐service lending;
originates primarily through its own vendor and direct relationships; and
funds its activities through commitments from institutional investors rather than accepting
deposits from the public.
Element is led by Steven Hudson, the Chairman and Chief Executive Officer of Element. Mr. Hudson has extensive experience in the equipment finance industry, including 14 years as chief executive officer of Newcourt Credit Group Inc. (“Newcourt”), a company he founded. Under Mr. Hudson’s leadership, Newcourt went public in early 1994, completed numerous acquisitions and experienced significant organic growth prior to the merger of Newcourt with The CIT Group, Inc. in 1999. Under Mr. Hudson’s leadership, Newcourt completed a number of acquisitions, including AT&T Capital Corporation, Commcorp Financial Services Inc. (CIBC Equipment Leasing) and the asset finance operations of Lloyd’s Bank and grew its portfolio of finance assets from $100 million to approximately $35 billion at the time of its sale to CIT..
Element has an experienced executive management team with each executive leading each of Element’s core business divisions having an average of 20 years of diversified asset finance and equipment finance industry experience. Element utilizes its management team’s extensive experience in the equipment financing industry and its industry relationships to maintain and further grow relationships with equipment vendors and direct relationships with customers.
Element currently operates in two distinct segments of the asset‐based finance market: (i) commercial finance and (ii) corporate finance. Element has organized its activities and operations around three core businesses: (i) Element Finance, (ii) Element Capital and (iii) Element Services.
ELEMENT FINANCE
Element Finance is the Company’s commercial finance business unit. Element Finance offers asset‐based
sales throu alers
(collectively h s c
gh select strategic relationships with equipment manufacturers, de and distributors , “vendors”). Element Finance provides its financial services throug four di tin t business units: Transportation and Construction Finance – provides vendor finance in the transportation,
construction, forestry and material handling markets;
Golf Equipment Finance – provides vendor finance in the golf equipment market;
Commercial and Industrial Finance – provides vendor finance in the commercial and industrial markets; and
Healthcare Equipment Finance – provides vendor finance and direct end‐user financing products designed to service the healthcare sector seeking financing for equipment, business acquisition and working capital.
ELEMENT CAPITAL
Element Capital was established on January 30, 2012 and offers asset‐based sales dedicated to large equipment financing and leasing transactions, including energy‐related assets, corporate aircraft and helicopters, rail and road transport, as well as mining and large‐scale construction equipment.
ELEMENT SERVICES
Element Services is the administrative unit of the Company responsible for managing the capital structure of the Company and for providing cost‐effective growth, control and support services to the Element Finance and Element Capital business units.
Element Services is divided into four principal operating units:
t; Treasury; Credit and Risk Managemen Financial Management; and Information Technology. CORPORATE AND EXECUTIVE OFFICE
The Corporate and Executive Office comprises Element’s Chairman and Chief Executive Officer and the Executive Vice‐President and Vice‐Chairman, and are responsible for the development and communication of Element’s overall corporate strategy and business policies as well as for the Company’s corporate capital structure, strategic corporate planning, business assessments and reviews and mergers and acquisitions.
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NARRATIVE DESCRIPTION OF THE BUSINESS
O V E R V I E W O F T H E A S S E T ‐ B A S E D F I N A N C E I N D U S T R YThe Company operates in two distinct segments of the asset‐based finance market: (i) commercial finance; and (ii) corporate finance.
COMMERCIAL FINANCE MARKET – ELEMENT FINANCE
The commercial finance segment of the asset‐based finance market involves the provision of direct and indirect financing for the acquisition of commercial equipment. This segment of the asset‐based finance market involves the financing of equipment as such assets move through the distribution channel from the manufacturer to the dealer to the ultimate end‐user of the equipment. Asset‐based financing within the commercial finance segment of the market is provided by a wide variety of market participants, including banks, captive finance companies and independent finance companies. The commercial finance segment of the market has experienced strong growth in recent years as a result of increased capital and infrastructure spending, increased machinery and equipment expenditures and the continuing trend of consolidation in the industry as larger participants build market share through acquisitions and the outsourcing by equipment manufacturers, dealers and distributors of their asset‐based financing requirements. Within the commercial finance market, the Company is focusing its activities on establishing formal vendor finance programs as a basis for originating asset finance business.
Vendor finance programs are agreements with equipment manufacturers, dealers, distributors and professional organizations (collectively, “vendors”) which provide a finance company with preferred access to financing transactions relating to a vendor’s equipment. These financings are generally offered to: (i) the ultimate end‐user of the equipment; and (ii) the vendor’s dealers and distributors through inventory or “floorplan” financing. Vendor finance arrangements provide a steady, reliable flow of new business with lower costs of origination than asset‐based financings marketed directly to end‐users. Vendors often provide various forms of support to the finance company under these programs, including credit support and equipment repurchase and remarketing arrangements. Vendor finance programs can also take the form of a referral relationship which is less formal and typically does not include credit support from the vendor. For vendors, these programs are attractive because the financing is tailored to the vendor’s particular product line and industry, thereby helping to promote equipment sales. The close relationship between credit sources and the vendor allows the vendor to maintain contact with the customer. These programs are often a less expensive alternative to a vendor maintaining its own captive finance company.
CORPORATE FINANCE MARKET – ELEMENT CAPITAL
The corporate finance segment of the asset‐based finance market generally involves large structured asset finance transactions. Financing in this market is required by corporations, institutions and government acquiring capital assets such as aircraft, toll highways, railway rolling stock and transportation fleets. Transactions in this market differ significantly from those in the commercial finance market in terms of their complexity. Funding is usually provided by banks, other private market lenders such as life insurance companies and through public capital markets. The principal intermediaries in the corporate finance market are investment bankers. Most transactions involve syndications, whereby several institutional investors participate in the financing.
The corporate market has experienced strong growth over the past several years. This growth is the result of corporate and institutional borrowers seeking to diversify their sources of debt capital by dealing directly with asset‐based lenders. As well, asset‐based lenders have been aggressively pursuing lending opportunities as a means of diversifying their investment portfolios.
E L E M E N T F I N A N C E
Element Finance is the Company’s business unit servicing the commercial finance market and focuses on the mid‐ticket finance segment of the equipment finance industry. The mid‐ticket finance segment of the equipment finance industry involves financing for the acquisition of equipment ranging in value from approximately $10,000 to over $1,000,000. According to the Canadian Finance & Leasing Association (“CFLA”), the Canadian equipment finance industry’s portfolio of owned and managed equipment finance assets was approximately $40 billion in 2010 ($40.7 billion – 2009), with approximately $16 billion of new business written in 2010 ($13.5 billion – 2009). The equipment financing industry is the second largest provider of debt financing to business customers and consumers after banks and credit unions. In general, the Canadian equipment finance industry is served by three main industry participants: independent lease finance companies like Element (including subsidiaries of U.S.‐based commercial leasing companies), captive finance companies
wned b
o y manufacturers and distributers, and Canadian banks.
Element Finance has assembled an industry‐leading national sales force, and currently heads an origination team of 20 salespersons covering all ten Canadian provinces. Element originates its equipment finance assets in specific segments of the equipment finance market, with a current focus on the commercial and industrial, transportation and construction, healthcare and golf equipment market verticals. To assure the quality of its equipment finance assets, Element emphasizes the creditworthiness of the end‐user or borrower, the value of the financed assets and the creditworthiness of the vendor.
Element Finance has identified three key objectives for the development of its equipment financing business: (i) target specific segments of the mid‐ticket equipment finance market and establish separate business units to cover each segment; (ii) as Element’s market presence grows, expand its vendor finance business by increasing the number of its vendor relationships; and (iii) expand Element’s equipment finance origination capabilities th ough targeted organic and acquisitive growth. r
Element Finance distinguishes itself from traditional equipment financing lenders such as banks and finance companies in that it offers selected equipment financing services and originates primarily through its own specialized in‐house leasing sales force and vendor relationships.
Element Finance primarily originates its equipment finance assets directly through its specialized verticals (of which there are currently four) and relationships with equipment vendors, as well as through relationships with select third‐party brokers. Unlike many of its competitors, Element Finance does not rely on third‐party brokers to originate a significant portion of its business due to the higher incidence of losses from this type of business. Broker originated business accounted for less than 5% of new business at December 31, 2011. As Element Finance implements its key objectives it has seen strong month‐over‐month growth in its origination volumes, from $1.4 million in April 2010 to $25.8 million in December 2011, a compound annual growth rate (“CAGR”) of 134%. The chart below illustrates the historical evolution of Element’s organic growth in origination volumes during the same period of April 2010 to December 2011: $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 Millions Apr-10 M ay-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct -10 Nov-10 Dec-10 Jan-11 Feb-11 M ar-11 Apr-11 M ay-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct -11 Nov-11 Dec-11 Element Finance expects to experience continued strong origination growth (generated both internally and through the relationships and customers acquired pursuant to the Alter Moneta Acquisition) and potential strategic joint venture opportunities. Element’s organic growth objectives are further described below. The growth objectives regarding the Alter Moneta Acquisition are described below under Narrative Description of
the Business – Acquisitions and Joint Ventures – Significant Acquisitions – Alter Moneta Acquisition and the joint
venture opportunities are described below under Narrative Description of the Business – Acquisitions and Joint
Ventures – Growth Strategies.
Element Finance operates with four distinct business unit platforms or “verticals”, each of which has national scope and coverage. Element Finance is supported by Element Services which provides comprehensive asset management s rvices. e
Historically Element Finance’s core origination business has been in the Transportation and Construction group. However, Element Finance expects a material portion of future growth in its origination business to come from the Commercial and Industrial, Healthcare Equipment and Golf Equipment groups. Element Finance believes that the diversification of its existing verticals will provide it with protection from economic cycles. Element’s equipment finance verticals are described in more detail below.
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TRANSPORTATION AND CONSTRUCTION FINANCE
The Transportation and Construction group provides equipment financing for customers operating in the transportation and construction equipment markets. Element enjoys vendor relationships and supplies equipment financing to established Canadian transportation and construction equipment vendors, which account for approximately 80% of the unit’s new business volume. Typical equipment financed includes heavy and medium duty trucks, highway trucks, highway trailers, vacuum trucks, tow trucks, utility trucks, passenger coaches, and all types of “yellow iron” equipment, including excavators, backhoes, graders, cranes, dump trucks and loading equipment. Element does not currently finance automobiles or light trucks for consumer use.
GOLF EQUIPMENT FINANCE
The Golf group provides equipment financing for customers operating in the golf equipment market. Element enjoys vendor relationships and supplies equipment financing to customers of established Canadian golf and turf care equipment vendors, which account for virtually all of the unit’s new business volume. Typical equipment financed includes gas and electric golf carts, turf care equipment and excavators.
COMMERCIAL AND INDUSTRIAL FINANCE
The Commercial and Industrial group provides equipment financing for customers operating in the commercial and industrial equipment markets. Element enjoys vendor relationships and supplies equipment financing to customers of established Canadian commercial and industrial equipment vendors, which account for approximately 50% of the unit’s new business volume. Typical equipment financed includes metal working, wood working, plastic injection moulding machinery, fabricating machinery, skid steers, lift trucks and scissor lifts.
HEALTHCARE EQUIPMENT FINANCE
The Healthcare group provides equipment financing to healthcare providers, including medical and dental practitioners, as well as veterinarian clinics, pharmacies and hospitals. Typical equipment financed includes patient care equipment, ranging from radiology equipment and magnetic resonance imaging machines to dental chairs, and related assets. The Healthcare group also provides financing for practice purchases, office construction and technology upgrades. For practitioners, the Healthcare group requires life, disability and property ins rance in a amount equal to the va ue of the finan ed ssets as a condition to providing fina cing. u n l c a n
The Canadian healthcare industry is characterized by significant government regulation, low to moderate growth, established healthcare providers and constraints on public funding. Element believes that healthcare providers will increasingly look to private sector sources of financing to fund capital expenditures, representing a significant opportunity for growth in the Healthcare group’s business.
Element is one of a limited number of companies in Canada that specialize in providing equipment financing to the healthcare industry. The Canadian healthcare equipment finance market has significant barriers to entry. Participants seeking entry must develop considerable industry knowledge and expertise while also overcoming the high degree of loyalty to existing financing relationships which healthcare practitioners have historically demonstrated. Element believes that its success in the healthcare equipment financing industry is the result of the detailed industry knowledge of its staff, the relationships which it has developed with healthcare practitioners and equipment vendors and the efficiency of Element’s portfolio management system.
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in rder to provide effective credit and risk management of Element’s portfolio.
To oversee credit management matters, the Element Board of Directors has established a Credit Committee. The Credit Committee is chaired by Pierre Lortie. Mr. Lortie has extensive experience in the asset‐
E L E M E N T C A P I T A L
On January 30, 2012, Element announced the establishment of a new Element Capital business unit dedicated to large equipment financing and leasing transactions. Element Capital will focus on areas including energy related assets, corporate aircraft and helicopters, rail and road transport, as well as mining and large‐ scale construction equipment.
The target market for Element Capital is focused on transactions in excess of $2,000,000. Element believes that there is a good opportunity for Element Capital in the market for large equipment financings as a result of the withdrawal of some traditional competitors from this market stemming from the financial market turbulence that began in 2008. Element Capital is supported by Steven Hudson and other senior managers of Element who oversaw a large and successful business in the large equipment financing market while at Newcourt and GE Capital. Element expects to originate transactions through both vendor programs and directly from end‐users. While Element Capital expects to selectively syndicate portions of large transactions, Element intends to hold some portion of all syndicated transactions and to manage any syndicates created to finance transactions originated by Element Capital.
The principal competitors of Element Capital are expected to be GE Capital, CIT, Key Equipment Finance, HSBC, Bank of America Equipment Finance, PNC Equipment Finance,, and other Canadian and US banks. Element Capital expects to generate revenue through various means, including fees for structuring transactions, syndication and service fees for acting as syndication manager of transactions originated by Element Capital, and finance income earned on transactions not syndicated (if any) and the portion of any syndicated transactions retained by Element Capital.
E L E M E N T S E R V I C E S
Element Services is the administrative unit of the Company. Element Services directly supports the Company’s corporate and commercial finance businesses with a wide range of growth, control and support services such as credit and risk management, customer services, financial reporting and information technology support. In addition, Element Services is responsible for managing the capital structure of the Company, including the management of Element’s various funding programs with in banks and institutional investors/lenders. Element Services’ four principal operating groups are described in more detail below. TREASURY The Treasury group is responsible for ensuring the Company’s liquidity and access to capital attractive pricing as well as managing the relationship with bank and institutional lenders. Treasury also manages certain financial risks generated in the normal course of business, such as interest rate and currency risks. CREDIT AND RISK MANAGEMENT The Credit and Risk Management group is lead by the Company’ Chief Credit Officer and is responsible for prudent and proper underwriting and portfolio management of Element’s credit risk
In connection with these core functions, Element has developed a series of credit management philosophies that are specific to the granting of credit to customers and adapted to each specific vertical, commercial and corporate asset type, as well as a credit manual and vertical‐specific credit underwriting manuals o
backed lending industry, having previously served as President and Chief Operating Officer of Bombardier Transportation, Bombardier Capital, Bombardier International, and as President of Bombardier Aerospace, Regional Aircraft. See Committees – Credit Committee.
UNDERWRITING
Element believes that effective credit management is critical to the success of Element’s portfolio. The Board has approved, through the Board’s Credit Committee, a credit manual which sets forth the business objectives, strategies, credit philosophies and credit guidelines that are to be followed by Element in considering prospective new business financings within its business units and for managing its existing asset portfolio. Element’s senior management team regularly reviews and monitors the credit manual to ensure consistency between Element’s business objectives and strategies and current economic conditions. By following a disciplined and consistent approach in its daily business operations, Element believes it can manage credit risks in a reasonable and prudent manner.
Element has also developed a series of credit management philosophies that are specific to the granting of credit to its customers, adapted to each specific business unit and equipment type. The Board has approved, through the Credit Committee, credit underwriting manuals which set forth business and credit philosophies and parameters and credit standards for each business unit. Element’s credit adjudication policy requires strict adherence to these credit underwriting manuals. This credit evaluation process, as specified in each of the credit underwriting manuals, sets out detailed procedures by which proposed transactions are presented, reviewed and assessed by a credit officer and ultimately approved or declined. These credit underwriting manuals are regularly reviewed and approved by the Credit Committee, as well as the providers of Element’s Term Funding Facilities, each of whom also regularly conduct reviews and audits of Element’s compliance with its credit procedures.
In general, Element’s credit underwriting guidelines include:
having a defined and consistent approach to the assessment and underwriting process used or f reviewing new credit applications;
using a prudent combination of judgement and a credit a ing system when considering an r t application for a new credit exposure;
ensuring all new transactions are correctly credit rated so that, in combination with onging monitoring of existing exposures, the overall level of credit risk in the portfolio can be accurately quantified and monitored on an ongoing basis;
creating reasonable and prudent policies regarding overall credit exposures to business lines, geographic areas and individual customer exposures;
setting formal and prudent individual approval levels, based on the experience and knowledge of the individual and Credit Committee authorities for the approval of credit granting – such
also o
credit authorities are based on a combined or consolidated exposure to the cust mer as opposed to individual credit requests;
constant monitoring of the portfolio for credit quality, various exposures and arrears performance and reporting on same to the Credit Committee on a monthly basis and the Board on a quarterly basis; and
quickly identifying and addressing potential or actual accounts that may be or have become credit impaired.
In conjunction with Element’s credit underwriting guidelines, Element has also developed a series of general underwriting philosophies which are employed throughout Element’s business units. In general, Element’s underwriting philosophies include the following:
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employing experienced and knowledgeable internal origination teams that are familiar with the stry segm
equipment product lines and indu ents in which they are originating new business applications;
transacting new business through bona fide equipment dealers and vendors that are known to Element and its employees;
following Element’s “Know Your Customer” philosophy which constitutes a major component of
l i n
effectively managing E ement’s cred t risks and is i strumental in significantly reducing and managing the possibility of fraudulent activity;
vetting and approving any financial intermediaries, such as third‐party brokers, that wish to
hic c
submit new business applications to Element, w h includes the ompletion of an application and intermediary agreement;
reviewing each intermediary’s transactions for delinquencies or other issues on an ongoing a
basis, including further review and possible termination of the intermediary s an origination source where excessive delinquencies or other issues persist;
employing a network of dependable and reliable bailiffs to quickly assist in the procuring of Element’s security on delinquent or impaired accounts as quickly as possible, thereby helping to reduce potential losses on those accounts; and
maintaining an accurate database on Element’s customers and a credit file on each individual customer which can be easily referenced in the event of any issues, changes or delinquencies that may arise.
Element believes that effective risk management against fraud is critical to the success of Element’s portfolio. Element has developed controls for the risks that result from fraud, which includes careful adherence to Element’s underwriting and documentation procedures. Element requires staff to be aware of the potential for fraud and to remain diligent in identifying and reporting to senior management any suspicious activities. Types of fraud that Element is exposed to generally fall into one of three primary categories: (i) vendor/dealer
raud; (i
f i) customer fraud; and (iii) employee fraud.
Element takes a number of steps to protect against vendor/dealer fraud by adhering to the policies and procedures documented in each of its credit underwriting and documentation manuals. Element primarily protects against customer fraud at the underwriting stage. Element’s underwriting staff is experienced at identifying warning signs associated with risk related to customer fraud. Element protects against employee fraud by maintaining a culture which focuses on the highest standard of business ethics and conduct by all employees, where Element’s staff are encouraged to identify and report unusual or irregular activities. As a member of the CFLA, Element and its staff abide by the CFLA’s Code of Ethics, which serves as the guiding principles for all members engaged in the business of leasing and asset‐based financing. Element has also adopted a written Code of Business Conduct and Ethics that applies to directors, officers and employees. The CFLA Code of Ethics and Element’s Code of Business Conduct and Ethics have been made available to each of its directors, officers and employees. Element has also established internal control procedures throughout the business process to reduce the risks of employee fraud.
PORTFOLIO MANAGEMENT
In managing the growth of Element’s portfolio, Element takes a disciplined approach to risk management. Element finances equipment in market segments that it understands and has the expertise to underwrite and manage and has adopted specific underwriting guidelines for each of the different equipment market segments that it finances. Portfolio risk is diversified across the full range of asset classes with concentration limits on market segments as a percentage of Element’s overall portfolio. The current portfolio concentration limits are subject to ongoing review by senior management and the Credit Committee and are adjusted in response to changes in market conditions and the addition of new product lines and market verticals. In managing the growth of the lease portfolio, Element adheres to a number of guidelines. Element does not currently solicit lease transactions for intangible assets (e.g., leaseholds, software), technology equipment or computer hardware, office furniture, phone systems, copiers or highly specialized equipment with limited re‐ sale value. Element will make exceptions for transactions within Element’s Healthcare portfolio, where intangible assets will be financed, for example, as part of a medical or dental practice purchase. Specific underwriting guidelines for the financing of Healthcare transactions are set out in Element’s Healthcare Underwriting Manual. Certain industries, including forestry, pulp and paper, mining, oil and gas and hospitality, are also viewed with more caution by Element, and as a result Element is more selective in new business origination in such industries. The business mix of Element’s portfolio will be monitored and adjusted over time to reflect market and industry conditions as well as the performance of the portfolio by asset class and risk rating category. Element has established documented policies and procedures in key risk areas including credit, documentation and collections. Element limits its exposure to individual customers by maintaining maximum exposure limits per customer account. Element intends to establish geographic concentration limits for the portfolio across Canada as its origination business grows based on the relative size of the particular region’s asset based lending volume.
EQUIPMENT FINANCE PORTFOLIO
Element’s equipment finance portfolio consists of those assets which it owns and manages. Certain of the financial features and financial performance of the equipment portfolio summarized below have a direct influence on Element’s cost of funds and its ability to generate new financing transactions.
Portfolio growth has assisted Element in diversifying its lending across equipment classes and geographically thereby reducing concentration risks. The following charts set forth a breakdown of Element’s portfolio concentrations, based on net book value as of December 31, 2011 by equipment class, geographic
egion a r nd transaction size. The concentration of the portfolio by equipment class as at December 31, 2011, and March 31, 2011 is shown in the following chart: December 31, 2011 March 31, 2011 $ % $ % Asset Class Highway Tractors $61,948,000 26.4 $9,500,000 25.1 Construction Equipment on Equipment 41,234,000 17.6 1 1 5,987,000 4 15.81 2 Highway Trailers i 34,973,000 4.9 ,401,000 1.6 Inter‐city Transportat 31,586,000 3.5 9,642,000 5.4 Healthcare Equipment ent uipment 19,767,000 1 1 8.4 567,000 1,702,000 1.54. Industrial Equipm ring Eq ipment 4,167,000 6.0 5 Manufactu ther Equ olf Carts 1,629,000 9,843,000 9,295,000 5.0 4.2 4.0 2,459,000 ‐ 3,646,000 6.5 ‐ 9.6 O G $234,442,000 100.0% $37,904,000 100.0%
15 The concentration of the portfolio by geographic distribution as at December 31, 2011, and March 31, 2011 is shown in the following chart: December 31, 2011 March 31, 2011 $ % $ % Ontario $100,279,000 42.7 $24,128,000 63.6 Quebec 71,392,000 2 1 3 10.5 ‐ ‐ Alberta 7,088,000 1.6 6,744,000 1,649,000 3,819,000 17.8 1 British Columbia 0,388,000 4.4 4.4 Manitoba ick 9,671,000 4.1 0.1 New Brunsw 6,084,000 3, 2, 2.6 393,000 5 6 1.0 1.4 1.7 Saskatchewan Island 669,000 1.6 32,000 28,00 Nova Scotia dward 218,000 0.9 0 Prince E 609,000 23 0.3 9 11,000 37,904,00 ‐ 100.0 Newfoundland Canada 736,000 2,134,000 0.3 9.0 ‐ 0 ‐ United States 2,308,000 1.0 ‐ ‐ $234,442,000 100% $37,904,000 100% The concentration of the portfolio by transaction size as at December 31, 2011 is shown in the following chart: December 31, 2011 Element AM Total
Transaction Size Number of
Contracts Portfolio Assets Number Contracts of Portfolio Assets Number Contracts of Portfolio Assets %
Less than $50,000 456 11,766,000 800 7,135,000 1,256 18,901,000 8.1 $50,000 - $149,999 577 47,131,000 969 24,242,000 1,546 71,373,000 30.4 $150,000 - $249,999 118 20,354,000 249 13,993,000 367 34,347,000 14.7 Greater than $250,000 100 51,337,000 308 58,483,000 408 109,820,000 48.8
Total 1,251 130,588,000 2,326 103,854,000 3,577 234,442,000 100.0
Element’s portfolio continues to perform well with delinquency and credit losses well below industry norms. Portfolio delinquency and losses are expected to rise with the growth of the portfolio; however, such delinquency and losses are projected by Element to be within industry norms for a commercial portfolio within Element’s designated equipment finance asset classes. Element’s portfolio yield was 7.4% for the nine months ended December 31, 2011.
FINANCIAL MANAGEMENT
The Financial Management group is lead by the Company’s Chief Financial Officer and is responsible for administration and financial reporting, information technology, tax and audit and documentation system services to Element’s verticals. The growth in the number of employees engaged in the activities of Financial Management has paralleled the growth in Element’s new business origination volumes.
ADMINISTRATION AND FINANCIAL REPORTING
The administration branch of the Financial Management division is responsible for ensuring that originated finance assets are not funded by Element until all credit and documentation conditions are satisfied and all required security is perfected. Services provided by this division include document administration, review and approval, funding, account set‐up and activation, account maintenance, invoicing, correspondence tracking, insurance tracking and security registrations. The portfolio of assets owned and managed by Element is monitored with the assistance of a comprehensive software package. Element has also invested in cost‐ effective financial reporting computer systems. Element has established back‐up arrangements and disaster
recovery solutions in the event of a failure in its principal systems. From December 31, 2010 to December 31, 2011, the number of lease contracts managed by the administration branch increased from 450 to 3,577.
Prior to the Alter Moneta Acquisition, Element utilized Casitron Limited’s Lease Accounting and Management System (“CLAMS”), which had proven cost effective and was hosted off‐site in a high security facility, providing Element with data security, backup and disaster recovery solutions. CLAMS is utilized by small to medium‐sized leasing companies, is functional, very stable and accurate in its financial calculations. In early 2011, with Element’s anticipated origination and portfolio growth, Element began to review its options to convert to a more robust and comprehensive lease management system in 2012. With the completion of the Alter Moneta Acquisition and the related acquisition of AM’s financial management information systems, Element has now migrated its asset portfolio to AM’s more robust lease management systems. These systems include: (i) Lease Plus (manufactured by Lease Team Inc.), a well‐developed, industry leading lease management software with sophisticated reporting capabilities, the ability to process significant growth and manage a large portfolio, which is used by numerous leasing companies in both Canada and the U.S.; (ii) Cognos, an IBM data warehouse which is updated on a daily basis and utilized to provide comprehensive reporting capabilities; and (iii) Great Plains, a product of Microsoft, a highly recognized general ledger system. All systems are interfaced with each other in order to provide Element with a seamless systems solution. AM’s robust lease management systems previously serviced a lease portfolio over US$2.0 billion. Element believes this proven capability provides it with significantly improved financial and lease information and administration regarding Element’s asset portfolio, and also enables it to process significant growth and manage a significantly larger portfolio as it continues to grow its origination business and consider business acquisitions.
INFORMATION TECHNOLOGY SYSTE S
Element’s Financial Management division currently utilizes a secure server for all of Element’s electronic data. The server contains all of Element’s important electronic files and is backed up automatically every evening on‐site and is also backed up remotely every 24 hours to a secure data centre. As described above, in connection with the Alter Moneta Acquisition, Element has transitioned its lease administration functions to LeasePlus.
M
A C Q U I S I T I O N S
Steven Hudson, Element’s Chairman and Chief Executive Officer, and James More, Element’s Senior Executive Vice President, are responsible for Element’s Acquisitions and Joint Ventures division. Mr. Hudson joined Element in 2010, in the capacities of Director and consultant, having extensive experience in the equipment finance industry, including the founding, building and leading of Newcourt over a 14 year period. Mr. More joined Element in 2010, in the capacities of Director and consultant, following over 20 years of extensive debt capital markets and securitization experience. Messrs Hudson and More become officers of Element in 2011. A key component of Element’s business strategy is to grow its business through both organic and acquisitive growth opportunities. The Acquisitions and Joint Ventures division, led by Messrs. Hudson and More, is responsible for developing, executing and overseeing Element’s non‐organic grow plan and strategies. th
Element has appointed an Advisory Committee that functions to provide advice and input regarding various matters relating to mergers and acquisitions, the integration of any merger or acquisition and major strategic initiatives. See Committees – Advisory Committee.
Since early 2010, Element has undertaken a prudent and disciplined approach in reviewing numerous acquisition opportunities. This approach recently resulted in the Alter Moneta Acquisition, which Element expects will be the first of a number of significant transactions as it assesses acquisition opportunities in both Canada and the United States. While Element takes a disciplined approach to opportunities it is willing to
pursue, it believes that significant strategic and accretive opportunities exist as many current equipment leasing firms throughout North America lack sufficient access to capital, are burdened with expensive sources of capital or are no longer a strategic fit for their current owners. Element believes that it has superior access to capital, a highly experienced management team and a broad network of relationships that provide it with a strong competitive advantage relative to many of the potential acquisition targets currently available. Moreover, with the addition of a number of the members of the former AM management team, Element is in a position to expand its prese s in that region. 17 nce in Québec and pursue further acquisition Element’s acquisitive growth objectives are: acquisitions of independent equipment leasing companies within Element’s core equipment and vendor markets; acquisitions of captive finance companies and portfolios; and o acquisitions f leasing businesses and portfolios from financial institutions.
Element’s focus for these acquisitive growth objectives will concentrate primarily on the Canadian market, with the potential for cross‐border and U.S. opportunities that are within Element’s core verticals and that possess processing capabilities and strong local management teams. At this stage in Element’s development process, acquisitions will be focused on businesses or portfolios that are a strategic fit in terms of back‐office, systems and originations capabilities, have the required infrastructure to continue to operate and grow independently without straining Element’s existing infrastructure and offer accretion to Element from a net income and return on equity perspective.
SIGNIFICANT ACQUISITIONS ALTER MONETA ACQUISITI
Effective August 1, 2011, Element acquired substantially all the assets of AM pursuant to an asset purchase agreement dated July 26, 2011 (as amended) (the “Asset Purchase Agreement”) with Alter Moneta Corporation, a corporation organized under the laws of Canada and Alter Moneta Corporation, a corporation organized under the laws of the State of Delaware (collectively, the “Vendors”) and IPC/AMH (Luxembourg) S.A.R.L., CDP Investissements Inc. and 4389930 Canada Inc. (collectively, the “Partners”). Element was not required to file a Form 51‐102F4 (Business Acquisition Report) with respect to the Asset Purchase Agreement as Element was not an issuing corporation at the time of the acquisition. Pursuant to the terms of the Asset Purchase Agreement, Element acquired all of the assets and assumed certain liabilities of the Vendors and their subsidiaries, which operated as privately‐held independent financial services companies, for approximately $160,180,000. The acquired assets included: net investments in leases; all financing contracts originated by AM and its affiliates; interests in leased equipment; intellectual property, including management information services and software; certain office leases (in Longeuil, Québec and Buffalo, New York); licenses; and all other assets required to conduct the business of AM as conducted at the time of the Asset Purchase Agreement. The geographic breakdown of the acquired lease portfolio consisted of 53% to obligors of leases in Québec, 31% of leases to ON obligors in the rest of Canada and 16% to obligors of leases in the United States, by dollar value.
AM was an independent financial services company operating in both the Canadian and U.S. markets, providing financing and leasing capital for a broad range of commercial assets to small‐ and mid‐sized companies in a number of industries, including transportation, construction, waste management, manufacturing, surface mining, passenger transportation and oil and gas.
Maturing Nature of AM Assets Acquired
In 2007, Irving Place Capital (formerly, Bear Stearns Merchant Banking) purchased a controlling interest in AM. Following the bankruptcy of Bear Stearns during the credit crisis in 2008, AM’s access to capital disappeared. Consequently, as of January 2009, AM ceased to fund new lease/loan originations. The absence of any new originations by AM since January 2009, together with the continued maturation of leases and loans in AM’s portfolio over the 31 month period up to the closing of the Alter Moneta Acquisition effective on August 1, 2011, led to a significant decline in AM’s assets and revenues over the period from January 1, 2009 until the closing of the Alter Moneta Acquisition. The value of AM’s finance asset portfolio at the time of its purchase by Element was approximately $158,474,000.
The finance asset portfolio acquired from AM consisted of over 5,000 leases and loans, which pool of finance receivables had an average remaining life of approximately 13 months at the time of the Alter Moneta Acquisition. The pool of finance receivables acquired under the Alter Moneta Acquisition was reduced to approximately $103,854,000 as at December 31, 2011.
Element expects to leverage its financial and operational abilities to service the maturing AM lease portfolio it acquired pursuant to the Alter Moneta Acquisition. Unlike AM, Element has the capability to service the AM customers behind the leases and loans acquired pursuant to the acquisition. In particular, AM’s portfolio of over 5,000 lease and loan assets provides Element the opportunity to either offer refinancing of equipment that has maintained its useful life or to extend new financing to former AM customers for replacement equipment. As a result, Element does not expect net finance receivables related to the Alter Moneta Acquisition to continue to decline. Rather, Element believes that the AM lease portfolio represents a substantial potential customer base for Element going forward, with the acquisition of the AM assets being accretive and a significant source of new business for Element.
Asset Purchase Agreement
The Asset Purchase Agreement contains customary covenants, representations and warranties. In the event of breach of the Asset Purchase Agreement, Element will have recourse to the Partners within 12 months of the date of the Asset Purchase Agreement for up to $12,500,000 in connection with certain representations and warranties made by the Partners under the Asset Purchase Agreement. As part of the foregoing recourse rights, on the closing date, $3,000,000 of the purchase price was placed on deposit with a New York bank, to be held in trust (the “Trust Account”), for the purpose of paying claims for damages subject to indemnification. The amount in the Trust Account will be paid to Element if the parties to the Asset Purchase Agreement agree to settle a damages claim in respect of AM or one of the Partners or a final arbitration decision is rendered in favour of Element within 12 months of the closing date.
Consideration
Pursuant to the terms of the Asset Purchase Agreement, the purchase price for the acquired assets was approximately $160,180,000, subject to specified post‐closing adjustments, together with the assumption of certain liabilities associated with AM’s ongoing business. The Alter Moneta Acquisition was financed from cash on hand of $42,800,000 and from the sale and concurrent lease of certain of the finance assets and property acquired from AM pursuant to the Securitization Agreement referred to below.
Securitization Agreement
Concurrent with the closing of the Alter Moneta Acquisition, Element and Element US (collectively, the “Securitizers”) entered into a securitization agreement (the “Securitization Agreement”) with a securitization
conduit trust (the “Trust”) administered by an affiliate of a Canadian Schedule I bank (the “Securitization Agent”).
19
Pursuant to the Securitization Agreement, the Securitizers have:
(a) sold to the Trust certain specified loans (each a “Loan”) made by AM to individual obligors (“Obligors”) to finance the purchase of the equipment and other movable or personal property which is collateral for the secured loan (“Collateral”); and (b) leased to the Trust under concurrent leases certain equipment and other movable and personal property (each a “Concurrent Lease” of the related “Leased Property”) which Leased Property was leased to individual Obligors (also “Obligors”) by AM under leases (the “Leases”) which are acquired by the Trust as a consequence of the Concurrent Leases.
As consideration for such sale and concurrent lease, the Trust paid the Securitizers a purchase price amount (in respect of the Loans) and prepayment of rent (in respect of the Concurrent Leases) at the time of closing in an aggregate amount of $120,700,000 (before taxes) (the “Initial Consideration”) and the Trust has agreed to pay deferred purchase price amounts and deferred rent (collectively, “Deferred Compensation”) from time to time in accordance with the terms of the Securitization Agreement. Of the initial consideration, $1,500,000 was paid to Element, $300,000 was paid to the Securitization Agent as a structuring fee, $1,500,000 was deposited to a reserve account established pursuant to the Securitization Agreement, which amount may be released to Element upon the termination of the transaction to the extent Collections (as defined below) are sufficient to satisfy all obligations payable out of Collections in priority to the Deferred Compensation payable to the Securitizer, and the remainder ($117,380,000) was paid to the Vendors pursuant to the terms of the Asset Purchase Agreement.
Furthermore, Element or Element US (each, an “Originator”) has agreed to pay the relevant Obligors certain floating rate adjustment payments that may become due or owing to such Obligors under the related Loans or Leases on an annual basis to effectively convert the fixed interest rate or implicit rate specified in the Loan or Lease into a floating rate of interest by compensating the Obligor for the excess of any such fixed payments over the amount of payments which would have been payable in the preceding year if the Loan or Lease was a true floating rate loan or lease. Element, as the servicer (the “Servicer”) under the Securitization Agreement, has agreed to administer, service and collect the Loans and Leases in accordance with its credit and collection policies and to perform the additional servicing obligations set out in the Securitization Agreement for no additional remuneration. Element may not resign from its obligations and duties as Servicer unless the Trust otherwise consents in writing. The Trust may appoint a back‐up servicer upon written notice to Element and may affect a transfer of the servicing obligations from Element to a replacement servicer on the occurrence of certain events (each, a “Servicer Termination Event”). A Servicer Termination Event will occur if one or more of the following events occurs: (a) Service Termination Events customary to securitization agreements, including the voluntary or involuntary bankruptcy or similar insolvency proceedings of the Servicer, materially false, misleading and incorrect representations and warranties made by the Servicer in or pursuant to any document relating to the Securitization Agreement and the occurrence of a material adverse change in the financial condition or operations of the Servicer which materially adversely affects the securitized assets or the Trust’s interests therein or the Servicer’s ability to perform its obligations under the Securitization Agreement;
(b) the failure of the Servicer to perform or observe any material term, condition or covenant under the Securitization Agreement which could have a material adverse effect on the Trust, the
