America’s second largest independent computer lessor, Continental Information Systems, says it is well underway with a plan aimed at returning it to profitability. But you couldn’t tell from Wall Street. CIS, as the Syracuse, New York, company is known in the trade, saw its market value drop by a third last Thursday. Its share price fell from $3 to $2 as rumours of a possible bankruptcy filing echoed within the leasing industry. Shareholders’ apparent realisation that CIS is in trouble appears to be late. So, too, perhaps, may be the company’s effort to slash costs and build client confidence. As part of its attempt to shore up relations with edgy customers, CIS has sent a team of executives on a cross-country tour. In a series of frank talks, the leasing company’s people have asserted that CIS intends to pare its sales force by more than 25% and its administrative staff by a third. It remains to be seen whether this will be enough to calm investors’ nerves however, as the company’s high operating costs are only one of its problems. Other financial pressures stemming from difficult conditions in the leasing business as well as CIS’ past business practices show no signs of relenting.
Technical violation of covenants The fundamental challenge facing CIS is a shortage of funds. The company has very little cash on hand – less than $6m as of August 31 – and a huge burden of debt – more than $350m. This cash crunch has pretty much prevented CIS from writing leases on new equipment. The company’s computer leasing business is in the main confined to the releasing of machinery it already controls and to the brokering of leases to other lessors. Under such conditions, CIS cannot benefit from financing opportunities associated with recently-announced IBM products. Nor will it gain from the even larger volumes of business that will be accessible to lessors in 1989. Among the developments eagerly anticipated by third party lessors are the first shipments of a new generation of IBM mainframe disk drives, the availability of fully-functional IBM 3990 disk controllers, enhanced editions of IBM’s 3480 tape subsystems and volume production of the 3090S mainframes. Over the years, CIS has traded growth for profitability. But until its acquisition of another lessor last year it always generated modest profits. The 1987 purchase of CMI, a Detroit lessor with which CIS contended for second place behind Comdisco, marked a turning point. In order to complete the buyout, CIS had to raise a great deal of money. It engaged in a series of large financing transactions that culminated over a year later on October 13 with a $110m sale of notes to insurance giant Prudential. The interest alone on this debt comes to more than $1m a month, and could grow if US interest rates rise, as some economists expect. In addition, CIS has amassed considerable additional debt in the form of bank lines. The leasing company’s poor results have put it in technical violation of various loan covenants, and CIS has staved off default only by persuading its lenders to grant it exceptions to the terms of various loan agreements. Thus CIS not only needs to stem its bleeding, but also generate considerable profit during the coming year in order to return to a state of health. Few observers expect the company’s lenders to force it into bankruptcy; the creditors stand a far better chance of recovering their investments if CIS remains functional and solvent. On the other hand, should CIS fail to make progress on its new course, it would take only one skittish lender to bring down the company’s whole tower of debt.
