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The Repo Man Cometh

If a car owner doesn't pay back his auto loan, the repo man usually arrives to take back the vehicle. But what if a company defaults on a loan for a multimillion-dollar SAP ERP software purchase? Or if it can't repay IBM Global Financing for the hardware, software and services that it bought two quarters ago? Does a repo man sneak into the data center and take back the servers?

As it turns out, hardware isn't that different from a 2008 Toyota Camry: It can be "repo'ed," refurbished and resold by the vendor. "We can take back equipment," says Fred Clarke, media relations manager for IBM Global Financing. "We can refurbish and resell them on IBM.com or through a broker network and really recapture the residual value on that equipment."

Tech vendors offering their own financing, such as IBM and Oracle, and those that rely on financing partners, such as Microsoft, may soon start to see red ink associated with their customer financing deals. Defaults on technology loans, which help customers purchase computers, software and other tech gear, have spiked this year, according to The Wall Street Journal. So repossessions are a possibility.

IBM's Global Financing resells any gear that is repossessed because a customer defaults and "we can't work out a deal," Clarke says. IBM employees or third-party partners will physically take back the equipment, load it on trucks and bring it to one of IBM's 22 refurbishment centers.

Software, though, is not as tangible as a mainframe: It cannot be resold and has no collateral value. "Software is pretty much a loan," says Clarke. "There's nothing you can do with software once you've taken possession of it."

For software vendors, the repo recourse is of negligible value. Microsoft and its financing partners have few options to recoup a loss. So while the relationship with Microsoft will surely sour, the customer still has the usable software.

Clarke admits that retrieving the IBM software bundled in a "solutions" deal is a bit riskier than handling the hardware loans, but "we adjust for that risk based on the interest rates we charge." He stresses that IBM has "a very conservative approach to lending. " IBM Global Financing's default rate, according to its third-quarter earnings report, increased from 1.1 percent to 1.3 percent.

Forrester Research VP and principal analyst Ray Wang says technology loan defaults historically haven't been a big problem for vendors that offer financing options. Clarke says that "this is not an everyday occurrence for IBM."

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