Plastic Bag Bans Amount To A Red Flag For Lenders, Boland Says

--Veteran Tiger Group appraiser cites economic consequences of trend in article in The Secured Lender.

May 02, 2013, 09:30 ET from Tiger Group

NEW YORK, May 2, 2013 /PRNewswire/ -- Eco-warriors across the globe have had great success in attacking the widespread use of plastic bags. But this trend amounts to a potential red flag for asset-based lenders who deal with the makers of these much-maligned products, writes Kevin Boland, a New York-based assistant vice president with Tiger Group, in the April issue of The Commercial Finance Association's The Secured Lender magazine.

"The global backlash against plastic bags—visible in the form of taxes and outright bans on grocery and merchandising bags made of blown-film plastic—threatens to undermine the recovery value of dedicated merchandise and equipment in this sector," writes the veteran appraiser.

In the article—"Blowing in the Wind: Are plastic-bag bans the death knell for related M&E?"—Boland begins by describing the scope and scale of environmentalists' war on plastic bags thus far. Domestically, he notes, plastic-bag crackdowns have passed in, among other places, Los Angeles County, Seattle, Portland, Austin, San Francisco, Washington, D.C., and the entire state of Hawaii. "The trend appears to have ongoing momentum: Earlier this year, for example, legislation was introduced to prohibit single-use plastic bags across the entire state of California starting in 2015," Boland writes. "Internationally, restrictions are already in place in at least 20 countries. Even Islamabad, Pakistan, has soured on non-degradable plastic bags; its ban goes into effect in April 2013."

This is significant for secured lenders, in part because of the high value of much of the production-line equipment used by the blown-film plastic industry. "The latest versions of so-called bubble or tubular extrusion machines, which cool much faster than their predecessors and are thus more efficient and productive, can be worth $1 million or more," Boland writes.

But rather than simply bemoan the trend, he writes, appraisers should focus on identifying those items that will still hold the potential for a mild or strong recovery in spite of the bans. "A sharp-eyed team can look past dedicated equipment like bag-forming machines, separators and packagers to those production pieces that are more universal and would be of interest to users in other industries," Boland writes in the piece.

He goes on to describe some of the specific types of equipment that are likely to hold their value, such as extruders, winders and various pieces of auxiliary equipment. "With a bit of retooling, extruders can be used to make a variety of other products, including plastic film and sheeting as well as profile extrusions such as moldings, trim products, pipe tubing and insulation for wire and cable," Boland writes. "Likewise, winders can sometimes be reapplied to the likes of textile products or plastic sheeting. Auxiliary equipment would include any number of grinders, hoppers, vacuum loaders, dehumidifiers, temperature controllers or even robots, while general support equipment could include things like chillers, cooling towers, vacuum pumps, air compressors and boilers."

In the conclusion, Boland points to countervailing trends that could eventually slow the progress of the bans. One is the revelation that reusable grocery bags can become breeding grounds for dangerous bacteria. The other hinges on some analysts' assertion that bans and taxes on these bags can cause significant economic harm in the municipalities where they occur. "Even the widespread imposition of plastic bag bans would not totally decimate the recovery value of M&E employed in these facilities," Boland writes. "Still, it is a good idea for lenders and appraisers to keep an eye on the bag-banning trend."

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