Stuart Papavassiliou 2017-07-26 06:52:42
TO GAIN SOME PERSPECTIVE on what many anticipate to be a pivotal year for business spending, Equipment Leasing & Finance magazine asked representatives from four ELFA Business Council Steering Committees (BCSCs) to share their views on their respective sectors through the lens of the results of the association’s Q1 2017 Beige Book. Here they weigh in on the survey’s results.
New Business Volume… A Full Spectrum
In the small-ticket sector, only 8% of the respondents reported a decline in year-over-year new business volume in the first quarter. David Normandin, Chair of the Small Ticket BCSC and Managing Director, Commercial Finance Group at Hanmi Bank, affirms, “For the most part, the responses in the Beige Book are in line with what we experienced in the small-ticket sector.” Yet certain realities persist, Normandin notes. “We all have aggressive sales goals, and we’re trying to grow our businesses when there are fewer opportunities to go around. We still see margin compression in spite of the fact rates have increased a few basis points. There’s a lot of money in the market looking for deals, so competition is high.”
Like the small-ticket sector, only 8% of respondents in the financial institutions sector said they experienced a decline in new business volume for the first quarter. Kirk Phillips, a member of the Financial Institutions BCSC and President & CEO of Wintrust Commercial Finance, also agrees with the overall findings of the Beige Book. He adds, “While much of the Beige Book data relates to companies that are more mature than ours at Wintrust, it serves as an excellent benchmark for our business.”
Michael Sweeney, Chair of the Captive and Vendor Finance BCSC and SVP of Originations, Vendor Finance at EverBank Commercial Finance, Inc., sees things similarly in his sector. “As I look at the Beige Book results, I’m struck that only a small number—10%—of captive or vendor organizations experienced a decline in new business volume in the first quarter of 2017. From that we can construe that the rest of the respondents were either flat or ahead in the first quarter as compared to 2016. That is a really good sign.”
On the other side of the spectrum, 64% of independent middle-market respondents saw a decline in new business volume in the first quarter. As Chair of the Independent Middle Market BCSC, Conrad Eimers, President of Vision Financial Group, Inc., attributes this to a continued shift in market dynamics. “I have observed banks gradually loosening credit standards with the vast amount of capital needing to be deployed into the market,” says Eimers. “Th is has led independents into closing more structured transactions resulting in higher spreads. I do think it’s interesting that while volume was down in the quarter, we saw an increase in hiring within the sector.”
“ There’s a lot of money in the market looking for deals, so competition is high.”
David Normandin, Hanmi Bank
Delinquencies and Charge-Offs— No Cause for Alarm
All four Business Council representatives cast the data concerning charge-off s and delinquencies in a relatively positive light. Three of the four sectors—captive and vendor finance, financial institution and independent middle-market players— reported increases in delinquencies and charge-off s for the quarter in the range of 20% to 27%. Eimers puts things into perspective: “While delinquencies are increasing and charge-off s are widening, I don’t see this happening at an alarming rate.” Still, he warns, the players in his sector are well-advised to be cautious going forward.
As for the financial institutions sector, Phillips explains the Beige Book findings likely reflect the stress experienced in portfolios with oil and gas, transportation and corporate air exposure. He offers, “Those sectors have seen challenging times, and those losses are reflected in the Beige Book data.”
With only 20% of captive and vendor finance respondents reporting an increase in delinquencies and losses—the lowest of all business councils—Sweeney remains encouraged. “I think that’s telling that, overall, portfolio quality is good.”
Fifty-eight percent of small-ticket players reported an increase for the quarter year-over-year. Normandin, for his part, remains unfazed. “We see delinquency rates and losses as being minimal, and we’re thrilled about that. I think this is the overall case for players in the small-ticket sector. Even though a little over half of the people in the Beige Book reported increases in delinquencies, that’s pretty decent when you consider the long-term historical performance of this asset class.”
“ Anything construction touches is doing well. We’re seeing marked improvement with more activity in the equipment rental business as well as in materials handling assets.”
Kirk Phillips, Wintrust Commercial Finance
It’s All about the Industry Sectors
Normandin further explains that portfolio performance is tied to the various niche industries served by equipment finance companies. He says, “You find this in all sectors, including the small-ticket sector. Some of the best-performing industries for some players are, at the same time, the worst for others. What does that tell you? If you have a specialty with a particular equipment type, those assets will perform well. If you don’t understand a particular industry, those assets may perform poorly.”
Phillips agrees. He says, “I find it interesting that mining equipment, which includes oil and gas, is listed among the weakest of asset classes. This is probably the case for those institutions that have legacy portfolios. At the same time, we are starting to see some signs of a return in the oil and gas industry, so there may be some opportunity there.”
Eimers weighs in on the challenges associated with the oil and gas industry. “At Vision Financial Group, we’ve carved out a specific niche within this sector. While Marcellus is down and out, there are still pockets to be had in that industry. Similarly, good opportunities exist within the industrial and manufacturing sector, but you need to drill down to find them.”
For Phillips, the same holds true with trucking. “We’ve experienced some positive results because our operators and carriers are larger players and have both the credit strength and wherewithal to take advantage of opportunities in their respective markets. In general, we’re experiencing the marketplace similarly as to what the Beige Book is reflecting.”
While there has been little light at the end of the tunnel for railcar assets, Phillips offers, “Th is weakness is attributable to crude oil transportation and some of the stresses we see in things like the frac sand transport business.” For Phillips however, there’s more than meets the eye. He explains, “Institutions can find some good opportunities if they focus on the power side of the business and deal with the stronger operators.”
Construction Machinery Stands Alone
While industry expertise makes the difference between the best and worst performing industries as with industrial machinery and oil and gas assets, there is little room for argument when it comes to construction machinery’s preeminence among the other key asset classes. Sweeney states, “Th e inclusion of construction equipment indicates the overall bullishness in the marketplace in terms of business expansion and the anticipation of an expansion of the infrastructure build. On the captive side of our business council, there appears to be renewed optimism stemming from the expectation of a robust infrastructure build coupled with a pro-business climate.”
Eimers echoes this sentiment. He says, “Construction will continue to be a strong sector, and I think we will see a good deal of infrastructure building with the new administration in place. We’ll gain momentum with new projects in the next two to three years. There’s also a move afoot to reduce regulatory oversight, which will expedite permitting and approval processes significantly on bigger projects.”
Phillips takes this point one step further. “Anything construction touches is doing well. We’re seeing marked improvement with more activity in the equipment rental business as well as in materials handling assets.”
Eimers adds, “Th e thing to remember in construction is that there is a changing customer profile. As we noted at the ELFA Convention, these customers are looking for greater convenience and flexibility. There’s a heightened demand for 12- to 24-month leases and rentals are becoming more commonplace.”
“ On the captive side of our business council, there appears to be renewed optimism stemming from the expectation of a robust infrastructure build coupled with a probusiness climate.”
Michael Sweeney, EverBank Commercial Finance
Credit Approvals Trend Upward
Th e Beige Book reveals that the increases associated with the number of transactions submitted through the credit approval process have ranged from 67% for the small-ticket sector on the high end to 50% on the lowest end among the captives and vendor finance companies. Th e independent middle-market companies reported a 64% increase in transactions submitted through the approval process while the financial institutions registered a 54% increase.
Normandin explains that the credit approval process has been interesting. “As margins have thinned, equipment finance shops have had to find ways to make money. Some of the big drivers have been reducing overhead costs, loss reserves and the cost of funds. With those three things in mind, we’ve had to figure out how to go upmarket with the credit quality we’re buying to affect reserves and negotiate for lower cost of funds.
“According to the Beige Book data, we’re starting to see more deals going through the system as players in our sector are looking to close more business. Th e approval rates—a key indicator of what’s happening in the industry—are more conservative to impact credit losses and drive that cost down.”
Guarded Optimism, Not Quite Ready for Gangbuster Growth
We asked the four executives to weigh in on what the future holds for their respective sectors. All expressed optimism, albeit with varying degrees of reservation.
Sweeney states, “As for the remainder of the year as it relates to new business, it will be a struggle to earn spreads, but there should be enough business for lenders and lessors to maintain their volumes. I think among ELFA members there’s general optimism that hasn’t been in place for a number of years. My sense is that everyone views the environment with guarded optimism.”
“ We’re cautiously optimistic, and a lot hinges on Washington and what happens on the Hill.”
Conrad Eimers, Vision Financial Group
“We’re cautiously optimistic, and a lot hinges on Washington and what happens on the Hill,” Eimers explains. “I expect we’ll see an uptick in the second quarter for the independents as the year progresses.”
Normandin says, “I’m optimistic about this year, and while we haven’t seen a dramatic shift , we have continuous growth. I anticipate that we’ll see new business volume increase in the second half of the year, and that should benefit the industry as a whole. Things may not be going gangbusters as of yet, but we’re optimistic.”
Hitting the highest note of optimism, Phillips says, “We’re still excited about 2017; our pipeline is robust, and we’re looking forward to a very solid year. I think for the industry overall, there are some concerns that remain, such as stress on spreads and the predictable uptick in losses as the economic cycle shift s. But, as a whole, I think our peers in the industry are optimistic as to how the year will turn out.”
Stuart Papavassiliou is a Philadelphia-based freelance writer with extensive experience in commercial finance topics. Papavassiliou can be reached at 610.724.8775 or by email at stuart@stuartpop.com.
Leasing Delinquencies and Charge-Offs—Holding Strong at Historic Lows
Recent data from the Federal Reserve validate what leasing professionals have understood about their industry for years. The data reach back to the first quarter of 1985 and underscore the fact that, when it comes to delinquencies and charge-offs, equipment leasing remains one of the best performing sectors under the broader umbrella of commercial finance.
Bob Rinaldi, Chief Executive Officer of Commercial Industrial Finance, Inc., shared his views on the data. For Rinaldi and any equipment finance professionals with 10 years of industry experience under their belts, the most recent data on charge-offs and delinquencies offer no surprises. Rinaldi states simply, “There’s nothing in this data that should alarm anyone in the industry… the data points are exactly where they should be. Everything here just makes common sense.”
The stability of leasing assets hangs on three attributes: the fact that lessors deal with essential use equipment, the value of the collateral and the short maturities with payment schedules that amortize to zero with no option to charge back up as is the case with lines of credit.
See the fed data at www.elfaonline.org/feddata.
While the facts speak for themselves, Rinaldi says the Federal Reserve data serve to debunk the misguided assumption that leasing is a riskier product offered by the commercial finance segment. He explains, “For those bankers the leasing story is hard for them to believe until you tell them that the data is compiled by the Federal Reserve.”
“As far as where we are to date, if you look at the MLFI-25—and you’ll note that delinquencies have picked up a bit—but in the big picture, those increases are at historic lows, and delinquencies and losses are lower than I can remember them being in the last 20 years or so.”
Going forward, Rinaldi sees things holding steady for the leasing industry as a whole. Like his colleagues, Rinaldi is optimistic but tempers this optimism until he sees some tangible results on the regulatory front. “Sure I’m more optimistic, but all the optimism in the world doesn’t change what we’re seeing in the present. I don’t see businesses throwing gas on the fire for growth…I think they’re still extraordinarily cautious with their capital spending.”
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