Gwen Moran 2016-07-29 03:21:28
Economic headwinds lie ahead in 2016, but ELFA members are weathering the storm
RECENT QUARTERS in the equipment leasing and finance market have shown a consistent attitude of optimism, ranging from cautious to confident. With historically low default rates, largely due to tight underwriting restrictions, ELFA members felt the pinch of tight margins but were able to find growth through increased customer demand and targeting niches. At the middle mark of 2016, however, sentiments seem to be more reserved.
“Delinquencies this low means credit quality is higher than normal as a group and small businesses can take on more borrowing when the economy picks up.” –Bill Phelan, PayNet
ELFA’s May 2016 Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $1 trillion equipment finance sector, showed year-over-year new business volume was down 7% from overall new business volume in May 2015. Year-to-date cumulative new business volume decreased 9% compared to 2015. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) for May was 55.1, a decrease from the April index of 59.1.
Such softening is also reflected in other financial data. ELFA’s first-quarter 2016 Beige Book data showed an overall decline of 8.5% year-over-year between the first three months of 2015 and 2016, respectively. Q1 2016 also marked the third consecutive quarter of decline after five consecutive quarters of growth.
Outside of ELFA, the Thomson Reuters/ PayNet Small Business Lending Index also showed a year-over-year decrease of 8% in April. William Phelan, President of PayNet, Inc., a leading provider of small business credit data, says this represents a sea change in sentiment to borrow and invest by small, privately owned U.S. companies, which began in the fourth quarter of 2015.
“We were seeing a 10% trend line growth rate of small, privately-owned companies in the first through third quarters of last year, but that really took a dive in the fourth quarter, and it’s continued that path,” Phelan says.
Volatility Returns
A variety of factors are aff ecting the markets now, some short-term and others potentially more long-standing. Th e chairs of four ELFA Business Council Steering Committees (BCSCs)—captive and vendor finance firms, financial institutions, independent middle market companies and small ticket firms—and Phelan gave their impressions on the state of the equipment leasing and finance market.
At the core, each seems to agree, is uncertainty. With the Presidential election looming, it is unclear how the election will affect everything from tax policy to regulatory environments. Economic concerns in Europe and China add an element of concern in international trade and financial markets. However, despite longtime speculation about their impact, the new lease accounting standards seem to have had little impact on customers.
At home, the Federal Reserve is sending mixed messages about the strength of the economy. Earlier in the year, expectations about an interest rate hike were strong as jobs and housing reports seemed largely robust. However, at its June meeting, not only did the central bank hold steady on interest rates, for the second time this year it cut its forecast for 2016 U.S. economic growth to 2 percent, down from 2.2 percent earlier in the year, citing “headwinds blowing on the economy” as one of the reasons. The Fed also revised its economic growth projection for 2015.
Most of the chairs agree that such uncertainty isn’t great for business. Kris Darby, Vice President of Risk Management at Western Equipment Finance in Devils Lake, North Dakota, and Chair of the Small Ticket BCSC, says that while there is some purchasing activity now in her sector because interest rates are low, she expects that to slow in the coming months as November gets closer, possibly continuing into early 2017 as the new President’s policies become clearer.
While there is some purchasing activity in her sector because interest rates are low, Kris Darby of Western Equipment Finance expects that to slow in the coming months. –Kris Darby, Western Equipment Finance
But ELFA members don’t seem to be blindsided by the current state of the market, Darby says. “When I talked to People last year in October, when everyone was setting their budgets, there was a general discussion that growth could be small or even just hold steady on a year-over-year basis. People were setting their budgets accordingly.”
Signs of Strength
Even with overall economic uncertainty, the equipment leasing and finance sector’s underpinnings are still strong. The May MLFI-25 data showed
Receivables over 30 days were 1.3%, up slightly from 1.2% the previous month.
Charge-off s were 0.33%, up slightly from 0.31% the previous month.
Credit approvals totaled 76.5% percent in May, up from 78. 2% in April.
Total headcount for equipment finance companies was up 4. 3% year over year
“ You are not seeing cookie-cutter approaches to financing anymore. Companies have to be willing to consider new types of businesses and employ structure to win that type of business.” – Conrad Eimers, Vision Financial Group, Inc.
While there is a slight uptick in delinquencies and chargeoffs, portfolio quality is still exceptionally strong. And that increase—illustrated by the Thomson Reuters/PayNet Small Business Delinquency Index 31-90 days past due at 1.20% to 1. 30%—might actually be good for business, Phelan says. Normal business cycles have typical delinquency rates of 1. 50% to 1.70%, so current levels are still significantly lower than that. “Delinquencies this low means credit quality is higher than normal as a group and small businesses can take on more borrowing when the economy picks up,” he says.
Even sectors seeing trending increases that seem relatively high are near or below historic levels, Phelan says. Transportation delinquencies are up 8 basis points to 1.37% for the 14th consecutive monthly increase, reaching their highest level since March 2013, yet still relatively low. Construction delinquencies are also up 6 basis points to 1.86% in their seventh consecutive monthly increase, but Phelan says that’s also relatively low.
Going Forward in 2016
Among ELFA members, strong sectors vary and oft en depend on areas of specialization, says Conrad Eimers, Chair, Independent Middle Market BCSC and President and COO of Vision Financial Group, Inc. in Pittsburgh, Pennsylvania.ELFA Beige Book data indicate market leaders are industrial and manufacturing, construction, transportation and health care services, while agriculture and mining and gas are among the worst performing. However, members may still find pockets of business in lagging sectors. It depends on how you structure your business, he says. Portfolio diversity is important to weather sector ups and downs.
“[M]ember institutions need to think about their client and think about ways to add value to their businesses.” –Alan Sikora, First American Equipment Finance, a City National Bank Company
“Independents are continuing to look for outside-the-box solutions with more flexible structures, and I think that’s really taking root in the marketplace. You are not seeing cookie-cutter approaches to financing anymore. Companies have to be willing to consider new types of businesses and employ structure to win that type of business. It’s moving away from who has the lowest rate. There is clearly a movement in that direction,” he says.
Alan Sikora, Chair of the Financial Institutions BCSC and CEO of First American Equipment Finance, a City National Bank Company based in Fairport, New York, which specializes in the technology, medical and aircraft sectors, says that specialization is important. With deep industry knowledge, finance companies can also act in a consulting capacity, helping customers make smarter decisions.
“I believe that member institutions need to think about their client and think about ways to add value to their businesses. There may be some things going on at the macro level that create some uncertainty,Which is never a good thing, but for those leasing companies that can have close relationships and add value to clients, it should be a good next six to 12 months,” Sikora says.
In the meantime, most businesses seem to be buckling down to ride out the remainder of the year and hope for the best in 2017, says Michael Sweeney, Chair, Captive and Vendor Finance BCSC and Senior Vice President Originations, Vendor Finance, at EverBank Commercial Finance, Inc. in Parsippany, New Jersey. “For most members, the word they’d probably use is ‘satisfactory.’ Portfolio performance continues to be good in most business sectors, with a few exceptions. Consumption is, perhaps, again, not robust, but steady,” he says. And, in volatile times, steady can be good news.
“ Portfolio performance continues to be good in most business sectors, with a few exceptions. Consumption is… not robust, but steady.” – Michael Sweeney, EverBank Commercial Finance, Inc.
Gwen Moran is a New Jersey-based freelance business and finance writer.
DON’T MISS THE LATEST DATA:
ELFA Monthly Leasing & Finance Index and Quarterly Beige Book at www.elfaonline.org/Data/MLFI/
The Foundation's monthly Momentum Monitor, Monthly Confidence Index and quarterly Economic Outlook Report at www.LeaseFoundation.org
Risk management resources from PayNet at www.elfaonline.org/Data/Paynet/
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