Shorter market cycles, advancing technology and regulatory compliance keep equipment managers paddling as fast as they can
VALUES MAY BE FLAT AND DEMAND FOR NEW INVENTORY LACKLUSTER, but anyone characterizing equipment management as “ho-hum” in early 2018 would be mistaken. Market cycles are contracting and deals are expanding. Automation is revolutionizing manufacturing and agriculture, and compliance requirements are roiling the appraisal business. Meanwhile, much equipment remarketing has moved online, where auctions can be held anytime and the selling prices posted soon after. Amid this fury of change, equipment managers are doing what actor Michael Caine once advised: “Be like a duck—calm on the surface, but always paddling like the dickens underneath.”
“Equipment management is in a transition,” confirms Kim Esposito, Managing Director, Asset Management Services for The Alta Group in Clearwater, Florida. “We’re learning to accommodate changes in the regulatory arena that shorten lease terms, affect return and maintenance provisions, increase audit frequency and influence other basic tenets of the leasing industry.”
In short, every aspect of the business is changing, including the equipment—and values are at the heart of the challenge. “Equipment managers have always been concerned with the accuracy of equipment values, especially residual values,” Esposito says. “But with new equipment technologies introducing obsolescence risks in historically staid industries such as plastics, medical and machine tools, it takes equipment management experience to identify the new depreciation cycles when there is no supporting marketplace data.”
Steve Robbins, Managing Vice President and Director of Asset Management at Signature Financial in Melville, New York, agrees. “Generally, values have remained flat for 2017, but one of the biggest challenges is to identify the market cycles, and there have been changes,” he says. “Some are still very predictable, but there are a number that have changed due to such occurrences as 9/11, the Great Recession and natural disasters. If anything, cycles have shortened.”
Liz Jaramillo, Vice President of Asset Management at Key Equipment Finance in Superior, Colorado, anticipates that residual values will be a stressor in early 2018. “There is a great deal of competitive pressure toward more aggressive residuals,” she says. “I expect that we will continue to have to weigh the economics of competing for deals that provide less upside at the end of the lease.”
Mark Loken, Vice President, Credit, at Farm Credit Leasing Services Corporation in Minneapolis, says chronically low rates and flat yields add that much more pressure for companies to increase residual values to win new business. “That’s the hard part of this—the fine line between maintaining prudent portfolio risk positions and seeing if you can stretch on a bigger residual position to win a specific deal,” he says. “Residual pressure will always be there because pricing pressure is in the here and now, and with residual risk you won’t necessarily realize you have a problem for several years down the road.”
The Auction Aspect
At least one development is helping equipment managers determine values, however, and that’s the growth and advancement of online auctions. Last year, Vancouver, B.C.-based Ritchie Bros. Auctioneers purchased competitor Iron Planet, expanding Ritchie Bros.’ reach into different areas of equipment marketing and growing its Internet sales. “We’re moving more aggressively into the Internet-direct market space, and Iron Planet dominated this,” observes Wade Whitenburg, Strategic Accounts Manager. “Iron Planet’s name recognition and specific technology for the platform, blended with Ritchie Bros.’ reputation for the live unreserved sale, now gives us three separate platforms for equipment sales.”
That means companies offering appraisals that can meet compliance requirements now enjoy a competitive advantage. But, as Esposito says, the traditionally solid lines separating appraisals, remarketing and auctions are blurred, and the change is being felt by the entire equipment finance industry. “We’ve experienced a significant increase in appraisal work for refinancing, loans and sale/leaseback transactions, particularly for construction equipment, process equipment and transportation assets,” she says. “In addition, there’s been a notable increase in appraisals for end-of-term negotiations and legal-support valuations.” Ritchie Bros. has also inherited increased appraisal work because the company can demonstrate compliance capability through its size, scope “and fortitude to work through the processes,” Whitenburg says.
Hot Markets
Despite all the changes, equipment markets continue to rise and fall, reflecting dynamics in the economy. Among the markets Jaramillo expects to be strong this year are heavy-duty trucks and trailers, cybersecurity software, renewable energy and machine tools.
“Class 8 orders steadily increased in 2017 and should remain strong for the first half of this year,” she says. “And regulators are considering more aerodynamic requirements and tire-monitoring equipment for trailers, both of which will increase fuel economy.” Meanwhile the cybersecurity industry has begun introducing new products and fixes every few months to combat new threats and ransomware, Jaramillo says. And solar energy should remain hot because applicable tax credits won’t begin to diminish until 2020. The wildcard: a potential tariff on imported solar panels. “The Chinese are reportedly flooding the U.S. marketplace with solar panels, and a suit has been filed,” Jaramillo says. “There’s a possibility that a tariff will be imposed.”
The machine-tool market is strengthening as additive manufacturing and metal-cutting experience growing demand, particularly in aviation. “Additive manufacturing is much like 3D printing but uses metal instead of plastic,” explains Jaramillo. “It’s an up-and-coming technology, and we think the automotive and aviation markets will drive its growth in 2018.”
Esposito adds a qualifier. “The present additive manufacturing market is limited by high machine costs and lack of a trained labor pool,” she says. “But Michigan, Indiana and Ohio are teaming up with universities, industry trade associations and manufacturers to provide the needed specialized education and training.”
In manufacturing generally, Esposito sees a shift to flexible, automated systems that use one machine to manufacture several products. “The goal in many industries is to create closed-loop manufacturing facilities in which product changeovers will be governed by sophisticated control and software systems, minimizing the human factor,” she says. “The largest challenges to equipment manufacturers will be machine speeds, product-changeover efficiencies and the willingness of end-users to pay for the technology upgrades.”
Robbins says Signature Financial realized growth in 2017 in all Signature Financial direct and indirect equipment finance business lines as well as in its specialty vehicle, franchise, commercial marine and municipal funding origination channels. He expects that growth to continue this year and thinks construction and over-the-road equipment will be particularly hot, “as long as the economy remains sound and rebuilding after the hurricanes continues,” he says. Both sectors could get a further boost if Congress passes an infrastructure spending bill. “But, of course, that’s a wait and see,” he adds.
Robbins also thinks the oil, gas and mining equipment markets could rise this year, “but up is the only direction they can go since hitting the dumps in late 2014 and ’15,” he says, adding, “That drop was like walking off a cliff.
Loken doesn’t anticipate any hot markets in agricultural equipment, but he voices mild optimism nonetheless. “Ag equipment resale values are still pretty soft and cap-ex related to farm implements and production equipment is still low, so we tend to see a fairly high supply of equipment for sale and falling prices, due to the low demand,” he says. “But one positive is that much of this equipment is consumable. Tractors, harvesters and sprayers last five to seven years. You can run them longer than that, but if you do the maintenance costs go up. So we’ll probably start to see some replacement expenditures increasing next year.”
What excites Loken is agriculture’s increasing adoption of technology. “We’re starting to see more and more GPS (global positioning systems) in sprayers and tractors, and we expect to have ‘operator-less’ tractors soon,” he says. Technology in dairies has increased significantly, and robotic milking machines are seeing increased acceptance, although they’ve been available for a while. “Because agriculture continues to be in a downturn, more farmers and ranchers are looking for efficiencies,” Loken explains. “When commodity prices were high, our customers weren’t necessarily looking for ways to cut expenses. But it’s more important now to become efficient to get back into profitability—and technology is one way to do that.”
Other Issues
Technology adoption aside, Loken worries how tax reform and impending changes in lease accounting rules will impact equipment management. “These things are first on our watch list to see how they’ll affect the appetite for leasing,” he says. He expects lease accounting changes to result mainly in questions from customers and their CPAs, but he voices concern that new tax legislation may change how equipment finance companies conduct their business.
Jaramillo expects that the new lease accounting requirements may result in some early terminations, restructures and perhaps exercising of early buyout options for deals already on the books. “Lessees will probably ask us to help alleviate their balance-sheet impact by coming up with restructures,” she says. For new business, she expects shorter-term deals with more aggressive residuals.
Robbins, meanwhile, frets about perpetuation. “There’s not much bench talent available, and a lot of us have been doing this for a long time,” he reflects. He knows that, for many, interest in equipment management pales beside interest in money management. But he hopes ELFA’s Emerging Talent Program will introduce new college graduates to this highly varied work. “We’re involved in every aspect of the business, from structuring deals to portfolio management to selling equipment,” he says. “Our work keeps us active, involved and stimulated—never a dull moment, and very rewarding.”
Five Reasons to Not Miss the 2018 Equipment Management Conference
- Network with your peers and industry colleagues.
- Learn about industry trends and developments at educational sessions.
- Inspect equipment.
- Tour equipment facilities and gain insight into a variety of equipment.
- Visit the exhibition and discover essential products and services.
