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Equipment Leasing & Finance

Funding’s Fragile Balance

March/April 2019

Zen

GE Healthcare Equipment Finance Global Capital Markets Leader Bob Blee pauses a moment during our phone conversation and then lets out a small sigh. “I wish there was some news,” he says sympathetically. “Last year’s U.S. funding environment was very stable with aggressive pricing, flexible terms and conditions and an appetite for larger-client credit exposures, driven by strong liquidity in the equipment capital markets. We’re expecting more of the same here at GE Healthcare Equipment Finance in 2019, and we’re pricing accordingly.”

In the equipment-funding environment, no news is good news—at least for 2019. To use Blee’s words, companies had “terrific access to capital at attractive rates in 2018,” and although the U.S. economy is expected to grow more slowly this year than last, he thinks major changes in funding are unlikely. “There’s no question that there is uncertainty in the markets right now,” Blee qualifies. “But the economy still seems to be growing. There’s nothing I see in mid-January that leads me to think there will be a significant downturn in 2019.”

Ifs and Buts
Not everyone is as sanguine. Lindsey McLorg, Director, Capital Markets, Structured Finance at Hitachi Capital America Corporation, calls last year’s funding atmosphere “unsettled,” and thinks the situation will be similar this year. Says McLorg, “Business managers hate uncertainty, and we’re in a political and economic environment where the only certainty is uncertainty.” 

Amid trade tariffs and backlash and potential interruptions to supply chains, McLorg wonders how companies will approach their capex plans. “Even companies awash in cash may prefer to finance equipment purchases to preserve cash, given that the economy is likely to slow,” she says. “It is also possible that businesses might postpone capex spending until they have a clearer view of how the economy will progress.”

Balance New developments that could upset the equilibrium seem to occur almost daily. “On one side, we’re expecting a healthy 4.1% expansion in equipment and software investments for 2019,” says Mike Clune, Director of Capital Markets at First American Equipment Finance, an RBC/City National Company. “On the other side, volatility in the stock market could constrain funding. I’m sure a lot of funding sources are watching this closely.”

First American Equipment Finance is active on the buy side, building a portfolio “that will perform in any economic environment,” Clune says. The company isn’t looking to change its credit box based on speculation, “so it would take strong indicators and proof that a downturn is imminent before we’d revisit our credit matrix,” he says.

Walter Stranzl, CFO of GSG Financial, believes several changes will occur in 2019 to moderate funding activity. “I think there will be more increases in interest rates and changes with respect to funding sources’ appetites,” he says. “There’s a great deal of uncertainty in the market place, and I think most companies that fund will stay close to home, doing what they’re best at, until the overall economic outlook changes.” 

Different Strategies, Similar Goals
Customers Commercial Finance is doing just that. “We’re sticking to our knitting,” says Tom Pagano, Senior Vice President and Capital Markets Leader. “We’re focusing in industries and equipment types where we have expertise. In fact, Customers Bank has increased our group’s credit authority at local levels to take advantage of our subject-matter expertise.” 

Pagano thinks fear of a slowdown and/or recession could cause businesses to cut capex spending and banks to tighten their credit boxes. “But on a positive note,” he says, “if credit hold positions decrease, we’ll see an increase in buy-sell activity in the capital markets area.” 

At the same time, Pagano observes, sharp increases in LIBOR and Prime rates have raised the cost of funds on warehousing lines for independent equipment-finance companies. As a result, “Independents may choose to flip deals right away rather than fund them on warehousing lines and then sell,” he posits.

Blee says the challenge for companies that fund is not to get wrapped up in the daily headlines. “Look at the macro factors,” he urges. Hitachi Capital America does that consistently. McLorg says the company has a mandate to grow—substantially—over the next six years. 

She elaborates: “We and our sister company, Hitachi Capital Canada, represent only 10% of our global company, so we have big goals for growth and plans to get there. We provide financing for many types of equipment, from many manufacturers, and use our structuring expertise to deliver valued solutions for our clients. We’re already financing software, and in addition to financing a wide range of commercial and industrial equipment, we’ve developed a large portfolio of energy-efficiency projects because globally, Hitachi is committed to supporting sustainable alternative energy solutions.” 

If banks retreat, McLorg says Hitachi Capital America can fill the void. “With our diversified strategy, we’ll continue to monitor the market and hope it works its way through any turbulence with minimal impact to our customers,” she says. “But we won’t back off our growth objectives. We are enhancing our capabilities through operational excellence and we’ll continue to consider a wide range of transactions.” 

At First American Equipment Finance, Clune eyes the company’s position in two strong markets. “Our company was built on serving the education and healthcare markets, and both are still meaningful parts of our portfolio,” he notes. “Both perform well during the economic cycle, and we take comfort from that.” 

Equipment Market Matters
Solid markets notwithstanding, several industries that haven’t fared well since the recession continue to be challenged, and funding professionals don’t see a reprieve. “We’ve seen some credits in oil and gas, and the pricing pressures are tremendous on both the commodities themselves and the capacity, so that’s rough,” says Stranzl. He also thinks cutbacks will continue in the printing industry, and he worries about healthcare equipment. “Many hospitals’ revenues are government-related, either Medicare or Medicaid,” he says. “When you consider a hospital for financing, you have to look at how much indigent care they provide and how much Medicare they do and ask, can this hospital fail? Or would someone swoop in because it’s a critical part of the community that no one would let fail?” 

To answer such questions, Stranzl says GSG is spending more time up front in its due-diligence process for customers that aren’t household names. “We’re making sure as best we can that there’s a strong management team in place,” he says. “If a customer has a bit of a story, we’re also looking for how much detail we can get to ensure that the story is almost over and the company is coming back online.” 

31st Annual National Funding Conference set for April 9-11 
Learn more about the funding landscape at the ELFA National Funding Conference, the annual forum for connecting funding sources with leasing and finance industry organizations looking to establish relationships to fulfill their funding needs. 
See www.elfaonline.org/events/2019/NFC/

At Customers Commercial Finance, Pagano ponders vulnerable markets and thinks of transportation and construction. Even though the bank approaches both only through capital markets, “Historically, both are leading economic indicators,” he says. “With many banks heavily concentrated in these areas right now, any slowdown in the economy will impact these industries.” Retail, in contrast, has everyone’s sympathy.

One sector currently experiencing a boom is equipment rental. “We see a number of requests for financing in this area and these firms are growing like crazy,” says Stranzl. The other side of the coin is that more rentals mean fewer leases and loans. “And yet, we find lenders generally are much more willing to finance a hard asset now than in prior years,” he says. “They want an asset that retains some value, as opposed to managed service agreements and IT assets where the price falls every six months or so.”

Costs and Pricing
Meanwhile, the federal funds interest rate stands at 2.5% after four hikes in 2018, and the Federal Reserve has said to expect more increases this year. Blee says funding sources are “already anticipating hikes for 2019,” and that he doesn’t expect the situation to have a negative impact on overall funding capacity.

But Pagano worries. “With strong portfolio performance and low delinquency, there is irrational pricing in the market right now,” he says. “Banks are not including risk in their pricing.” He believes a slowing economy and weaker portfolio performance could prompt a return to risk-based pricing and more rational spreads.

McLorg sees some of the same inexplicable behavior. “For the most part, our industry is able to pass on interest-rate increases and/or tighter structures to our customers,” she says. “At Hitachi, we try to maintain pricing discipline while emphasizing flexibility, responsiveness and less bureaucracy, which resonates with clients.”

On a slightly more positive note, Clune sees companies’ increased use of technology creating efficiencies in pockets of the market. “These efficiencies can help lessen expenses for lessors,” he says. “They also help facilitate lending, especially to small businesses, as many of their funding needs are now accommodated seamlessly by automatic or quick credit-decisioning. This value and convenience for the client can help ensure that proper pricing is achieved.” 

Stranzl doesn’t worry much about the cost of funding, because he’s skeptical that interest rates or trade tariffs will have big impacts. But he does think equipment finance companies are missing growth opportunities that could be accessed by doing two things, as he explains. “Since the recession, funding sources and banks particularly have been trying to reduce staff or keep it to a minimum, even though we’ve been in a strong environment,” he says. “I think funders would do themselves a favor by increasing their credit team, whether credit analysts or asset managers, because originators want quick decisions so they can move on to other transactions. If someone told me that their company was increasing their credit team or asset management group by 10% next year, I believe they’d see an immediate jump in business.”

Stranzl also thinks funding sources should consider broadening their offerings and expanding their credit matrixes slightly. “If you can diversify your product offerings, you can work with your trusted long-term customers and partners who have a solid track record you can rely on,” he says. And by expanding their credit matrix carefully, Stranzl continues, companies could increase their yield. “If you’re an A player, you could adjust your matrix to accept a little bit less,” he says, adding, “We know our delinquent defaults are much lower than in other areas of the finance world, and the strength of our industry has been validated many times.”

Clune seconds that. “I think no matter what happens this year, there are a lot of advantages to being in equipment finance and funding sources will respond,” he says. “Ultimately, I expect the funding environment to be appropriate to the economic situation, and if there’s any type of constraint from current sources, I expect others will jump in.”

Whether any of those others will be market newcomers remains to be seen. But one thing is sure: established equipment finance companies that fund have been here before. And if the past is prologue, the weight of experience will help keep them in balance.

Looking for a Funding Source? 
In addition to attending the National Funding Conference, check out ELFA’s online Funding-Source Database. Search by type of company, types of lease structures, funding programs, equipment types and/or credit criteria: https://apps.elfaonline.org/Directories/FundSource/
 

Categorized With:

  • FUNDING & ALTERNATIVE FINANCE