MONITOR: Can you please provide some background on the launch of Pawnee Leasing back in 1982? Were you part of the original team? Please comment on your initial role and subsequent career path that led to your current position as president.

Gary H. Souverein: Pawnee Leasing began as a result of an investment interest, our founder, Rob Day, had in an Apple Computer Store in the small eastern plains town of Sterling, CO. Rob was an optometrist at the time and admits he knew very little about leasing, but took Apple Credit’s leasing application and Bank of America’s lease agreement and Pawnee Leasing was born. In those early years, Rob moonlighted as a funding source, working after hours from his optometry practice. Pawnee’s originations then were limited to the Apple Computer Store customers. In 1989, Rob sold his optometry practice and moved to Fort Collins, CO and devoted his full-time energies to building Pawnee. A chance meeting by Rob in 1992 with a Denver-based leasing broker would forever change our business and marked Pawnee’s starting point with the broker community.

The most recent ‘financial crisis’ was perhaps the worst case ‘stress test’ that we could have conceived. We’ve been exceptionally fortunate and emerged from the cycle stronger than when we went in. We recognized … that the industry was mispricing risk, and the early-warning nature of our portfolio alerted us to the troubles ahead, earlier than many other funders.

Pawnee’s lens on the leasing industry was still pretty limited when I joined the company as its fifth employee in January 1993. We were working with about a dozen leasing brokers at the time. I came to Pawnee fresh out of Colorado State University with a finance degree in hand and while it wasn’t my opinion at the time, I really didn’t know much about business or finance. There was no doubt that I was a source of frustration to a seasoned entrepreneur like Rob, but he’d kindly admit today that I had “potential.” We were a small business when I started so I called on brokers, processed credits, funded deals and did some collecting too. As we expanded, so did my opportunities. I eventually focused on the origination side of Pawnee in sales, credit and funding.

MONITOR: What was the original vision and go-to-market strategy and how has it evolved or changed over the past 30 years? Please comment on your broker-only model with personal guarantees as a risk mitigation strategy.

GS: I’d like to admit that Pawnee’s early years were a carefully plotted vision but in fact our market strategy was more accident than plan. Rob had a desired rate of return that he wanted on the capital in the business and we put the pricing on the street that would meet that desire. It didn’t take long to determine that the only transactions that were attracted to that pricing were startups and non-traditional credits. By 1995, that would become our motto — “Your funding source for Startup and B credits.” By this time too, we had left any vendor roots behind, including the original Apple Computer Store, and 100% of our originations were from a rapidly expanding broker channel.

MONITOR: What were some of the milestones of the company that are both memorable and had an impact on Pawnee’s growth?

GS: There were four events that had lasting influence and effect on the growth of our business. The first was Rob Day. While Rob hasn’t been involved in the day-to-day business since 1999, his impression on the culture of Pawnee is still evident today. He was a passionate, driven, nimble, creative and customer-focused leader. I believe our team today provides some of the best service levels in the business in large part because of the culture he ingrained into the company in our early years.

The second, is what I’d call “The Trade and Sam Leeper.” By 1997, Pawnee’s growth was out-stripping the financial capacity of Pawnee’s small shareholder group and our banking facilities, and we needed more capital. At the same time, Rob was contemplating succession planning for himself. In leadership terms, Rob was a sprinter and he recognized Pawnee needed a new influence for our next phase of growth. Our banker from Bank One, now JPMorgan Chase Bank (JPM), Sam Leeper, was aware of our needs and introduced Pawnee to Dick Monfort.

The “trade” was Dick’s purchase of the minority shareholders’ interests in Pawnee and the concurrent hiring of Sam to succeed Rob. Dick met Pawnee’s capital needs and Sam was precisely the ingredient we needed. Sam, with engineering and finance training, was methodical, structured and a master of systems and process building. Sam subtly shifted our focus from thinking of ourselves as a leasing company to being a risk management and collection company. Little did we know how valuable this perspective would be as we entered the next two credit cycles.

The third was “The Sale.” While the sale could be an interview in itself, it was up to that time the highlight of our business and for me personally. By 2004, the ownership group of Rob, Dick and Sam had built a sizable financial engine in Pawnee. Rob and Sam, in particular, were seeking a liquidity event as they had a significant portion of their net worth tied up in Pawnee, and were approaching an age where a liquidity event made sense. In early 2005, after a six-month due diligence process, we had a binding agreement to sell to a private equity firm, but just weeks before the closing the lead partner took a position with a large bank’s leasing operations and the deal was dead. A few weeks later, Rob, Dick and Sam asked me to lead the company as its next president.

In July 2005, we would meet our eventual buyer after a visit from Barry Shafran, president and CEO of cars4U Limited. cars4U was a Canadian public company in the auto sales and leasing business looking beyond its borders to make an acquisition and expand its leasing business. The acquisition would be through the formation of a newly created public company that combined cars4U and Pawnee. The new entity, Chesswood Income Fund, via an initial public offering on the Toronto Stock Exchange, acquired Pawnee. In April 2006, after several months of due diligence and public offering document preparations, Barry, Sam and I would spend two weeks in Toronto preparing with a firm that trained management teams specifically for IPOs. In short, we spent this time scripting and practicing a 30-minute oral and visual presentation as well as rehearsing responses to questions that we might receive from institutional and retail investors during our road show.

After two weeks of 5/8-day, 60-minute presentations, the road show process culminated in a “filling of the book,” or commitment by investors to purchase into the IPO. It’s not until the final day that investors are asked to make these commitments so it’s a frantic day for the investment banking team and a stressful time for us. The offering was a success. After the road show, we were back in Toronto for follow-on processes and meetings related to the offering and within the next week Chesswood Income Fund was a reality and Pawnee was sold.

In September 2008, we launched our B+ credit program with risk-based pricing from 14% to 26%. As is our style, we took a methodical and cautious approach and have slowly built that portion of our business to where it is today — a substantial portion of our originations and portfolio.

The fourth “milestone” was our entry in the larger B+ credit market. By late 2008, we were nearing the second full year of contraction in our portfolio, due to our unwillingness to match what we considered to be irrational underwriting and pricing of credit risk, and we were beginning to deal with challenging portfolio performance as well. Our contraction went hand-in-hand with our belief that there would be a market correction. By the fall of 2008, funding sources were fleeing the market en masse. It was a terribly difficult time for our broker customers, which were left with few funding sources to support them. Many brokers began contracting their businesses just as we had two years earlier. In September 2008, we launched our B+ credit program with risk-based pricing from 14% to 26%. As is our style, we took a methodical and cautious approach and have slowly built that portion of our business to where it is today — a substantial portion of our originations and portfolio.

MONITOR: You note in a 2010 letter that Pawnee “has earned a commendable reputation as one of the few able and stable funding sources through numerous credit cycles.” Since Pawnee has survived a few downturns since its launch, can you please tell us what it was like to prevail, despite the headwinds?

GS: Well, for one thing, anyone reading this and still in the business should be commended — you have prevailed. The most recent “financial crisis” was perhaps the worst case “stress test” that we could have conceived. We’ve been exceptionally fortunate and emerged from the cycle stronger than when we went in. We recognized, I think, earlier than many, that the industry was mispricing risk, and the early-warning nature of our portfolio alerted us to the troubles ahead, earlier than many other funders. This recognition caused us to make, by late 2006, the incredibly difficult decision to pull back our originations. After 25 consecutive years of growing Pawnee’s originations, we contracted in 2007 and 2008.

While we were tightening credit and toiling with challenging collections in our portfolio, most of our competitors would continue charging ahead seemingly oblivious to the challenges that they would soon face — for most of them late 2008 would mark the beginning of their misfortunes and in a few cases, their demise. Looking back, I’m proud of the decisions we made through the credit cycle and I give Chesswood’s Board, Barry and our employee team kudos for being steadfast in the face of a difficult plan that called for contraction and grinding through an operating environment none of us had ever experienced.

I believe our industry has great opportunities ahead and I’m especially bullish about Pawnee’s position today… What we’re beginning to hear is that while the tone of business equipment acquisition remains very cautious, more brokers have begun to add sales headcount for the first time since 2008. I believe this is a … leading indicator about what they are seeing and expecting in their business in 2012.

Acquisition by Chesswood Group in May 2006

MONITOR: Could you provide our readers with some background on Chesswood and its rationale for this acquisition?

GS: Chesswood Group Limited is a public company trading on the Toronto Stock Exchange (TSX:CHW). Pawnee comprises 75% of the net assets of CHW. Chesswood has a history in the leasing industry as owner and operator of a vehicle leasing business in Canada that was founded in 1972. Chesswood believes that there are opportunities to provide stakeholders with strong returns from the prudent operation of financial services businesses that are sound managers of risk. Chesswood would tell you that Pawnee is exactly that — a sound manager of risk that has provided monthly returns to shareholders since 2006.

MONITOR: In what ways has Pawnee benefited from the merger? You describe in the 2010 letter that Chesswood was a “prudent catalyst to our continuing success.”

GS: Most noticeable is the tremendous human capital we have to support us. Barry, although headquartered in Toronto, serves as our chairman and CEO and is actively involved in all strategic matters; Lisa Stevenson, CHW’s CFO, serves as a director and adds to our bench strength whenever called upon. We also have the added benefit of continuing to draw on Rob and Sam, who sit on Pawnee and Chesswood’s board of directors. Chesswood’s board is an impressive collection of entrepreneurs including Chesswood’s chairman, Ed Sonshine, who is the CEO of Canada’s largest REIT and also is a director of Canada’s largest bank, Royal Bank of Canada.

MONITOR: You note that a bank syndicate led by JPMorgan Chase has provided a “longtime credit facility.” Can you tell us more about this relationship?

GS: Our banking relationship with JPMorgan Chase Bank, as our agent bank, dates nearly 20 years. Our banking syndicate with JPM also includes Key Bank and BBVA Compass. We are very fortunate to have unwavering support from our banking team, including the support they showed Pawnee through the credit cycle. We’re also very pleased that our banking partners expanded the overall size of our funding line at the time of our last renewal in September 2010. Pawnee has plenty of capacity to support its growth plans.

The Future

MONITOR: Going forward, can you please give us your take on the leasing industry? What are some of the challenges and opportunities you see ahead for both the industry and for Pawnee in particular?

GS: I believe our industry has great opportunities ahead and I’m especially bullish about Pawnee’s position today. Because our broker network is so large and diverse, I believe they are a great barometer on overall leasing activity. What we’re beginning to hear is that while the tone of business equipment acquisition remains very cautious, more brokers have begun to add sales headcount for the first time since 2008. I believe this is an encouraging sign and leading indicator about what they are seeing and expecting in their business in 2012. Real opportunities exist for those of us that successfully navigated the financial crisis, to expand market share and enter underserved markets. In 2008, for example, we took advantage of the departure of competition created in the B+ credit markets and continue to increase our penetration today. We’ve also been able to take advantage of the very strong credit quality of applicants in our core and B+ business, provided to us as a result of the overall contraction of capital in the market.

MONITOR: Is there anything you would like to add that would be of interest to our readers, especially those in the broker community?

GS: First, our thanks to the many brokers that have been our customers for years and continue to work with and support Pawnee. We are very grateful for your business and your long-term loyalty! Second, we encourage those brokers that are less active in the B and Startup markets to consider the great opportunities for growth and income that this segment of the equipment finance industry can offer.

Amanda L. Gutshall is an associate editor of Monitor.