The Same Old Buy Desk Challenges Abound

by Lisa A. Miller
Monitor contributor Lisa Miller catches up with this year’s buy desk roundtable panelists, as they lament the same challenges that many leasing professionals have faced during the last few years: price compression, low interest rates, tight margins and increased competition. David Drury, Joe Fantauzzi and Bob Wright strive to embrace this “new normal” as they tackle 2015.

If “challenge” is just another word for “opportunity,” then challenges abound for our colleagues plying their trade in today’s capital markets arena. Lack of product, price compression, low interest rates, tight margins and increased competition intensify as we enter a year that looks to be a lot like the last one — and the one before that, and the one before that.

“Hopefully, the environment will stabilize,” says Bob Wright, SVP, Capital Markets Buy Desk at Wells Fargo Equipment Finance. “I haven’t seen structures move drastically, though they are certainly more aggressive. From time to time, you see individual transactions that make you scratch your head, especially from an equipment value standpoint. Some people are taking more aggressive residuals that seem outside the bounds of reason. We try to be a consistent player and make sure that the residual risks we take are consistent and will hold up over time.”

“As pricing has dropped, some players have found they are unable to compete on price alone, and the alternative is to compete on structure,” adds Joe Fantauzzi, EVP, Capital Markets Division head at Signature Financial, a subsidiary of Signature Bank. “For example, an asset that once was financed for five years may now be pushed to six or seven. Longer terms, larger balloons, residual positions, and the waiving of corporate and/or personal guarantees are all part of the historical cycle when margins compress. As an industry, we really do need to be careful here.”

“In one word, I would describe the 2014 competitive environment as ‘brutal,’” chimes in David Drury, recently-named president at Cole Taylor Equipment Finance. “From the buy desk perspective, we made a conscious decision in 2014 not to trade price for volume and, as a result, our margins actually increased year over year. That being said, the price compression in the market never ceases to amaze me, as there is so much money chasing the opportunities that are out there.”

You’ve heard the adage about squeezing blood from a stone. One would think that the slow pace of U.S. economic growth and the reluctance of many businesses to invest in capital equipment would encourage pessimism. Yet our buy desk manager panel remains optimistic and recalls a good year in 2014, a year in which they continued to close business and meet volume expectations.

Wright reports, “2014 was a good year for us, and we hit our budget. Given the environment, I feel good about that. A year ago I said I didn’t think the environment could get any more competitive, but the surprise was on me. It got more competitive as the year went on; pricing got tighter, and liquidity was more prevalent. There are a lot of people out there who think our asset class is very attractive and have decided to enter the market. The number of competitors continues to grow.”

In 2014 Signature Financial exceeded both buy and sell plan expectations in its capital markets division and surpassed plan in each of its respective origination verticals. The company celebrates its three-year anniversary in March 2015, and as a result of the contributions of all business line verticals, they closed 2014 with a portfolio in excess of $2.6 billion. “I believe our success to date can be attributed to the dedication from each of our respective business verticals in terms of delivering a high-quality experience to our valued clients and sources,” says Fantauzzi. “Client focus is one of our key differentiators — we are nimble, responsive and reliable in our execution. We do what we say we are going to do. We believe that has real value, even in this time of price compression.”

Cole Taylor Equipment Finance, having closed its second full year in business, had a record year in terms of production. “Our growth was driven by direct origination activity,” relates Drury. “Given that focus, buy desk activity was down year over year. We also successfully expanded our national sales force into nine cities and began to make the transition into being primarily a direct origination shop. We syndicated our first transactions, and the buy desk will continue to be active with strategic partners.”

Another major accomplishment at Cole Taylor was the completion of the merger between Cole Taylor Bank and MB Financial Bank. Cole Taylor Equipment Finance is now a subsidiary of MB Financial Bank. The bank has several dedicated leasing businesses, each serving a different market: Cole Taylor Equipment Finance, MB Lease Banking, Celtic Commercial Finance and LaSalle Solutions.

One of the year’s notable surprises was the fourth quarter decline in the price of oil and its effect on the oil and gas industry. Fantauzzi says that the turmoil has created some positive opportunities: Lower gas prices at the pumps may increase consumer confidence, and commercial transportation and vehicle-related businesses could realize improved operating margins. But there is heightened concern by banks and finance companies that need to be watchful of clients who may be impacted by the recent decline. “Assuming this instability continues, I don’t think we’ll see the real impact until the middle or latter part of 2015. The good news for Signature Financial is that we are not heavily concentrated in this segment. We have historically been selective in energy-related segments and have focused primarily on general-purpose assets that transcend beyond the oil and gas industry.”

However, Wells Fargo Equipment Finance, a significant player in the oil and gas market, plans to continue in that direction. “There are obviously going to be issues with some players; but looking at the other side of the coin, there could also be opportunities with the larger companies that have weathered the storms through numerous cycles,” says Wright. “We look at a company’s background, the industries it touches and any implications that might affect its business. Today, if someone has contact with oil and gas in a big way, we dig deeper to understand that business a degree or two better than we might have before. But this is not a dramatic change from how we have always done business.”

Growth Beneath the Shadows

“Despite the competitive landscape, the equipment finance and leasing industry remains an area of positive growth potential for many banks, independents and captives,” states Fantauzzi. “Overall growth trends in our industry have been favorable over the last few years with new entries continuing. That said, demand continued to outweigh supply. As a result, there was continued compression on margins on the front end of the business origination cycle across most credits and asset types in our industry. This ultimately trickled down and impacted pricing in our capital markets segments, and we expect more of the same in 2015.”

To date Cole Taylor Equipment Finance has focused largely on building its portfolio through its buy desk. “This has served as a way to grow the portfolio while doing the longer-term, heavy-lifting job of building our direct sales force,” explains Drury. “During this process, I saw a lot of aggressive pricing relative to risk profile in transactions, and we were not willing to chase volume at the expense of price on our buy desk. We have been and will continue to be strategic about how we deploy our capital on the buy desk, with reciprocal relationships being very important to us, as we continue concentrating our efforts toward growing our direct originations channel.”

“Pricing did get lower in 2014 which means the risk/reward characteristics are not quite as good as they might have been a year ago,” admits Wright. “We are still a player, and we are out there competing with everyone else in this space. Our business is growing faster than the economy, so we are obviously doing some things right.”

“It is more of the same,” laments Fantauzzi. “The risk-versus-reward is still unbalanced overall, and the additional pricing compression didn’t help the situation in 2014. I think it is going to be very much the same in 2015.”

“Generally speaking, the risk/reward dynamic in today’s market seems to be reverting back to the days just before the financial crisis when we saw returns falling relative to the inherent risk profile of any transaction,” recalls Drury. “The returns are lower for the same risk profile, yet I don’t see the market taking more risk now. In fact, I see more sensitivity to certain sectors and industries with commodity risk. There is a lot of volatility in oil, coal and gas, and we are therefore very selective in those markets. Most of our peers are probably taking a similar approach.”

In last year’s roundtable, the talk was about increased competition, tightened spreads and stretched structures. The new normal of risk-adjusted rates and compliance issues faces everyone in the industry and compels some to adapt their processes. One year later, the same topics dominate the conversation. With everyone struggling to work within the new norm, has anything changed?

“We all need to take a close look at the transactions that cross our desks, given the thin pricing,” stresses Wright. “We can’t afford to make mistakes. We try to be very thoughtful about our decisions, to make sure a transaction is a sound investment. Our process of scrutiny has never, by any means, been light, but when something is priced so thinly, you have to take a second look — to feel sure it is a piece of business that makes sense in your portfolio.”

“As a subsidiary of a regulated financial institution, our credit review and compliance processes reflect the latest regulatory requirements,” affirms Drury.

“We remain focused on maintaining operational disciplines while also being cognizant of the competitive landscape,” emphasizes Fantauzzi. “Since Signature Financial was launched only three years ago, the truth of the matter is that we have been dealing with the ‘new norm’ since our inception. There have not been any major changes in how we review credit.”

“Compliance is something that has impacted the process for all of us in the industry, and it has added some extra steps, costs and tasks that we didn’t have a few years ago,” remarks Wright. “No one likes to have steps added to a process, but we have gotten used to it. You recognize that you have to take those steps, and you have to do them right. It is just part of the world we live in today.”

“These challenges seem to exist year over year, and somehow, we all have budget expectations that continue to grow,” observes Fantauzzi. “Each year many of us continue to meet those expectations, despite the compression. Pricing and the impact on margins are an obvious concern for us, but we are not alone here. We remain competitive where appropriate and are not interested in stretching our growth at the expense of credit quality or for sub-standard returns on investments.”

“From a buy-desk perspective, margin compression has certainly impacted volume opportunities; but, equally important, I believe the inventory of transactions available for sale is more limited than in past years, due to the desire of financial institutions to grow earning assets,” says Drury. “From a direct originations perspective, margin compression has made us smarter about the types of transactions and customer profile we pursue. If the customer issues an RFP and always goes with the low bidder, this isn’t the profile that works best for us; we will focus our efforts elsewhere.”

“It is easy in today’s environment to get caught up in what is happening right now, but we try to take a step back and ask ourselves if this deal makes sense for the long run,” explains Wright. “Getting more senior level people involved earlier is part of that process.”

“We focus on making prudent risk-versus-reward decisions while continuing to emphasize our ability to service our clients and sources,” notes Fantauzzi. “Part of our success can be attributed to the improved economy as well as how we differentiate ourselves in the marketplace. I’ve worked in both large and small institutions throughout my career, and I can honestly say that here at Signature Financial, we pride ourselves on execution and client focus. We run a relatively flat organization, and decisions are made prudently and quickly.”

Glimmers of Brightness

Certainly technological advances make it easier to meet the everyday challenges of doing business. “We have always focused on technology, and we are focusing on it heavily now,” comments Wright. “Technology allows us to provide more services to our end-user clients as well as our buy-sell source clients. It is a way to deliver more information and make people’s lives easier.”

“Both our buy desk and direct sales teams have world class technology at their fingertips,” relates Drury. “This enables them to access their CRM database and other research tools on any mobile device. So, at any time, both sales teams and senior management have the ability to view activity, pipeline and other details to get a real snapshot of the business at a moment’s notice. We also have plans to integrate some of these tools into our workflow to further streamline our processes.”

“Being a relatively new entity, we are fortunate to have implemented a technology platform that allows us to execute for our clients at a high level,” states Fantauzzi. “We have the luxury of a top-notch, in-house tech team to assist as needs arise. We are always looking for ways to enhance our operations through improved technology, and with seven business verticals, all possessing differing needs and nuances, we are able to operate and maintain solid efficiencies in each.”

In a challenging market, some of the best sources for new business can be found by looking for expertise and growth options within one’s own ranks. This can also serve as a launching pad for external opportunities. “We have started to do more small-ticket business, and this is an area where we are looking to expand,” ventures Wright. “We have the capability to credit-decision and process small transactions through our small-ticket shop. A couple of years ago we started purchasing portfolios of small-ticket transactions. We are now comfortable with our capabilities in that space, so we want to try to grow it larger.”

“We will continue to leverage and seek to grow relationships with strategic partners for both buy desk and syndication opportunities in 2015,” reveals Drury. “In terms of our direct channel, we have only scratched the surface of leveraging opportunities from within our commercial banking franchise. We plan to aggressively pursue growth in that area in 2015.”

“Part of our strategy is to continue to prudently diversify our business origination channels,” offers Fantauzzi. “We achieve this by leveraging existing talent or by hiring business line team leaders and experts within an industry. We started two initiatives in the second half of 2014: franchise finance and commercial marine finance. In both instances, we identified and hired a business line expert team leader. We also leveraged credit and risk expertise to support each of those business lines. Additionally, we are exploring the establishment of a municipal tax-exempt platform. Our management team has solid experience and a strong history of success in this sector.”

With each new year comes renewed expectations and a level of commitment on which our panelists must deliver. While asking about his wish list for 2015, Wright replies, “Can you make the economy grow another point or two? That would make it easier for everybody. The economy is projected to grow 2% to 3%. We are growing a lot faster than that, but at our size, that leaves us with some big numbers to achieve. As we grow, we can take more on balance sheet, but we also have to manage our exposures in a prudent fashion. This is what creates opportunities for us.”

With a relatively new sales force, Cole Taylor’s biggest challenge is to convince prospective customers to bypass the many options available to them and “take a taste” of what his group has to offer. “Our team has the ability to provide a level of service that is largely unparalleled by larger financial institutions,” praises Drury. “But we are a small group who can make quick decisions, and our customer service is top notch. When given the opportunity to demonstrate our expertise and reliability in closing what we have proposed, it’s clearly a game-changer from a competitive standpoint.”

A year ago, Signature Financial was still considered a relatively new entrant to the market, but Fantauzzi doesn’t think they are perceived that way any longer. “We are well-established in all of our disciplines, including capital markets. Today Signature Financial is managing $2.6 billion in assets and employs nearly 90 colleagues company-wide. With headquarters in Melville, NY, on Long Island and a regional operational office in Redmond, WA, we have 19 locations in 17 states. We have a presence in most of the major metropolitan cities and will continue to grow accordingly as we further develop and strengthen our position industry-wide.”

“I still worry about the lack of product,” says Wright. “Over the last few years, a lot of people have been trying to grow their portfolios, and that means they offer less business to syndicate in the marketplace.” That said, Wright still feels good about this year: “I really do! It’s going to be competitive, and it’s not going to be easy, but I feel good about where we are in the space. We’ve been in this space for a lot of years, we are dedicated to it, and we have been a consistent player. While it is not an easy environment, we are a competitive player and we will continue to be.”

“I am excited about 2015 and the opportunity to continue building our company as a pre-eminent player in the equipment finance market while leveraging MB Financial Bank’s expertise in the overall leasing industry,” finishes Drury. “We spent much of last year trying to build our sales team, and we’ve planted a lot of seeds. Now some of those seeds are starting to sprout, grow and blossom. It fires me up to see our hard work pay off.”

Lisa A. Miller is a regular Monitor contributor who has worked in the equipment financing industry for more than 15 years.

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