In Construction Equipment Finance, One Thing Is Constant…Continuing Change

by Philip D. Cooper September/October 2007
Industry veteran Philip Cooper provides an overview of the industry — pointing out the recent changes such as Wells Fargo’s acquisition of CIT’s Construction Equipment unit, among others. In it, he finds, that although the years pass, the only thing that remains constant in the industry is, in fact, change.

A French author Francois de la Rochefoucauld once wrote: “The only thing constant in life is change.” As I look back over my 30 years in the equipment finance industry this certainly applies to our industry and to me as well. When I began my career in 1971, Credit Alliance Corporation was the $75 million operating subsidiary of Commercial Alliance Corporation (CAC) a company traded on the American Stock Exchange.

In 1984, First Interstate Bancorp acquired CAC where it remained as a wholly owned subsidiary of the bank until 1989. The sale enabled CAC shareholders to maximize their return while First Interstate obtained national exposure from its newly landed equipment finance subsidiary. The company’s new lower cost of funds allowed it to grow substantially during that period.

In 1989, the company, then First Interstate Credit Alliance, Inc., was acquired by ORIX Corporation, Japan’s largest leasing company and was re-named ORIX Credit Alliance, Inc. The sale provided a gain to the bank and increased presence in the United States for the global ORIX Corporation. The company continued to prosper.

During each change in name and ownership what remained constants were the management and more importantly, the culture of the company. “Credit Alliance” was never removed from the name because of the value it brought to the table. And despite having several different shareholders, no one ever suggested that we change the way we approached our business model.

Industrials Exit the Business
Since the first Monitor 100 was published in 1992, 76 companies have exited the business for various reasons. Some were sold, some were merged, some — unable to sell or merge — sold portfolios and ran-off what was left while others were simply liquidated. Additionally, there were many other companies that exited the business in the years prior to 1992 including: Westinghouse Credit, Litton Industrial Credit, ITT Industrial Credit, Massey Ferguson Credit and others too numerous to list. Major industrial companies thought it was a great idea to form finance subsidiaries; however, GE is the only one that remains.

Associates First Capital
Some well-known acquired companies lost their “name identity” after a sale. For decades, The Associates (Associates First Capital) was a multi-billion-dollar competitor in the truck finance market with manufacturer programs and vendor relationships throughout the country. It was also a billion-dollar player in the construction equipment finance arena. Associates had been a private company, a public company twice — owned by Gulf and Western, then Ford Motor Company — before being acquired by Citigroup. The transportation business was subsequently sold by CitiCapital to GE Commercial Finance. As an interesting side-note, CitiCapital announced, earlier this year, it would reenter the transportation business.

CIT Sells Construction Equipment Finance Business
CIT’s recent announcement that it would sell its construction equipment finance business to Wells Fargo caught me by surprise. Over a period of almost 100 years, CIT had been owned or controlled by a series of corporate partners including: RCA, Manufacturers Hanover, Dai-Ichi Kangyo, and most recently, its ill-fated acquisition by Tyco International before it was spun-off in an IPO to become the largest publicly traded independent commercial finance company in the U.S. For years, a mainstay of CIT’s business had been its presence in the construction equipment financing space.

Each year, for as long as I could remember, CIT published the Construction Industry Forecast — a clear sign of its commitment to the industry — which was required reading when it became available at the annual AED Convention. The company’s welcoming party was the “highlight” event at the convention and was not to be missed. Whether a manufacturer, vendor, customer or competitor, everyone who had an interest or was a participant in the construction industry was a welcome guest.

As a competitor, CIT was a formidable player in the construction equipment arena. Its business included numerous manufacturer programs and a loyal vendor and end-user customer base. Its marketing representatives were knowledgeable about the industry and created loyalty among their vast customer base.

So despite losing its name recognition, Wells Fargo Construction Finance will essentially go to market with the same group of people who sustained CIT’s leadership position in the marketplace for so many years. If the company can maintain its relationships and culture and build on the same credit philosophy it can be successful. It is certainly possible it will have a lower cost of funds advantage, which should help with customer retention. The change, however, must be seamless to the customers and employees.

I have been through two sales and both were seamless. It requires a great deal of work and a good bit of luck. I wish them well. By way of analogy, Credit Alliance had an excellent experience as part of First Interstate Bank and might have remained had it not been for the bank’s problematic real estate portfolio. Now isn’t that an interesting twist of fate.

Financial Federal
It now appears that Financial Federal with more than $2 billion in finance receivables outstanding as of its latest fiscal third quarter is the only major independent commercial equipment finance company with a specialty in construction equipment. Approximately 33% of the company’s portfolio is construction equipment giving them more diversity than the captives.

The Captives
Captive finance companies have increased their market presence over the years. Properly managed, they have instant credibility, product knowledge and a ready market for returned equipment through their dealer base. They generally provide floor plan/rental fleet financing for their dealer customers, so it is quite natural the retail finance business will accrue to their benefit as well. It is a great product line to offer and you can’t fault anyone who has the “cradle to grave” mentality (i.e., sell it, finance it, insure it and take it as a trade on the replacement.)

If the captive has a program rate that is below market and its customer is new or has not exceeded its credit comfort level, the captive would probably be approached first. Alternatively, a vendor will rarely discourage a customer’s request for a specific finance company (other than the captive) due to a long-standing relationship. Also, a lower equipment price for a non-subsidized rate might help level the playing field for other finance sources.

Depending upon the relationship between the dealer and the manufacturer/captive, it is possible that the proceeds, which exceed the floor plan debt on equipment sold, may be applied to the vendors open account. Thus, selling all or substantially all of their paper to their captive may preclude the dealer from deciding how the excess proceeds will be used in their business. Additionally, in the past, some of the manufacturers required their captives to retain a reserve on each deal purchased. The big exposure for the captives is concentration of risk. Industries have been known to be fickle over the years, whether it was coal mining, home building, road construction and repair, water well drilling, oil related, shipping or transportation, and I remember them well.

The Nuts & Bolts
Construction equipment financing is quite simple if done correctly. Borrow money at wholesale rates, lend at retail rates and control your overhead. If you finance the correct equipment over the right term with the right credit, in a worst case scenario the equipment should protect your investment. This assumes, of course, that you had a properly filed first lien and the equipment value upon sale is worth what is owed. Those who understand that repossessing equipment in a default situation is not always the best way to get your money back are successful during both expanding and recessionary economies. Those who have set-in-stone repossession default triggers, along with weak remarketing expertise, will soon exit the business licking their wounds during a downturn in the economy.

I was recently asked when would be a good time to enter the equipment finance business. My response: anytime there exists excess liquidity in the marketplace with sufficient financing products, which will enable you to be competitive and still have the flexibility to manage your way through an economic downturn. Unless we are in a depression, the state of the economy is not really an issue. Some of the best business relationships are forged during difficult economic times when flexibility and creativity may be better options than repossession and liquidation. Such a scenario can only be accomplished by people who understand the customer, the industry and, most importantly, the collateral.

American Industrial Finance, Inc. is a pre-start-up company. Our company is built on the premise that once we locate the proper equity/debt partner(s), success will rely on our ability to grow the company based upon a culture that has worked in the past. We will operate from one centralized location, using available technology to obtain information, with people — not credit scoring — making prompt consistent credit decisions. And people will succeed in the future as they did in the past.


Philip D. Cooper is chairman, president and CEO of American Industrial Finance, Inc., a pre-start-up equipment finance company. Previously, he was chairman, president and CEO (retired) of ORIX Credit Alliance, Inc (OCAI). His career at OCAI spanned 30 years. He started as an accounting clerk in a branch office and worked his way up in the organization culminating with his election as chairman and CEO in 1994. At the time of his retirement in 2000, OCAI had gross outstanding receivables of $3.7 billion. Cooper is a former member of the ELA, EAEL, AED and the Truck and Trailer Credit Committee.

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