How has the economy and the geopolitical environment impacted your team and your vendor partners this year?
NEAL GARNETT: End user demand has generally been softer than in the recent post-Covid years. Vendor partners need to keep their production lines moving and dealers need to move inventory into the market. This is where vendor finance specialists like DLL really show our value. We work on creative marketing campaigns to stimulate end user orders, often combined with incentives provided by our partners. We also need to keep our credit box open despite some weakening of underlying end user corporate health. Experience of navigating previous, much more significant slowdowns and the advantages of deep, long-standing partnerships with our vendors, places DLL in a strong competitive position.
ERIC GROSS: The rate environment, specifically the inverted yield curve, has certainly impacted independent lenders. While the supply chain disruptions are mostly in the rear-view mirror, inflation and a general tightening of the economy continues to place pressure on new equipment acquisitions.
DAVID O’NEILL: Overall activity levels remain strong. Everyone is monitoring the latest rate forecast, economic trends and activity levels to ensure production capacity aligns with market demand. There’s typically uncertainty as you try to forecast future performance, and 2024 brings unique challenges with the upcoming U.S. election, demand expectations and the conflicts in Ukraine and the Middle East. It will be important to consider whether there will be a soft landing, a recession or something else to consider as we look forward.
JUSTIN TABONE: Managing risk is always a balancing act as we strive to maintain momentum and manage business dynamically. At EverBank, that involves prudent oversight of the bank’s balance sheet while remaining competitive and responsive to customers. We are drawing on our experience in managing many past cycles and geopolitical events and remain confident that we will continue to have a strong portfolio that can withstand new headwinds.
When you compare today’s vendor finance market to the state of the market one year ago, what has changed?
GARNETT: I would highlight three specifics:
1. Market rates have normalized, whereas in 2023 some lessors owned by deposit taking banks were in a strong competitive position using deposit funding on their lease and loan activities.
2. There has been a higher incidence of assets on floorplan being sold out of trust in the U.S. and elsewhere in our global footprint from dealers suffering liquidity issues. In general stock turns have slowed and floorplan balances have increased.
3. New private equity/family fund owned and funded entrants have entered the U.S. market sensing an opportunity to pick up market share as higher capital requirements lead to some bank-owned lessors prioritizing their core banking activities over their leasing product lines.
GROSS: With both independents and banks, increasingly there are players with capital and those without. Additionally, depending upon the markets you are involved with, your portfolio may have been adversely impacted by under-performing segments which, of course, impact your ability and or appetite for growth. These factors have led to an environment where acquisitions and/or portfolio sale activities are becoming more active. I would expect this trend to continue through the end of the year.
O’NEILL: The market continues to make progress on production levels and clearing the backlog from pandemic-induced supply chain challenges. As production levels normalize, there’s more focus on ensuring supply chains are robust with a focus on diversification. From a supply chain approach, “just in time” replaced “just in case” over the past 30 years, and the pandemic demonstrated that there’s probably a middle ground somewhere between the two approaches that provides long-term protection against future supply chain challenges.
TABONE: Our vendor finance business today is more diversified as we continuously evaluate and respond to new adjacent industries now ripe for equipment finance. Because we stress the importance of well-structured financing solutions in our vendor programs, we can support a range of partners of both size and scale. We have more robust resourcing platforms today that enable us to expand even larger vendor programs.
What are the top challenges your vendor partners face today?
GARNETT: For our hard asset verticals, our partners have to calibrate production volume with dealer inventory capacity and softer end user demand. Tech is still rebounding from the reduced device sales in 2023 following extremely strong 2021 to 2022 post-Covid outturns. Office equipment dealers are doing a great job of diversification whilst leveraging their deep customer relationships in a mature copier marketplace. Healthcare is a mixed picture, although most of our partners in this space are seeing improved performance as we move into the summer. Generally, with supply chains and lead times normalized, our partners are looking to use financing to stimulate end user demand and are looking to us to create new schemes, products and services.
GROSS: With liquidity pressures mentioned prior, some market segments have been more negatively impacted than others. In particular, spaces that are primarily serviced by brokers have been particularly hit hard as the lenders to these brokers tend to exit their space first in choppy economic environments. These spaces tend to perform less favorably than others. As a result, liquidity has been especially difficult to come by to support these areas.
O’NEILL: In addition to aligning production to reach pre-pandemic backlog levels while meeting current demand, equipment providers need to continue assessing their investment commitments to new technology, including the transition from combustion engines to clean energy options. Demand is increasing, which requires a delicate balance to ensure supply chains can meet requests while vendors simultaneously stay competitive in the market. However, the transition away from combustion engines is still in very early stages.
TABONE: One of the challenges is the fact that transactions today must be approached with a multi-layered perspective. The focus is not just on the equipment or the financing but also on the technology and sales needs of partners. It is important to understand the end user’s requirements as well. In healthcare, for example, on any given day we may interact with a hospital CFO, a sales rep who needs to make monthly quota, a bank’s financing executives and/or their marketing partners. It is multifaceted because you touch so many different areas of business continuously.
What is your outlook for the vendor finance market for the year ahead? What are the greatest opportunities, challenges and concerns that you anticipate?
GARNETT: Year to date and in the most recent month, our application inflow in numbers and dollars is significantly up in 2024, despite end user demand being soft. This implies we are picking up market share. DLL is seen as the growth engine of the Rabobank Group where we have the backing of the bank to grow organically and inorganically. In the U.S. construction space, we anticipate a very strong market towards the end of this year and into the following year and beyond as the infrastructure bill funds projects. Whilst we anticipate some delays in purchase decisions due to elections this should be temporary.
GROSS: I see the market improving. With inflation receding and the anticipated moves by the Fed to cut rates, relief should be felt by the lenders, vendor and customers. As a feeling of certainty enters the market, I believe the liquidity that has been on the sidelines will engage and we will see an overall improvement in most business activities.
O’NEILL: We compete in markets that trend with economic activity in the U.S. and Canada, therefore we are cautiously optimistic that activity levels will remain strong. Portfolio performance has been strong for the past three years, but we have seen some softening in performance over the past six months. While portfolio performance is better than pre-pandemic, it is weaker than in 2023.
TABONE: We will continue to innovate technologically to gain more efficiencies but also stay connected with our partners. We will never lose sight of our core focus on fostering relationships. Building and maintaining customer relationships is at the heart of what we do. •
